A Unitholders Agreement is an agreement between unitholders and the Unit Trust trustee. It overrides a Unit Trust Deed. It sets out how the unit trust is managed. They are similar to a Shareholders Agreement.
Unitholders’ Agreements manage the behaviour of unitholders in a unit trust.
Unitholders’ Agreements are cost-effective and allow for:
– alternative dispute resolution clauses for unitholders
– the issuing, valuation and transfer of units in a unit trust
– unitholder insurance – trauma, TPD, life and income protection
Unitholders Agreements outline each unitholder’s rights and obligations for one another. In the case of conflict, dispute resolution clauses manage conflict outside the courtroom. This enables the parties to reach a cost-effective solution. As the rights and behaviour of unitholders are managed by the Unitholders Agreement, the opportunity for conflict is substantially reduced.
“Bob co-owns a $500,000 boat with two of his closest business partners – Ben and Jerry. He is unrelated to his partners and only engages them in joint business ventures. Bob, Ben and Jerry come to an arrangement. The boat is managed through a Unit Trust. Everyone contributed different amounts and the market value of the boat is forever fluctuating. All three partners are made Unitholders to the Trust. Bob does not seek any legal or financial advice. A Unitholders Agreement is never signed between the three business partners.
One day, a dispute arises as to the valuation of units Bob and his partners own through the Unit Trust. The unit trust does not contain procedures for valuing units, nor dispute resolution clauses. Because Bob and his business partners did not seek advice nor sign a Unitholders Agreement, their only solution is pursuing time-consuming and costly litigation.”
The Unitholders Agreement saves unitholders, such as Bob, from the headache of litigating disputes arising in unit trusts.
You build and sign a Unitholder Agreement many years after you started your Unit Trust.
While Family Trusts deeds and Self-Managed Superannuation fund deeds need to be updated on average every 5 – 8 years, Unit Trust Deeds don’t usually need to be updated to deal with tax and trust matters. But of course, you can update a Unit Trust, as often as you wish, if all the unitholders agree.
If you want to formalise the relationship between the unitholders consider also building a Unitholders Agreement. This document can also be updated over time. But again it is also not common to update a Unitholders Agreement.
Unitholders debating on what the Unit Trust will do and invest in is not a matter of the Unit Trust deed or a Unitholders Agreement. This is much like a company and shareholders agreement. When shareholders debate on how to run the business they don’t usually update the company Constitution or the Shareholders Agreement.
Our Unitholders Agreement also includes a Deed of Accession. When Unitholders become a party to a unit trust, they are not bound by the provisions of the pre-existing Unitholders’ Agreement. Upon signing the Deed of Accession, the new unitholders are bound to the Unitholders Agreement, as if the new unitholder was party to it
The Deed of Accession, provided as part of our Unitholders’ Agreement, enables a speedy and simple binding of new unitholders to the Agreement.
You need separate agreements for each of these situations:
1. A Unit Holders Agreement is a contract between the Trustee of the Unit Trust and the unitholders. It overrides a Trust Deed. And details how the company is managed. (It is similar to a Shareholders Agreement.)
2. A Business Succession Plan is an agreement to get rid of the disabled or dead owner with some money. The outgoing owner gets some money and the remaining owners get his interest in the business. A BSP does nothing to help the business itself. The business may well fold after the person leaves, but at least his wife gets some money and the remaining owners get the business. A BSP is funded with life, TPD and trauma insurance.
3. Key person insurance agreement is insurance paid to the business if a key person is disabled or dies. This does not deal with how to get the shares off the outgoing owner. Key person insurance just helps the business. Key person insurance is usually to repay debt (often secured by the outgoing owners’ home) or cover the cost of training up a new person.
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Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
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