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A trust is a relationship where a trustee legally owns and manages trust assets on behalf of (or for the benefit of) the beneficiaries. A unit trust is a type of fixed trust, where each beneficiary is entitled to a fixed proportion of the trust’s income and capital of the trust. Unit trusts are often used for specific projects.

In this article, we look at how to buy a unit in an existing unit trust.

Joining a Unit Trust

Buying a unit in a unit trust is conceptually similar to being an investor in a company. Broadly speaking, you are essentially buying a part of the pie that is the unit trust.

The practical procedure for becoming a unitholder also mirrors the process of becoming a shareholder. The following table illustrates the similarities between the documents that govern a unit trust, and those that govern a company.

 

Company Unit Trust
The company issues a non-binding term sheet to prospective investors which sets out the terms of the transaction. This document is a key instrument to facilitate negotiations. The new unitholder formally requests to become a unitholder in the trust through an application for units. This sets out the price and number of units the applicant wants to purchase.
The shareholders agreement governs the relationship between shareholders. The unitholders agreement governs the relationship between unitholders.
The register of members or share register records the:

  • number of shares allotted to each shareholder;
  • date of the allotment of shares; and
  • payment status of the shares.
The register of unitholders records the:

  • current unitholders;
  • date of allotment of units; and
  • proportion of units held by each unitholder.
A deed of accession binds parties to the provisions of the shareholders agreement. Unit trusts also use deeds of accession.

 

How to Buy a Unit in an Existing Trust

You can buy a unit in two ways:

  1. through subscription, where you apply for new units to be allocated to you; or
  2. through transfer, where an existing unitholder sells their units to you.

Through Subscription

You must submit a formal request for an allotment of units using an application for units. This application includes the:

  • terms of the issue;
  • price; and
  • number of desired units.

The trustee will then decide whether to accept your application. If accepted, the trustee will issue you with a unit certificate. This certificate sets out the price, class and number of units.

Through Transfer

The current unitholder will complete a transfer of unit formto formally transfer you the units at the agreed price.

Once the applications have been processed, the register of unitholders is then updated to reflect the changes. The register lists the current unitholders and the proportion of units they hold.

Note: Sometimes the terms of the trust deed may set out specific procedures to transfer a unit. These may vary from the usual process set out above, so make sure to look at the deed beforehand. 

 

Other Issues to Consider

Unitholders Agreement

Unitholders in a trust may be party to a unitholders agreement. This agreement governs the relationship between unitholders, similar to a shareholders agreement in a company. It includes terms concerning:

  • the issue of new units;
  • the sale of units; and
  • dispute resolution mechanisms.

When buying a unit in a unit trust, you should look at the terms of the unitholders agreement and the rights and obligations that apply to you. For example, there may be restrictions on the transfer of units, which may be significant if you are purchasing a unit as a short-term investment.

Once your application for units is accepted, you will need to become a party to the unitholders agreement. Usually, you will achieve this by signing a deed of accession, rather than requiring all unitholders to sign the unitholders agreement afresh.

Corporate Trustees

Often, each unitholder in a unit trust will hold an equivalent proportion of shares in the company that acts as the trustee. The unitholders may also have the right to appoint a director on the board of the corporate trustee. Therefore, the required formalities for a standard share sale or share transfer will need to occur to affect the transfer.

Key Takeaways

The process to buy a unit in a unit trust is similar to buying shares in a company. However, the process can be confusing, particularly if the trustee of the unit trust is a company. Accordingly, it is best to get legal assistance to help you through the acquisition process.

If you need help with handling trusts and unit purchases, contact LegalVision’s business lawyers today on 1300 544 755 or fill out the form on this page.

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