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A unit trust is a common business structure when dealing with a commercial project or investment that features more than one unrelated interest or party. Beneficiaries of a unit trust have a fixed interest in all property that is the subject of the trust. A unit trust differs from a discretionary trust as beneficiaries’ rights to income and capital are not fixed and not at the trustee’s discretion. This article will explain the purpose and operation of a unitholders agreement, which is the key document that governs a unit trust.

Purpose of a Unitholders Agreement

A unitholders agreement is a contract between the unitholders of a unit trust and the trustees. This agreement includes agreed conditions as to how the trust operates. The agreement generally covers a range of subjects, including:

  • the trust’s funding;
  • structure;
  • governance; 
  • associated commercial outcomes; and 
  • the duties and obligations of stipulated unitholders. 

This agreement establishes and upholds terms for engagement between unitholders. It addresses matters not thoroughly or referenced explicitly in the unit trust deed. The agreement is a proactive measure to reduce ambiguity, conflict or delay if varying opinions arise between unitholding parties.

Likewise, this agreement is important when more than one unitholder is bound to a shared unit trust, irrespective of whether the unitholders are connected parties. Further, it is sensible to actively deliberate your motive for having or pursuing this agreement for personal commercial circumstances. Consider whether this agreement is suitable for the outcome that you are seeking to achieve. 

Additionally, it is important to review whether the trust deed sufficiently addresses the items that unitholders are attempting to document through this additional agreement. 

Unitholders Agreement and the Trust Deed

The trust deed binds the trustee by setting out how they should manage the trust. The deed also specifies rules governing the relationship between the trustee and unitholders. It is crucial to read the unitholders agreement in the context of the trust deed. If the trustee is a company, the trustee’s company constitution is additionally relevant, or the ‘replaceable rules’ if the trustee company lacks a constitution.

Provisions within a unitholders agreement should prevail if any inconsistencies arise between the trust deed and the agreement. The agreement will also bind members upon any inconsistency between this document and the trustee company’s constitution. Nonetheless, to be sure, where you find an inconsistency, it may be critical to amend the trust deed. This is because the trustee must operate the trust deed with consideration to this deed. Parties are often required to operate their voting rights to wholly accept the trust’s terms of the agreement.

Unitholders Agreement Provisions

A unitholders agreement can address any matter that unitholders seek to govern regarding the trust’s management or business interests. For example, the agreement can address one or more of the following issues:

  • the makeup of the trustee company’s board of directors (and appointing requirements);
  • categories of decisions that mandate majority (or ordinary) (50%), special (75%), unanimous (100%) or specialised approval;
  • viable unitholding parties; and
  • meeting requirements for unitholders.

Unitholders commonly retain discretion to appoint and remove trustees. Therefore, it is critical that trustees are bound to the agreement to ensure they (or directors of the trustee company) understand agreed terms between them and unitholders. Likewise, trustees and directors must also review the unitholders agreement’s provisions. This is in addition to the unit trust deed and the trustee company constitution, if applicable.

While the unit trust deed covers the requirements when executing and operating the trust, it does not detail the relationship between unitholders. This can generate uncertainty as to how to proceed when a:

  • deadlock throughout decision-making occurs;
  • dispute arises between unitholders;
  • party wants to exit the trust;
  • party commences competing business; or
  • conflict of interest involving a unitholder is identified.

A unitholders agreement sets out the framework for managing these types of scenarios. The agreement can address each matter differently, according to its purpose and negotiated terms of the parties. 

Importance of a Unitholders Agreement

A unitholders agreement is not mandatory, but it is best practice to have one in place. Most importantly, having this agreement can address common circumstances including:

  • a deadlock at a unitholders meeting;
  • exiting the trust; and
  • upholding the trust’s investment. 

We discuss how the unitholders agreement can address these issues below. 

Dispute Resolution Framework

A disagreement may arise concerning a matter that generates a deadlock at a unitholders meeting. Alternatively, a prominent issue could emerge between parties that fundamentally affects the operation of a trust. Prompt and constructive dispute resolution can support the unit trust’s continued operation and reduce the viability of party relations resultantly deteriorating. Therefore, it is strategic to implement a dispute resolution framework that reflects provisions to identify the unitholders’ key priorities. This framework can encourage alternative methods of dispute resolution that provide time-sensitive and cost-effective support to address disagreement. This is usually far more mutually beneficial than the process of court-mandated directions.

Exiting the Trust

Given that each unit may hold voting rights, the sale, transfer or amendment of a unit holding can impact other trust members. As a result, agreements often feature clauses that enable existing unitholders priority in purchasing units from an exiting holder. The agreement may also contain drag along clauses, which mandate unitholders to sell units when a majority of unitholders intend to sell their units to a non-member party.

Upholding the Trust’s Investment

As discussed, unrelated parties often implement a unit trust to jointly invest in a shared development or project. In this case, certain parties generally prioritise their personal interests ahead of the investment. A unitholders agreement can mitigate this risk through non-compete, conflict of interest and confidentiality clauses. For example, a non-compete clause may deny unitholders from intentionally capping or lessening the trust’s value.

These clauses are popular in commercial agreements as they deny or disincentivise business parties from competing against the shared interest. Additionally, such clauses safeguard the interests and investment of parties whilst also offering a mechanism for accountability and compensation access upon a breach. 

Key Takeaways

A unitholders agreement functions alongside the trust deed to optimise smooth management of the trust and maintenance of accurate records of the unitholders. This agreement holds parties accountable to all agreed terms, reducing prospects for associated disputes while enabling clarity for prospective unitholders. For more information, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a unitholders agreement?

A unitholders agreement is a contract between the unitholders of a unit trust and the trustees. This agreement includes agreed conditions as to how the trust operates.

How does a unitholders agreement complement a unit trust deed?

A unit trust deed binds the trustee by setting out how they should manage the trust. While the trust deed covers the requirements when executing and operating the trust, it does not detail the relationship between unitholders. This is where a unitholders agreement can complement a trust deed.

What kinds of situations would I expect to rely on a unitholders agreement?

A unitholders agreement sets out the framework for managing common circumstances including a deadlock at a unitholders meeting, where a unitholder seeks to exit the trust and upholding the trust’s investment.

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