What is a Unitholders Agreement?
A Unitholders Agreement is a documented contract between the unitholders of a business and outlines their agreed behaviours and responsibilities to each other. (It helps you stay friends with the people you decide to go into business together with).
When would I need one?
When more than one person enters a business relationship with another, they need to formally document their obligations and responsibilities to each other – this is equally important for Company and Unit Trust structures.
Unitholder Agreements are cost-effective and allow for;
- Alternative dispute resolution clauses for Unitholders,
- The issuing, valuation, and transfer of units within a unit trust,
- Unitholders Insurance – Crisis/trauma, Total & Permanent Disability (TPD), Life & Terminal Illness insurance, and Income Protection insurance.
What's the difference between a Shareholder’s Agreement and a Unit Holders Agreement?
Company structures are controlled in different ways to Unit Trust structures and therefore need different documents to serve different purposes.
- A Company structure has a Shareholders Agreement to manage shareholder obligations.
- A Unit Trust structure has a Unitholder Agreement to manage unitholder obligations.
Why would I need one?
People in business with others always need to document their rights, responsibilities and obligations agreed to, early in every business relationship. Being in business with another person (or persons) increases the known statistical risks of business interruption (not decreases) to manage.
- Whether you’re in business using a general partnership, perhaps you have controlling shares in a company structure or maybe you hold ownership units in a Unit Trust that’s responsible for the day-to-day business, a Unitholders Agreement sets out the relationship between the Unitholders.
- This ‘side agreement’, binds the Unitholders to a set of agreed-upon rules and outlines the rights and obligations to one another. For example, how disputes are managed, how the valuation of the ownership units are calculated, and what happens when a unitholder leaves the business in the future. Its dispute resolution clauses seek to manage conflict outside the courtroom and enable the parties to reach a cost-effective solution.
When to put a Unitholders Agreement in place?
Put a Unitholders Agreement in place when you first establish the Unit Trust. Doing this in the early stages of a professional relationship, before commercial stressors and personal circumstances change, or resentment builds between unitholders, will help to preemptively manage conflicts, expectations and disputes.
Good news: a Unitholders Agreement can be entered into at any time — as long as there is a unanimous agreement from all Unitholders to all the requirements and responsibilities listed in the agreement.
What's the difference between a Unit Trust Deed and a Unitholders Agreement?
A Unit Trust Deed and a Unitholders Agreement are different documents that serve different purposes.
- The Unit Trust Deed creates a legal trust relationship. It sets out the rules of how the assets are held and what the Trustee must do.
- A Unitholders Agreement manages the commercial relationships between the Unitholders and deals with issues not contained in the Trust Deed.
Both these key legal documents can be purchased through Sapience Financial.
What's in a Unitholders Agreement document?
A documented Unitholders Agreement is a written contract between the parties that clearly outlines roles, responsibilities, and how the business will be run between two or more people whose ownership in the business, is set by the number of units they each hold.
A Unitholders Agreement deals with:
- Dispute resolution procedures
- Regular valuation of the business and the units it holds
- The Buy-Sell Buy-Sell obligations of the Unitholders to each other
- The personal insurances needed to underwrite the Buy and Sell obligations
- The process to be followed for departing Unitholders and how they receive fair payment for their owned share of the units
Not having a Unitholders Agreement in place is high risk - and often an impediment to becoming a member of a larger commercial supply chain.
Insight: Unit Trusts are a common business and investment structure that can provide a simple way for parties to work together and or invest together, in business or property. In particular, investing via a unit trust is a popular way for many SMSFs to invest in real estate.
Case study – Allen, Bruce & Charles from ABC Engineering
Allen co-owns a modern Heavy Excavator Tractor with two of his business partners Bruce and Charles - his mates from University - who all together established ABC Engineering.
- He is unrelated to his business partners and only engages them in joint business ventures on major road construction and tunneling operations.
- The three of them come to an agreement - the Excavator is co-owned through a Unit Trust and rented out to large contractors as needed.
The value of the machine continues to fluctuate as demand and supply for its capacity changes as government contracts are completed or started. All three business partners are made Unitholders to the Trust, ABC Engineering Unit Trust.
Problem: Their Unitholders Agreement is never signed between the business partners.
One day a dispute arises as to the valuation of the units that Allen and his partners own in the Unit Trust. The Unit Trust Deed does not contain procedures for;
- valuing the units in a Unit Trust, nor
- dispute resolution clauses.
Because Allen and his business partners did not sign a Unitholders Agreement, their only solution is using time-consuming and costly litigation, in an attempt to get past their decision deadlock.
How we can help
A Unitholders Agreement is an important part of protecting your business and your family, from the business.
- We can supply this personalised legal document.
Contact us for a confidential chat about your needs.
Related: Key Legal Documents for Business Owners
- Non-Disclosure Agreements (NDA)
- Company Power of Attorney (CPO)
- Partnership Agreements
- Shareholders Agreement
- Unitholders Agreement
