Unitholders Agreements Stand Up

Trading trusts, typically unit trusts, are regularly used to structure multiple owners’ entitlements in businesses. The business owners will normally appoint a company as trustee of the unit trust, with each business owner also a shareholder of the trustee company. This structure is attractive to entrepreneurs when it delivers tax benefits not otherwise available from a straight up company structure.

When a unit trust is used, the legal documents between the owners, setting out their rights and responsibilities, is called a “unitholders agreement” or “unitholders deed”. As the trustee is often a company, the owners will also require a “shareholders agreement” to also address the corporate aspects of their structure. These agreements will sometimes be drafted separately and sometimes into one document, referred to as a “shareholders and unitholders agreement”. Both ways are effective. My preference is to merge the terms into one document so the owners have one reference point.

Agreements between business owners are an important risk management tool. They address the common pitfalls of co-ownership that do not exist with sole ownership. The process of entering into these agreements, in my view, is just as important as getting it signed. It allows the parties to clarify their expectations of one another. Misaligned expectations often leads to unitholders disputes.

Sometimes, this process is rushed. With so much to do in the start-up phase of a business, the owners are more focussed on the growth, or even the survival, of their new born baby business, that their attitude towards the agreement is reduced to: “where do I sign.” This is a lost opportunity for the owners to invest the time required to clarify, and understand, their expectations of one another: an excellent investment. Where they are misaligned and not capable of resolution, the unitholders benefit from realising this quickly. It is far easier to unscramble a “partnership” when the owners’ business is smaller and simpler.

Also, when the parties sign off on in a unitholders agreements, prepared by a good business lawyer, it is likely to be effective and stand up if challenged in court. For example, unitholders agreements normally address the circumstances in which one of the owners may be forced out by the other owners. In the Victorian Supreme Court case of Arhanghelschi v Ussher [2013] VSC 253, a unit trust with a corporate trustee was used by group of doctors for their business. Their unitholders agreement included a compulsory transfer clause where the majority of the unitholders could force a unitholder out by giving them written notice. In this case, the majority wanted one particular doctor out and gave that notice. The outed doctor objected and sued his fellow unitholders, contending that they had not acted in accordance with overarching laws that protect unitholders in similar circumstances. This did not help him. The court found that the words in the unitholders agreement clearly dealt with the complained about eventuality. The notice was valid and the majority of doctors could proceed with the cancellation or redemption of the outed doctor’s units, i.e. get rid of him.

Business owners must be clear on their expectations of one another and ensure that the agreements they sign (e.g. the shareholders and unitholders agreement) reflects their understanding. It is often necessary to get legal advice to achieve this. Otherwise, if the unitholders fight, it could result in litigation. The stress, cost and time involved will affect the business.

What do you need to do?

If you are starting a business utilising a unit trust, with others, call me to see if I can help you with a unitholders agreement. Also, if you are a unitholder disputing with other unitholders, call me to see if I can help you with your dispute.