What is a Unit Holder Agreement?

A Unit Holder Agreement governs the relationship between the holders of units in a Unit Trust. Unit holders can be individuals, companies, or even discretionary trusts. The Unit Trust itself is formed through a trust deed, which is settled by a trustee, most often a company when business activities are involved. The Unit Trust Deed is the legal document that outlines the basic rules for the trust, but a Unit Holder Agreement goes further, detailing the specific rights, responsibilities, and obligations of unit holders, similar to how a Shareholder Agreement works in a company structure.

While the Unit Trust Deed sets up the legal foundation, the Unit Holder Agreement provides a more detailed framework, particularly around business operations, management decisions, and the transfer of units. This document is essential for unit holders to clearly understand their role and protect their interests within the trust.

Key Elements of a Unit Holder Agreement

A Unit Holder Agreement typically includes the following elements, many of which are similar to those found in a Shareholder Agreement:

1. Management and Decision-Making
   The agreement outlines the decision-making process for the trust, including who has authority over day-to-day operations and major decisions. This could include provisions for voting rights, quorum requirements, and procedures for making important business decisions.
2. Transfer of Units
   A Unit Holder Agreement will include provisions for how units can be transferred, either to other unit holders or third parties. This may include pre-emptive rights, where existing unit holders have the first option to purchase units before they are sold to an external party.
3. Pre-emption Rights
   In the event of the death, disability, or bankruptcy of a unit holder, the agreement often includes pre-emption rights, which give the remaining unit holders the option to buy the affected holder's units. This protects the existing unit holders and ensures that the control of the trust remains with those who are already involved.
4. Exit Provisions
   The agreement should detail how unit holders can exit the trust, whether by selling their units or other means. Clear exit provisions help avoid disputes and ensure a smooth transition when unit holders wish to leave the trust.
5. Dispute Resolution
   Just like in a Shareholder Agreement, a Unit Holder Agreement includes mechanisms for resolving disputes between unit holders. These could include mediation, arbitration, or court proceedings, depending on the complexity of the trust.

Why You Need a Unit Holder Agreement

A Unit Holder Agreement is crucial for protecting the interests of the unit holders and ensuring smooth business operations. Here’s why:

• Clarifies Relationships: The agreement clearly defines the rights and responsibilities of each unit holder, reducing the chances of misunderstandings.
• Manages Conflicts: By setting up dispute resolution procedures, the agreement helps resolve conflicts quickly and efficiently, minimizing disruption to the trust’s operations.
• Ensures Stability: Pre-emption rights and clear unit transfer provisions help maintain control of the trust within the existing unit holders, providing stability to the trust’s management.
• Business Continuity: The agreement ensures that the trust can continue its operations smoothly, even if a unit holder exits or passes away.

Conclusion

A Unit Holder Agreement is a key document that provides clarity and security for unit holders in a Unit Trust. By outlining the roles, rights, and obligations of unit holders, it helps prevent disputes and ensures the trust’s operations continue smoothly. Like a Shareholder Agreement, it is essential to have the Unit Holder Agreement drafted and reviewed by a qualified business lawyer to ensure it addresses all necessary legal and business requirements.