We are often asked “do I need a shareholder’s agreement or a unit holders’ agreement?” by our clients.
Both documents govern the relationship between the parties but relate to two different structures.
A shareholder’s agreement will regulate and govern the relationship between the owners of the shares in a company structure whereas a unit holders’ agreement will likewise regulate and govern the relationship between the owners of the units in a unit trust.
Whilst there is no legal requirement to have either a shareholder or unitholder agreement, it is in my opinion an essential part of any business enterprise to avoid conflict, encourage good governance and ensure smooth operation and management.
A company is an entity that has a separate legal existence from its owners. The owners of the company are known as members or shareholders.
Its legal status gives a company the same rights as a natural person which means that a company can incur debt, sue and be sued.
Companies are managed by company officers who are called directors and company secretaries.
A company has its own legal entity so the liability of members or shareholders is limited and generally they will not be personally liable for the debts of the company unless they have provided personal guarantees for such things as borrowing money.
A unit trust holds assets and they are administered by the trustee of the trust for the holders of units in the unit trust.
This means that unit trusts pre-determine the unit holder’s entitlements, which may be for income, capital or both.
Why do I need a Shareholder Agreement for my company?
I can never stress enough to clients in any form of businesses relationship involving a company the importance of having a Shareholders Agreement in place.
It is not sufficient to just rely on the company constitution which are often very generic documents and do not consider the issues a shareholder agreement covers.
A shareholder agreement will ensure that the company is run in accordance with the shareholders wishes.
It will ensure clarity and certainty as to what can or cannot be done, that decisions are made after discussing the options and with consensus.
Most importantly it will reduce the potential for conflict between shareholders and help the company to run smoothly and profitably.
Any Shareholder Agreement must consider:
- How the company will be managed and operate
- How decisions will be made
- Who will be the directors and how can they be appointed, removed and/or replaced?
- When will meetings be held both for the directors and the shareholders
- How to protect the business interests of the company such as through non-competition clauses and intellectual property protection
- What happens in the case of a deadlock or disagreement?
- What happens from a succession perspective in case of death or disability?
- How to value the shares when a party is exiting or coming into the company
- How are the dividends to be distributed?
Why do I need a Unitholder Agreement?
Like a shareholder agreement a unitholders agreement will address how decisions are made, what happens upon the exit of a unit holder and how disputes are handled.
If you are a unitholder in a trust that holds assets such as a business or property it is imperative that you have a unitholder agreement in place.
The benefits of a unitholder agreement are:
- It will outline rules for such matters as voting rights, income distribution etc.
- The prevention of misunderstandings and promote dispute resolution so as not to end in expensive litigation
- It will ensure unitholders will not prefer their interests ahead of the other unitholders
- It will determine how the units are issued, transferred, and valued
- It will outline how a unitholder can be removed and in what circumstances
How can we help?
At FC Lawyers we have a range of experts in our business, corporate and property teams who have advised companies and businesses of all sizes in relation to the best structures for their needs.
Whether you need a shareholder, unitholder agreement or general advice we will be able to assist you.
Contact our team today to discuss your legal needs.
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