The gap in unitholder rights
Published on November 22, 2024 by Selwyn Black
Unit trusts have certain tax advantages (and other disadvantages) compared to investment in a company. In recent years they have become particularly popular for joint real estate investments.
However, unitholders will not have the statutory rights applicable to shareholders under the Corporations Act, to seek a winding up, compulsory buyout, and other remedies, on the basis of unfairly prejudicial conduct, or because it is just and equitable.
This can leave unitholders stuck in a deadlock position, without a way out, potentially resulting in mutually assured destruction of the business.
This position was recently confirmed in the New South Wales Supreme Court case of David & Ros Carr Holdings Pty Ltd v Ritossa. Richmond J said in this case while the outcome was “unfortunate” for the plaintiff, they had received legal advice that it was important to have an exit strategy but failed to follow up on that advice.
Sometimes there can be protections conferred by the trust deed. There may be some comfort where the trust has a single reputable trustee/manager, although that may still leave unitholders with structural risk, including if the manager changes.
Apart from careful choice of a trustee/manager, and careful consideration of the trust deed terms, some protections might be obtained by a combined unitholders and shareholders agreement under which unitholders agree with each other as to the operation of the trust and of the trustee company in which they each may hold a corresponding number of shares.
The consequences of inadequate protection can include being left without any ability to realise your investment in the trust, and staying indefinitely, with people or management you are definitely not happy with!
This is a case for remembering Black’s Law No. 9 – don’t get into something unless you know how to get out of it!
Please note that this article does not constitute legal advice. If you are seeking professional advice on any legal matters, you can contact Carroll & O’Dea Lawyers on 1800 059 278 or via our Contact Page and one of our lawyers will be able to assist you.
