Top Unitholders Agreement Forms

Generally, an Agreement for a small private company will place restrictions on the introduction of new Shareholders. For example, it may state that all (or at least a significant percentage) of the other Shareholders must approve a new Shareholder before they can join the Company.

A drag along clause is used to ensure a Shareholder can "drag-along" other Shareholders and force them to sell their shares.

Let's say you own most, but not all of the shares in a company. You negotiate with a potential buyer who wants to buy your shares in a company. But here's the snag! The buyer says they will only buy your shares if they can buy all of the shares in the company. Now, the problem is you only own 70% of the shares. What to do!?

Well, if you have a drag-along clause in your Shareholders Agreement, you can force the other Shareholders (who own the other 30% of the shares) to sell to the buyer at the same time you sell (and at the same price). That is, by "dragging" them along to make a sale.

This is also known as a Forced sale clause.

The Agreement will describe the services (or other things such as intellectual property) each Shareholder (or business partner) must provide to the Company. This is an important part of the Agreement as the success of the joint business will usually hinge on the financial and personal contributions of the partners. This is also known as a Shareholder/Partner contribution clause.

If a Shareholder wants to sell their shares or other equity interest, they will usually have an obligation to offer it to each other second party. Then, the selling second party can only sell the equity interest to a third party buyer if each other second party decides not to buy the seller's interest. In other words, each second party has a right of pre-emption, also known as a right of first refusal.This is also known as a Pre-emptive rights clause.

In most cases, the Agreement will include a clause to say that the Company cannot issue new shares to a third party (who is not already a Shareholder) unless the Company first offers them to the existing Shareholders and they refuse the offer.

So, this gives the current Shareholders the opportunity to take up (and pay for) any new shares, and to avoid having their shareholding diluted. This is also known as a Pre-emptive rights clause.

This clause usually prevents each Shareholder from:

- competing with the Company's business and

- working with a client, customer, employee or supplier of the Company.

The clause operates: - while the agreement is on foot and

- for a period after the agreement ends (for example, anywhere form a further 2 months to 24 months).This is also known as a Restraint or non-solicitation clause.

Whether a Shareholder gets to appoint a director to the company's board of directors. The Agreement might state that, in order to appoint a director, a Shareholder needs:

- to hold at least say 20% of shares or

- be one of the founding Shareholders.

This is also known as a Directorships clause.

The Agreement will generally set out how many shares each party owns and any right or options they have to acquire further shares. This is also known as a equity allocation clause.

How much each Shareholder must lend to the company. This is also known as a Funding clause.

The Agreement will often list out important decisions or resolutions that can only be passed with the support of a specific percentage (eg, 75%) of the Shareholders. These decisions may include, for example:

- sale of the company's assets

- a substantial change in the nature of the business

- a change in the name of the company

- the issue of new shares.

This is also known as a Super-majority clause.

A tag along clause allows a Shareholder to tag along (participate in) a sale of shares to a third party.

Typically, this clause is invoked when a majority Shareholder negotiates to sell its shares to a third party and a minority Shareholder wants to join in on the sale. The minority Shareholder can piggy-back on the sale and sell its shares on the same terms and conditions as the majority Shareholder.

So, this clause is included to protect the little guy.This is also known as a Piggy-back clause.

A Unitholders' Agreement is between:

- the entity (usually a company) that acts as the trustee of the unit trust ("Company") and

- each person who holds units in the trust (each "Unitholder").