When a company has more than one owner, the relationship between those owners matters just as much as the business itself. Questions about decision-making, funding, profit distributions, share transfers and exits can be straightforward while everyone agrees. They become much harder when ownership changes or the shareholders want different things.
A shareholders agreement is a contract between some or all of a company’s shareholders, and sometimes the company itself. It can set out how important decisions are made, how shares may be transferred, what happens when a shareholder wants to leave, how funding is dealt with and what process applies if a dispute arises.
It works alongside the Corporations Act 2001 (Cth) and the company’s constitution, if it has one. The aim is not to replace those legal rules, but to document commercial arrangements that are specific to the owners and the business.
This guide explains what a shareholders agreement does, the clauses commonly included, what can happen if a company does not have one, and when a shareholder dispute may require separate legal advice.
What is a shareholders agreement?
A shareholders agreement is a contractual agreement between some or all of a company’s shareholders. Depending on how it is drafted, the company may also be a party.
It can deal with the relationship between owners and the way important ownership and governance issues are handled. This may include decision-making thresholds, director and management appointments, funding obligations, dividend or distribution policies, transfers of shares, exit arrangements and dispute-resolution processes.
A shareholders agreement operates alongside the company’s broader governance framework. Under Australian law, a company’s internal management may be governed by the replaceable rules in the Corporations Act, a constitution, or a combination of both. ASIC also notes that shareholder rights may arise under the Corporations Act, a company constitution and the replaceable rules, depending on what the company has in place.
The replaceable rules do not apply to a proprietary company while the same person is both its sole director and sole shareholder. For companies with more than one owner, the interaction between the Act, the constitution and any shareholders agreement should be considered carefully so the documents work together.
Shareholders agreement vs company constitution
A company constitution and a shareholders agreement serve different purposes.
A constitution forms part of the company’s statutory governance framework. It operates as a contract between the company and its members, directors and secretary, and between members themselves. A company can use a constitution instead of some or all of the replaceable rules.
For proprietary companies, a constitution is generally kept with the company’s records and does not ordinarily have to be lodged with ASIC. Public companies have additional lodgement requirements. Changing or repealing a constitution generally requires a special resolution, which at a meeting requires at least 75% of the votes cast to be in favour.
A shareholders agreement is different. It is a private contractual arrangement between the parties who sign it and is not lodged with ASIC as part of the ordinary company register. How it can be amended depends on the terms of the agreement and the consent requirements the parties have adopted.
For that reason, the two documents should be drafted to work together rather than treated as interchangeable.
Why your business needs a shareholders agreement
A shareholders agreement allows owners to decide in advance how particular commercial and ownership issues will be handled.
That can be especially useful where there are multiple founders, investors or family members involved in the company, or where ownership and management responsibilities are not identical.
Depending on the business, a shareholders agreement can:
- Set approval thresholds for major decisions, including matters that require board, shareholder, special-majority or unanimous approval.
- Give minority shareholders agreed rights in relation to specified decisions, information or share issues.
- Set out how additional funding will be raised and whether shareholders are expected to contribute.
- Establish processes for transferring shares, bringing in a new owner or dealing with a proposed sale.
- Provide mechanisms for dealing with deadlock or disputes before the parties consider formal proceedings.
- Address confidentiality, intellectual property and, where appropriate and enforceable, restraint provisions.
- Set out what happens when a shareholder wants or needs to leave the business.
A shareholders agreement does not prevent disagreement. Its value is that the owners have already documented how particular issues should be handled if circumstances change.
What a shareholders agreement usually covers
There is no single form of shareholders agreement that suits every company. The terms should reflect the ownership structure, funding arrangements, industry, roles of the shareholders and the commercial outcomes the parties want to preserve.
Common areas include the following:
Decision-making and reserved matters
The agreement can identify which matters are left to the board and which require shareholder approval. Reserved matters may include taking on material debt, issuing new shares, entering major contracts, changing the nature of the business, making significant capital expenditure or selling key assets. The voting threshold for each matter should reflect the ownership structure and the level of control the parties intend each shareholder to have.
Funding, profit and reinvestment
The agreement can address how future funding will be raised, whether shareholders are obliged to contribute further capital, and what happens if one shareholder cannot or does not want to participate. It may also set out principles for dividends or distributions and the circumstances in which profits are retained for working capital or reinvestment.
Transfer and sale of shares
Transfer provisions can control when and how a shareholder may sell their shares.
These may include pre-emptive rights that give existing shareholders an opportunity to buy shares before they are offered outside the group. Depending on the business and ownership structure, the agreement may also include drag-along and tag-along provisions dealing with a proposed sale of the company.
Deadlock and dispute resolution
A deadlock clause can set out what happens when the required decision-making threshold cannot be reached. The process may include staged negotiation, mediation, independent valuation, a buy-sell mechanism or another agreed pathway. The right mechanism depends on the company and the consequences of a deadlock.
Leaving the business
Exit provisions can address what happens if a shareholder resigns from an employed role, retires, dies, becomes incapacitated, becomes insolvent or otherwise leaves the business.
Where relevant, an agreement may distinguish between different exit circumstances and set out how shares are valued and transferred.
Confidentiality, intellectual property and restraints
Depending on the business, a shareholders agreement may include provisions protecting confidential information and intellectual property. Restraint provisions may also be included, but their enforceability depends on the circumstances and whether the restraint goes no further than reasonably necessary to protect a legitimate business interest. They should be drafted for the particular business rather than treated as a standard inclusion.
What happens if you don’t have a shareholders agreement
A company can operate without a shareholders agreement. The legal position will then depend on the Corporations Act, the replaceable rules that apply, the company’s constitution, the rights attached to its shares and any other relevant agreements.
The difficulty is that those documents may not address the particular commercial arrangement the owners assumed would apply.
Depending on the circumstances, this can create problems such as:
Decision-making deadlock. In an evenly owned company, or where a particular approval threshold cannot be reached, important decisions may be delayed while the parties try to negotiate a way forward.
Uncertain exit arrangements. If there is no agreed process for valuing and transferring shares, a proposed exit or buyout may require the parties to negotiate the price and terms from the beginning.
Disagreement about funding or distributions. Owners may have different expectations about further capital, dividends or reinvestment if those arrangements were never documented.
More complex dispute resolution. Without an agreed deadlock or dispute process, the parties may need to rely on contractual, statutory or court-based remedies depending on the issue.
Minority shareholders still have rights and remedies under the Corporations Act even without a shareholders agreement. One important remedy is the oppression regime in Part 2F.1. Section 232 allows the Court to make orders where company affairs or conduct are oppressive, unfairly prejudicial or unfairly discriminatory to a member, or contrary to the interests of members as a whole. The available remedy depends on the circumstances, and section 233 gives the Court broad powers if the statutory test is met.
A shareholders agreement cannot remove statutory rights, but it can provide additional contractual rights and agreed processes that may help the owners deal with issues before a dispute reaches that point.
When shareholder disagreements turn into disputes
RedeMont’s Disputes team acts in shareholder and business disputes involving companies, directors and shareholders.
The firm’s live business-disputes material includes disputes about breaches of shareholder agreements, director duties, governance, profit distribution, exit arrangements, valuations, business separation and shareholder oppression claims.
Where a shareholders agreement is in place, the first step is usually to review what the agreement says about voting, reserved matters, transfers, exits and dispute resolution. The company’s constitution and the Corporations Act may also affect the parties’ rights and options.
If there is no agreement, or the agreement does not deal with the issue that has arisen, legal advice can help identify the available contractual and statutory options and whether negotiation, mediation or formal proceedings are appropriate.
Getting advice early does not guarantee a particular outcome, but it can help clarify the legal position before decisions are made, communications escalate or the business takes steps that are difficult to reverse.
RedeMont’s Disputes team advises on shareholder and director disputes, business separations, buyout negotiations, valuation disputes, mediation and litigation. Where the problem also involves governance documents or a future ownership structure, the Disputes team can work alongside RedeMont’s corporate lawyers on the underlying governance arrangements.
Getting a shareholders agreement in place
A shareholders agreement is often considered when:
- a company is established with more than one owner;
- a new shareholder or investor is joining;
- ownership percentages or management roles are changing;
- the company is raising capital;
- a founder or shareholder is planning an exit;
- the business is restructuring; or
- an existing agreement no longer reflects how the company operates.
It is also worth reviewing an existing agreement when the business changes materially. A document drafted when there were two founders may no longer suit a company that has added investors, changed management responsibilities or introduced a different funding model.
RedeMont’s Corporate Advisory and Governance team advises on governance models, constitutions, shareholder and other security agreements, funding requirements, management protocols and exit arrangements.
Where an ownership change forms part of a broader transaction, RedeMont’s Deals and Capital Investment team advises on acquisitions, business sales, due diligence, transaction structuring and related ownership changes.
If a disagreement has already developed, the firm’s corporate lawyers can work with the Disputes team so the immediate dispute and the longer-term governance position are addressed together.
Contact us to discuss the agreement or governance arrangements your business needs.
Common mistakes to avoid
Using a generic template
A template may not reflect the company’s actual ownership split, funding arrangements, decision-making thresholds or exit expectations. Those differences matter when the agreement needs to be relied on.
Leaving reserved matters unclear
The agreement should make it clear which decisions require board approval, shareholder approval or a higher voting threshold. Ambiguity around decision-making can itself become a source of disagreement.
Ignoring deadlock risk
A deadlock mechanism is particularly important where the ownership structure or voting thresholds can leave two sides unable to reach the required approval.
Failing to review the agreement
A shareholders agreement should continue to reflect the business. New investment, ownership changes, restructures or changes in management roles can all justify a review.
Treating the constitution and shareholders agreement as the same thing
The documents have different legal roles. A constitution forms part of the company’s statutory internal-governance framework, while a shareholders agreement is a contractual arrangement between its parties. They should be checked together so their terms do not create avoidable inconsistencies.
Getting it right
A shareholders agreement cannot remove every source of disagreement between owners. What it can do is make the agreed rules around decision-making, funding, ownership changes, exits and dispute resolution clearer before those issues become contentious.
RedeMont advises business owners on shareholder agreements and governance through its Corporate Advisory and Governance practice, and on shareholder and business disputes through its Disputes practice.
Whether you are putting an agreement in place for the first time, reviewing an existing agreement after a change in ownership, or dealing with a dispute that has already started, contact RedeMont to discuss the next steps for your business.
Frequently asked questions
What is a shareholders agreement?
A shareholders agreement is a contractual agreement between some or all of a company’s shareholders, and sometimes the company itself. It can set out how important decisions are made, how funding and distributions are dealt with, how shares may be transferred, what happens when a shareholder leaves, and how disputes or deadlocks will be handled. It operates alongside the Corporations Act and the company’s constitution or replaceable rules.
Do I need a shareholders agreement if I already have a company constitution?
A shareholders agreement is not automatically required simply because a company has more than one shareholder, but it can deal with commercial arrangements that a constitution does not address in the same level of detail. A constitution governs the company’s internal management under the Corporations Act, while a shareholders agreement is a separate contract between its parties. Whether both are appropriate depends on the company’s ownership structure and the arrangements the shareholders want documented.
What happens if shareholders don’t have an agreement and can’t agree on a decision?
If there is no shareholders agreement, the position depends on the Corporations Act, any applicable replaceable rules, the company’s constitution, the voting rights attached to the shares and the decision involved. In an evenly owned company, or where a particular approval threshold cannot be reached, some decisions can become deadlocked. The shareholders may then need to negotiate a solution or obtain legal advice about the available rights and remedies.
Can a minority shareholder be protected without a shareholders agreement?
Yes. Minority shareholders can have rights and remedies under the Corporations Act even where there is no shareholders agreement. One important statutory remedy is the oppression regime in Part 2F.1, which may allow a member to seek court orders where the statutory requirements are met. The appropriate remedy depends on the facts, and a shareholders agreement can provide additional contractual protections and agreed processes.
When should a business put a shareholders agreement in place?
A shareholders agreement is commonly considered when a company is established with multiple owners, when a new shareholder or investor joins, when ownership or management roles change, or when the business is raising capital or restructuring. An existing agreement should also be reviewed when material changes mean its decision-making, funding or exit provisions no longer reflect the business.
Can a shareholders agreement be changed later?
A shareholders agreement can generally be amended in accordance with the amendment provisions in the agreement and the consent requirements that apply to the parties. The exact process depends on how the agreement was drafted. A review is worth considering after significant changes in ownership, investment, management roles or the way the business is funded.
What should I do if I’m already in a dispute with a co-owner?
If a dispute has already started, legal advice can help clarify the effect of any shareholders agreement, constitution and statutory rights before further steps are taken. Depending on the issue, the available options may include negotiation, mediation, a negotiated buyout or formal proceedings. RedeMont’s Disputes team advises companies, directors and shareholders on business and shareholder disputes.
These FAQs are general information only and are not legal advice for your specific circumstances. The commercial and legal position depends on the detail of your matter. For advice built around your situation, speak with our team about the right next steps.
