If you own shares in a company with other people and you don’t have a shareholders’ agreement, you’re taking one of the biggest risks available to you in business. And most people don’t even realise it.
What Is a Shareholders’ Agreement?
A shareholders’ agreement is a contract between the shareholders of a company. It sits alongside the company’s constitution and governs how the shareholders will deal with each other in relation to the company.
Unlike the constitution—which is a public document and must comply with the Corporations Act—a shareholders’ agreement is private, flexible and can address any issue the shareholders agree is important.
Why Does It Matter?
Without a shareholders’ agreement, you’re governed by the company’s constitution (which, if you incorporated through ASIC’s online portal, is probably the replaceable rules—a generic framework that doesn’t address the specific needs of your business) and the default provisions of the Corporations Act.
This means that critical questions—like what happens when shareholders can’t agree, or how shares can be transferred, or who controls key decisions—are answered by a generic legal framework that wasn’t designed with your business in mind.
What Should a Shareholders’ Agreement Cover?
A well-drafted agreement should address:
- Decision-making — Which decisions require unanimous or majority approval? What matters can the board decide without shareholder input?
- Deadlock resolution — If shareholders can’t agree on a material decision, what happens? A Russian roulette clause? A valuation mechanism? A buy-sell arrangement?
- Share transfers — Who can shareholders sell to? Pre-emptive rights (rights of first refusal) are standard—but the mechanism matters.
- Exit events — Tag-along rights (minority shareholders can “tag along” on a sale by a majority) and drag-along rights (majority can compel minority to join a sale) are essential for clean exits.
- Vesting — If a co-founder leaves early, do they keep all their shares? A vesting schedule tied to continued involvement is standard in any sophisticated agreement.
- Restraints — What can shareholders do after they leave?
- Funding obligations — Are shareholders obliged to contribute capital? On what terms?
- Management roles — What are the obligations of shareholders who are also employees or directors?
When Should You Put One in Place?
Ideally: before you start the business. The conversation is easy when everyone is aligned and optimistic about the future. It becomes significantly harder—and more expensive—when there’s already a dispute or when one shareholder wants to exit and there’s no agreed mechanism.
If you’re already in business without one: now. Today. Don’t wait until you need it.
Don’t DIY This
Shareholders’ agreements are not the place for a template you found online. The devil is in the detail—particularly around valuation mechanisms, deadlock triggers and exit provisions. A poorly drafted clause can be worse than no clause at all.
Contact Envision Legal to discuss drafting or reviewing a shareholders’ agreement for your company.
This article contains general information only and does not constitute legal advice. Envision Legal accepts no liability for any loss arising from reliance on this content. You should seek independent legal advice tailored to your specific circumstances. For enquiries, contact Envision Legal.