- 1A company's constitution sets general rules; a shareholders' agreement records the commercial deal between the owners.
- 2The most valuable clauses deal with the hard moments: deadlock, exits, death, incapacity and a sale of the business.
- 3It is far cheaper to agree these terms at the start than to litigate them later.
Why a shareholders' agreement matters
Most small and mid-sized Australian companies are owned by a handful of people who know each other well. That familiarity is exactly why the rules for disagreement get left unwritten. The Corporations Act 2001 (Cth) and the company's constitution (or the replaceable rules) provide a baseline, but they were not written with your business, your relationships or your exit plans in mind.
A shareholders' agreement is a private contract between the shareholders — with the company itself a party in most agreements. It sits alongside the constitution and records the commercial deal: who makes which decisions, how shares can be bought and sold, what happens if someone stops contributing, and how value is protected if the relationship ends.
The clauses that do the heavy lifting
Every agreement should be tailored, but most well-drafted agreements cover the following:
- ✓Decision-making: which matters need a simple majority, which need a special majority, and which need unanimous approval — for example issuing new shares, borrowing above a threshold or selling the business.
- ✓Board composition: who can appoint directors and how the board operates day to day.
- ✓Transfers of shares: pre-emptive rights, so existing shareholders get the first opportunity to buy before an outsider.
- ✓Drag-along and tag-along rights: letting a majority deliver a clean sale, while protecting minority holders so they can sell on the same terms.
- ✓Deadlock: a clear path when shareholders or directors cannot agree, such as escalation, mediation or a buy-sell mechanism.
- ✓Restraints and confidentiality: reasonable limits on competing with the business or soliciting its clients and staff.
Planning for exits, death and incapacity
The most important question an agreement answers is what happens when a shareholder leaves — voluntarily or otherwise. Good agreements set out the trigger events (resignation, retirement, breach, insolvency, death, loss of capacity), whether the remaining shareholders must or may buy the departing shareholder's shares, and how those shares are valued.
Valuation is where disputes start. Agreeing in advance on a method — an independent valuer, a formula, or an annually agreed value — removes much of the heat from what can be an emotional moment.
Where a shareholder dies or loses capacity, the agreement should work together with each owner's estate plan and, where it suits, with insurance funding. Buy-sell insurance arrangements can give the surviving owners the funds to purchase the shares, and the family a fair price, without either side being forced into a fire sale.
When to put one in place — and review it
The ideal time is when the company is set up or when a new shareholder comes in. At that point everyone is aligned and the terms can be negotiated calmly. The next best time is now: an agreement can be added to an existing company at any stage with the consent of the shareholders.
Agreements should be reviewed when the business changes materially — new investors, a capital raise, a change in the owners' roles, or a planned succession. We also recommend checking that the agreement and the constitution say the same thing, as inconsistencies between the two are a common source of dispute.
Common questions
Do we need a shareholders' agreement if there are only two of us?+
Two-shareholder companies are among the most exposed to deadlock, because a 50/50 split means neither owner can outvote the other. A clear deadlock and exit mechanism is especially valuable where there are only two owners.
Is a shareholders' agreement the same as a constitution?+
No. The constitution is the company's internal rulebook and is generally available to the company's members. A shareholders' agreement is a private contract that records the commercial deal between the owners, and it can be more detailed and more specific.
Sources & further reading
- ↗Federal Register of Legislation — Corporations Act 2001 (Cth) — replaceable rules
- ↗ASIC — Australian Securities & Investments Commission — company constitutions and officeholder obligations
- ↗business.gov.au — business structures and agreements
This guide is general information about Queensland and Australian law and is not legal advice. Laws change and every situation is different — speak with us about your specific circumstances before acting.
