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Shareholders Agreement Australia: Is Your Company Ownership Legally Protected?
A shareholders agreement in Australia can address decision-making, founder responsibilities, share transfers and exits. This guide explains the default rules that may apply without one and the key terms co-founders should consider documenting.
If you and a co-founder own a company together and have no shareholders agreement, your relationship is generally governed only by the Corporations Act 2001 (Cth) and the company’s constitution (or the default “replaceable rules” if there is no constitution). Those documents were written for companies in general, not for two people who started a business together and trust each other. They typically say nothing useful about what happens if one founder stops contributing, wants to sell, or disagrees with the other about direction.
This article explains what the law generally provides by default when co-founders own a company together, why a company constitution is not the same thing as a shareholders agreement, and what a shareholders agreement should cover. If you are earlier in the journey and still choosing between a partnership and a company, start with our October article, Business Partnership Agreement Australia: Is Your Business Partnership Legally Protected?
What Is a Shareholders Agreement in Australia?
A shareholders agreement is a private contract between the shareholders of a company (and usually the company itself). It records how the owners have agreed to run the business together: who makes which decisions, what happens to shares if someone leaves, and how disputes are resolved.
Shareholders Agreement vs Company Constitution: What Is the Difference?
A company constitution is different. Under the Corporations Act 2001 (Cth), a company’s constitution generally operates as a contract between the company and its members, and between the company and its directors. It sets out the company’s internal rules. A proprietary company is not required to have a constitution, and if it does not, a set of default provisions known as the replaceable rules generally applies instead.
The practical difference is that a constitution is a company document. It applies to the company and all of its members, and amending it generally requires a special resolution. A shareholders agreement is private to the parties, can include commercial terms the founders do not want public, and is typically where the detail about founders’ rights and obligations to each other sits. Most well-structured companies use both.
What Happens Without a Shareholders Agreement?
Without a shareholders agreement, the following default position generally applies to a small proprietary company. It will vary if the company has its own constitution, so the constitution should always be checked.
Directors Manage the Company
The default rules provide that the business is managed by or under the direction of the directors, not the shareholders. A founder who holds shares but is not a director generally has limited say in day-to-day decisions.
Most Decisions Are Made by Simple Majority
Ordinary resolutions need more than 50 percent of the votes cast. This means a founder holding 51 percent of the shares can generally pass an ordinary resolution without the other founder agreeing.
Some Decisions Need 75 Percent
A special resolution, which is required for things like changing the constitution, needs at least 75 percent of the votes cast. This is why a 75/25 split gives the majority holder control over most things, while a 25 percent holder can generally block a special resolution.
A Majority Shareholder Can Generally Remove a Director
For a proprietary company, the default position is that members can remove a director by ordinary resolution. A founder who holds more than 50 percent of the shares may therefore be able to remove the other founder from the board, unless the constitution or a shareholders agreement provides otherwise. We cover what protections a minority shareholder may have in a later article this month.
A 50/50 Split Can Produce Deadlock
Where two founders hold exactly half each, neither can pass an ordinary resolution alone. Without an agreed deadlock process, the company can stall on every significant decision.
There Is No Default Exit Process
Nothing in the default rules says how one founder buys out another, how the shares are valued, or what happens if a founder wants to sell to an outsider.
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What Should a Shareholders Agreement Cover?
The right terms depend on the business, but most founder-level shareholders agreements deal with the following areas.
Share Ownership and Contributions
Who holds what percentage, what each founder has contributed (cash, assets, intellectual property or time), and how any future funding will be handled.
Decision-Making and Reserved Matters
Which decisions the board can make alone, and which need the agreement of all shareholders or a stated majority, such as taking on debt, issuing new shares, selling the business or changing its direction.
Roles, Time Commitment and Vesting
What each founder is expected to do, and whether a founder’s shares vest over time. Vesting is a contractual arrangement, not a legal default, which means it only exists if it has been documented.
Leaver Provisions
What happens to a founder’s shares if they resign, are removed or cannot continue, often distinguishing between a “good leaver” and a “bad leaver” and setting the price accordingly.
Share Transfers and Pre-emption
Whether a shareholder who wants to sell must first offer their shares to the other shareholders, and any rules about who can become a new shareholder.
Deadlock and Dispute Resolution
A defined process, such as negotiation, mediation, or a structured buy-sell mechanism, for when the shareholders cannot agree.
Restraints and Confidentiality
Limits on a departing founder competing with the business or using its confidential information, drafted so they are likely to be reasonable and enforceable.
Intellectual Property
Confirmation that IP created for or used by the business belongs to the company, not to individual founders. We covered why this matters in our October series.
Do I Need a Shareholders Agreement in Australia?
There is no law that requires a proprietary company to have a shareholders agreement. That said, the risk is highest where there are two or three founders with similar stakes, where one founder is less active than the other, where outside investors may come in later, or where founders previously worked together informally before incorporating. Companies in those situations are the ones that most commonly find the default rules do not suit them.
When Should Co-Founders Put a Shareholders Agreement in Place?
The best time to put an agreement in place is when the company is formed, because the founders are generally still aligned and the terms are hypothetical. The second best time is now. The longer a company runs without one, the more value it typically has, and the harder it can be to agree terms if relationships have already come under strain.
If your company is already operating and you are not sure where it stands, the first step is usually to review the existing structure. We cover this in The Legal Audit Every Scaling Business Should Do Before Something Goes Wrong, which notes that if a business operates through a company but has not formalised shareholder arrangements or director responsibilities, governance issues can arise as the business grows.
Business Legals Audit A Business Legals Audit reviews your structure, agreements and governance arrangements against how your business actually operates today, and flags where shareholder arrangements need to be put in place or updated. From $495 Book a Business Legals Audit
Shareholders Agreement Australia: Frequently Asked Questions
Do I legally need a shareholders agreement in Australia?
There is generally no legal requirement for a proprietary company to have a shareholders agreement. However, without one, the relationship between shareholders is governed only by the Corporations Act and the company’s constitution (or the replaceable rules), which rarely address founder-specific issues such as exits, deadlock or vesting.
What is the difference between a shareholders agreement and a company constitution?
A constitution is the company’s internal rulebook, which generally operates as a contract between the company, its members and its directors. A shareholders agreement is a separate private contract between the shareholders, usually dealing with commercial arrangements between them. Many companies have both, and the two documents should be consistent with each other.
If I own 51 percent of a company, can I make all the decisions?
Not necessarily. A holder of more than 50 percent can generally pass ordinary resolutions, but some decisions need a special resolution of at least 75 percent of the votes cast, and directors, not shareholders, generally manage the day-to-day business. A majority holder must also be careful that their conduct is not oppressive or unfairly prejudicial to minority shareholders, which can give rise to court remedies.
Can a shareholders agreement be put in place after the company has already been operating?
Yes. A shareholders agreement can be entered into at any time if all relevant shareholders agree to its terms. It is generally easier to agree terms earlier, before there is a live disagreement, but it is not too late if the company is already trading.Yes. A shareholders agreement can be entered into at any time if all relevant shareholders agree to its terms. It is generally easier to agree terms earlier, before there is a live disagreement, but it is not too late if the company is already trading.
Does a shareholders agreement replace a partnership agreement?
A shareholders agreement applies to companies, and a partnership agreement applies to partnerships. They serve a similar purpose, which is to document what the people involved have agreed, but they work differently because a company is a separate legal entity. Which one you need depends on how your business is structured.
References
Corporations Act 2001 (Cth), Federal Register of Legislation
ASIC: Passing a company resolution, Australian Securities and Investments Commission
Business Partnership Agreement Australia: Is Your Business Partnership Legally Protected?, ND Legal
The Legal Audit Every Scaling Business Should Do Before Something Goes Wrong, ND Legal
Choosing the Right Business Structure for Your Online Business in Australia, ND Legal
Strategy & Advice Consult Own a company with a co-founder and want to know where you actually stand? Book a Strategy & Advice Consult and we’ll look at what your company needs documented.From $222 · 1h Book a Strategy & Advice Consult
This blog is intended for general information purposes only and does not constitute legal advice. The content is based on Australian law and may not be current at the time you read it. Legal requirements may vary depending on your circumstances. Always seek independent legal advice tailored to your specific situation before acting on any information provided.
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