Shareholders Agreement
A shareholders agreement governs the relationship between company shareholders, supplementing the company constitution to protect all parties.
What is a Shareholders Agreement?
A shareholders agreement is a contract between the shareholders of a company that sets out their rights and obligations in relation to the company and each other. It operates alongside the company's constitution and the Corporations Act 2001 (Cth) to provide a framework for decision-making, share transfers, and exits.
Unlike a company constitution, a shareholders agreement is a private document — it is not lodged with ASIC and does not become public record. This makes it the preferred vehicle for sensitive commercial arrangements between shareholders, including pre-emption rights, drag-along and tag-along provisions, and founder vesting.
Shareholders agreements are particularly important for early-stage companies where the shareholder group is small and relationships are close. Without one, disputes about control, share transfers, and exit are governed by default Corporations Act provisions, which are rarely optimal for startup or private company shareholders.
When do you need a Shareholders Agreement?
- ✓When incorporating a company with multiple founders or shareholders
- ✓Before issuing shares to any external investor, including friends-and-family rounds
- ✓When bringing in a new shareholder through a share purchase or issuance
- ✓Before a seed or Series A investment round
- ✓When restructuring share ownership in an existing company
- ✓When creating an employee share option plan (ESOP)
Key provisions to include
Voting Rights
Defines how shareholders vote on resolutions, including which decisions require unanimous consent versus simple majority.
Pre-Emption Rights
Gives existing shareholders the right to purchase new shares pro-rata before they are offered to third parties.
Transfer Restrictions
Limits the circumstances in which shareholders can transfer their shares, including lock-up periods and approval requirements.
Drag-Along Rights
Allows majority shareholders to force minority shareholders to sell their shares in a third-party acquisition.
Tag-Along Rights
Allows minority shareholders to participate in a sale if majority shareholders are selling their stake.
Founder Vesting
Documents founder equity vesting schedules and the consequences of a founder leaving before their equity is fully vested.
Dividend Policy
Sets out when and how dividends are declared and paid, and in what proportion.
Exit Provisions
Defines how shareholders can exit, including permitted transfers, buyback mechanisms, and change-of-control provisions.
Common mistakes to avoid
Relying solely on the company constitution, which does not address the commercial arrangements between shareholders
Not including drag-along provisions, which can make it impossible to sell the company if minority shareholders refuse to participate
Failing to address what happens when a founder or key shareholder dies or becomes incapacitated
Setting quorum and approval thresholds so high that routine decisions become impossible to make without unanimous consent
Not keeping the agreement updated when the shareholder group changes through new rounds or share transfers
Frequently asked questions
Is a shareholders agreement required by law in Australia?
No. A shareholders agreement is not legally required — a company can operate under its constitution and the Corporations Act alone. However, for companies with multiple shareholders, a shareholders agreement is strongly recommended to address commercial arrangements that are not covered by the default legal framework.
What is the difference between a shareholders agreement and a company constitution?
A company constitution is a public document that governs the internal management of the company and applies to the company itself. A shareholders agreement is a private contract between specific shareholders and can contain terms that are more commercially sensitive — such as vesting provisions, tag-along rights, and dividend policies — without being publicly disclosed.
Do all shareholders need to sign the shareholders agreement?
For maximum protection, yes. A shareholders agreement only binds the parties who sign it. If a new shareholder joins later, they should sign a deed of adherence to become bound by the existing agreement.
Can a shareholders agreement override the Corporations Act?
In some areas, yes — the Corporations Act permits shareholders to agree to different arrangements in a shareholders agreement. However, certain provisions of the Act are mandatory and cannot be contracted out of. A qualified lawyer should review the agreement to identify any provisions that may conflict with mandatory legislative requirements.
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