Shareholders Agreements in Australia: A Founder's Guide

Most founders register a company, adopt a standard constitution, and move on without giving it much more thought. That is fine right up until two co-founders disagree about the direction of the business, one wants to leave, or an investor is about to put money in and asks where the shareholders agreement is. A constitution sets out the basic rules of the company. It rarely deals with any of the situations that actually cause disputes between shareholders.

This guide covers what a shareholders agreement is, why it is different from a constitution, when you need one, and what it should include.

A constitution is not a shareholders agreement

Both documents are binding, but they do different jobs. A company constitution operates as a statutory contract between the company and each member, between the company and its directors, and between the members themselves. It has to comply with the Corporations Act, and any part of it that breaches the Act is simply void.

A shareholders agreement is a private contract between the shareholders (and usually the company) that sits on top of the constitution and the general law. Its advantage is flexibility: it can capture arrangements between shareholders that the company itself could not put into its constitution, and it can stay confidential where a constitution is a more public document.

Because both documents can end up covering the same ground, a well-drafted shareholders agreement includes a clause stating that it prevails over the constitution if the two conflict, and the constitution includes a matching clause pointing the other way. Having the provision in only one of the two documents is a common gap. In practice, the cleaner approach is to keep the two consistent in the first place and amend whichever document is out of step, rather than relying on the inconsistency clause to sort it out later.

When you need one

You need a shareholders agreement if:

There is more than one shareholder and the business has any meaningful value or growth trajectory
An investor is putting money into the business, since most investors will not proceed without one
Founders are contributing different amounts of time, capital, or expertise and want that reflected in decision-making rights, not just shareholding percentage
You want share vesting in place so that a co-founder who leaves early does not keep a full, unearned stake

You can usually wait if:

You are a sole director and shareholder
The business is genuinely pre-revenue and pre-commitment, with no co-founders or external investment yet on the table

The point at which founders usually wish they had one already is the point at which it becomes hardest to negotiate fairly, once there is a disagreement, an exit, or money on the table. It is far easier to agree on these terms before there is anything to fight about.

What happens without one: the statutory fallback, and why it is not enough

If you have no shareholders agreement, you are not entirely without protection. The Corporations Act provides an oppression remedy, which lets a shareholder ask a court for relief where the conduct of the company is unfairly prejudicial, unfairly discriminatory, or oppressive. It is a genuinely broad remedy, and courts have applied it to a wide range of situations: a majority shareholder diverting the company's business to another entity they control, paying themselves excessive remuneration, issuing new shares mainly to dilute a minority, or shutting a minority director out of meetings and information.

The catch is that the oppression remedy is litigation. The burden is on the person bringing the claim to prove they were treated unfairly, not merely that they came off worse, and the outcome depends on a court weighing competing interests after the fact.

A shareholders agreement is more effective precisely because it front-loads these decisions. Instead of arguing after a relationship has broken down about what is "fair," the parties have already agreed on a buy-out procedure, a valuation method, and a dispute resolution path. For closely held companies, where deadlock is more likely and there is no public market to exit through, that pre-agreement is worth far more than the theoretical availability of a court remedy.

What a shareholders agreement should cover

Decision-making and reserved matters

Set out which decisions need unanimous or majority shareholder approval beyond what the constitution already requires. Common reserved matters include issuing new shares, taking on significant debt, or changing the nature of the business. For a minority shareholder, veto rights over a defined list of reserved matters are often the most valuable protection in the whole agreement.

There is no automatic legal right for existing shareholders to be offered shares before an outside buyer when someone sells their existing shares. That protection only exists if you write it in. It usually takes one of two forms: a right of first offer, where a departing shareholder must offer their shares to the others before going to a third party, or a right of first refusal, where they must bring a genuine third-party offer back to the other shareholders first. One practical point that catches people out: if these restrictions live only in the shareholders agreement, they bind only the people who have signed it. To make sure a new shareholder is caught, the agreement should require any incoming shareholder to sign a short deed agreeing to be bound before they receive their shares.

Tag-along and drag-along rights

A tag-along right lets minority shareholders join a sale if a controlling shareholder sells, on the same terms, so they are not left behind under new ownership. A drag-along right lets a controlling shareholder require the minority to sell alongside them, so a buyer can acquire the whole company and a single small holder cannot block a sale the rest of the business wants. These are enforced strictly as contractual rights, which cuts both ways: disputes usually turn on technical details like whether notice was validly given, whether the disclosed terms were accurate, and whether every shareholder was treated consistently. Even where a drag-along is validly triggered, directors still have to comply with their duties, and a flawed or unfair sale process can itself become the basis of an oppression claim. The practical lesson is that these clauses are only as good as the paper trail behind them when they are used.

Deadlock resolution

Where two founders hold equal shares, a mechanism for breaking genuine deadlock matters more than most founders expect at the outset. Options range from giving one party a casting vote, to referring the dispute to a mediator or independent expert, to more drastic buy-or-sell mechanisms such as a "Russian roulette" clause, where one shareholder names a price and the other must either buy at that price or sell at it. Worth knowing: the more aggressive buy-out style mechanisms have fallen somewhat out of favour, because in practice they can be manipulated by the party in the stronger financial position and often trigger deeper disputes rather than resolving them. Escalation to negotiation and independent expert determination is increasingly preferred over mechanisms designed to force one party out.

Vesting

If founders are not contributing equally from day one, or if the company wants to protect against a co-founder leaving early with a full stake intact, vesting terms should sit inside or alongside the shareholders agreement. Vesting is usually time-based (you earn your shares over a period of continued involvement), performance-based, or a mix. Where an employee or founder also holds shares, it is important that the vesting and leaver terms line up with the shareholders agreement rather than contradicting it, which is usually handled either by having them sign up to the agreement or by mirroring the key terms in both places. For more on how this works in practice, see our guide on share vesting.

Good leaver and bad leaver terms

Many agreements distinguish between a "good leaver" (someone who leaves in acceptable circumstances, such as redundancy or ill health) and a "bad leaver" (someone who resigns to join a competitor or is dismissed for serious misconduct), and treat their shares differently on the way out. This is standard, but there is a trap: if the price a bad leaver is forced to accept is discounted so heavily that it looks like a penalty rather than a genuine reflection of the loss to the business, a court may refuse to enforce it.

Exit and buyout mechanics

What happens if a shareholder wants to leave, is forced out, or dies. This should include how their shares get valued, who has the right or obligation to buy them, and over what timeframe. Getting the valuation method agreed in advance is one of the single most useful things a shareholders agreement does, because it removes the biggest thing people fight about at exit.

Do you need a lawyer, or is a template enough?

A generic template can work for a very early, low-stakes arrangement between founders who trust each other completely and have nothing at stake yet. Once there is real value in the business, more than one founder with different contributions, or an investor involved, the specific mechanics need to reflect your actual situation. As the points above show, the difference between an enforceable clause and one a court reads down often comes down to detail: whether pre-emptive rights bind a new shareholder, whether a bad leaver discount looks like a penalty, whether a drag-along was exercised through a clean process. Getting this wrong is far more expensive to fix later, usually in the middle of a dispute, than it is to get drafted properly from the outset.

FAQ

Is a shareholders agreement legally required in Australia?
No. A company can operate on its constitution and the Corporations Act alone. Most businesses with more than one shareholder choose to have one anyway, because the statutory fallback (mainly the oppression remedy) means going to court rather than following a process everyone agreed to in advance.

What happens if there is no shareholders agreement in place?
Disputes fall back on the constitution and the Corporations Act. The main protection is the oppression remedy, which lets a shareholder ask a court for relief from unfair conduct, but it requires litigation and proof of unfairness. Case law is full of disputes (excluded directors, diluted minorities, forced-out employee shareholders) that a well-drafted agreement could have resolved through a pre-agreed process instead.

Do I need a shareholders agreement if it is just me and one co-founder?
Generally, yes. Two equal shareholders is the scenario where a deadlock mechanism matters most, since there is no natural majority to break a tie.

How much does a shareholders agreement cost in Australia?
Costs vary with complexity, but a straightforward founder shareholders agreement is typically available as a fixed fee rather than an open-ended hourly engagement. At Plumlaw, shareholders agreements start from $1,250 + GST on a fixed fee basis, so the cost is known before work begins.

Can I update a shareholders agreement later, or does it need to be finalised at incorporation?
It can be put in place or updated at any point all existing shareholders agree to it, including when a new investor or co-founder joins. It does not need to be finalised at incorporation, though earlier is generally easier since there is less at stake to negotiate around.

This article is general information only and does not constitute legal advice. The law is complex and fact specific. What applies in one situation may not apply in yours. For advice specific to your circumstances, speak with a lawyer at Plumlaw at plumlaw.co/contact.

Shareholders Agreements in Australia: What Founders Need Before Bringing on a Co-Founder or Investor