Shareholders Agreement vs Company Constitution: What's the Difference - and Do You Need Both?

What a company constitution actually does

When you register a company in Australia through ASIC, you're making a choice - even if you don't realise it. You can adopt your own custom company constitution, or you can rely on the default replaceable rules in the Corporations Act 2001 (Cth). Either way, what you almost certainly won't have is a shareholders agreement. And for most startups with two or more founders - or that plan to bring on investors - that's a significant gap.

A company constitution is a public-facing, ASIC-registered document that governs the internal management of your company. It sets the rules for how the company itself operates - not how the shareholders relate to each other.

Think of it as the rulebook for the company as an entity. It covers things like:

• How directors are appointed and removed
• How board meetings are called and conducted
• How shares are issued, transferred, and in some cases valued
• The rights attached to different classes of shares
• How general meetings of shareholders are held
• The powers and duties of the company's officers

Importantly, a company constitution is a public document. It's lodged with ASIC and is accessible to anyone who searches your company. If you amend it, that amendment also needs to be filed with ASIC.

What a shareholders agreement actually does

A shareholders agreement is a private contract between the shareholders - and often the company itself. It sits alongside the constitution; it doesn't replace it.

Where a constitution governs the company's internal mechanics, a shareholders agreement governs the relationship between the people who own it. It covers the things that matter most when founders co-own a business and money, control, or exit is eventually on the table.

Because it's a private contract, it's not filed with ASIC. Its terms aren't accessible to the public. That confidentiality is often one of the main reasons sophisticated founders and investors want one in place.

The key differences - side by side

Why most startups need both

A shareholders agreement doesn't make a constitution redundant, and a constitution doesn't replace the need for a shareholders agreement. They work together.

A well-structured startup will typically have a constitution that reflects its share structure - noting that different classes of shares exist - and a shareholders agreement that contains the commercial detail about how those shares work, who gets what rights, and what happens in various scenarios.

Here's a concrete example. Say a co-founder leaves eighteen months in. Your company constitution probably says nothing about what happens to their shares. The replaceable rules certainly don't address it. Without a shareholders agreement, you have no mechanism to buy back those shares, apply a vesting schedule, or prevent your departing co-founder from selling to whoever they want.

That's a painful and avoidable situation. It's the kind of scenario that ends co-founder relationships, delays investment rounds, and - in the worst cases - leads to litigation.

When to get a shareholders agreement in place

The short answer is: before you need it, not after a problem has already emerged.

At co-founder stage - before launch

If you're starting a business with one or more co-founders, the time to document how equity works, what vesting looks like, and what happens if someone leaves is before you've built anything together. It's far easier to agree on these terms when the stakes are low and the relationship is fresh.

Before bringing on your first investor

Any sophisticated angel investor or VC will want to see a shareholders agreement - or will insist on one being signed as a condition of investment. Having a well-drafted agreement already in place signals maturity and speeds up the process.

Before issuing shares to an employee or advisor

If you're giving shares (not options) to someone other than a founder, that person becomes a shareholder. What rights do they have? Can they vote? Can they sell? A shareholders agreement determines the answers.

Before raising a formal round

At seed or Series A stage, investors will almost certainly want to replace or significantly update any existing shareholders agreement with one that includes investor-friendly provisions - liquidation preferences, anti-dilution protections, information rights, and board composition clauses.

What your shareholders agreement should cover

Every shareholders agreement is different, but for a seed-stage or growth-stage startup, you'd typically expect to see the following:

Vesting

How does each founder earn their equity over time? A typical structure is a four-year vest with a one-year cliff - meaning a founder earns nothing in the first twelve months, then 25% on the cliff date, with the remainder vesting monthly over the following three years. The agreement should also address what happens to unvested shares if a founder leaves (good leaver vs bad leaver provisions).

Transfer restrictions

Can shareholders sell their shares freely? Typically not. A shareholders agreement will impose pre-emption rights (existing shareholders get the first opportunity to buy before shares can be offered to a third party), board consent requirements, and restrictions on transfer to competitors.

Drag-along and tag-along rights

A drag-along right allows majority shareholders to require minority shareholders to sell their shares in an exit. A tag-along right allows minority shareholders to join in on the same terms if majority holders are selling. Both matter for exits to work cleanly.

Reserved matters

Which decisions require a shareholder vote? Which require unanimous consent? This section prevents individual directors from making major decisions unilaterally - issuing new shares, taking on significant debt, or selling key assets.

Dispute resolution

If shareholders can't agree, what's the process? A well-drafted agreement includes a mechanism - mediation, escalation, buy-out rights - before the situation reaches litigation.

Founder obligations

Non-compete and non-solicitation clauses while a founder is a shareholder, and for a period after departure. These need to be carefully scoped to be enforceable in Australia - they can't be unreasonably broad in geography, duration, or activity.

A note on replaceable rules

If you registered a company without a constitution, you're operating under the replaceable rules in the Corporations Act. These are functional defaults - but they were written for general corporate governance, not for startups.

The replaceable rules say nothing about vesting, pre-emption rights, drag-along rights, or founder obligations. They're adequate for a simple proprietary company with a single director-shareholder. They're not adequate for a company with multiple co-founders and plans to raise capital.

You can adopt a constitution at any time by passing a special resolution (75% of shareholders voting in favour). But for most startups, getting a shareholders agreement in place is the more urgent and commercially meaningful step.

Common mistakes founders make

Treating a template SHA as done

Generic shareholders agreement templates circulate widely. They're a starting point, not a finished document. The provisions that matter most - vesting schedules, leaver definitions, reserved matters - need to be calibrated to your specific situation and shareholder composition.

No vesting at all

Issuing co-founder shares without vesting is one of the most common structural mistakes in early-stage startups. If a co-founder leaves after six months - for any reason - they typically keep all their shares. That creates a significant cap table problem for future investors.

Not updating the SHA as the company evolves

A shareholders agreement signed at formation needs to be reviewed when you bring on new shareholders. Investors will usually require a new deed of adherence - or a full SHA replacement - as part of their investment round. Failing to keep documents current creates ambiguity about who is bound by what.