Shareholder Agreements in Australia: What to Include and What Happens Without One

Most business partners who form a company together are optimistic. They get along well, share a common vision, and see a shareholders agreement as an unnecessary formality — something for big companies with lawyers on retainer. Then the business grows, relationships change, and disagreements emerge. Without a shareholders agreement, what seemed like a sensible informal arrangement suddenly becomes an expensive, bitter, and protracted dispute.

This article explains what a shareholders agreement is, what it should contain, and — critically — what happens when you don’t have one. If you are about to enter a business with partners, or if you are already in one without a formal agreement, the information below is directly relevant to your commercial position in Queensland and across Australia.

What Is a Shareholders Agreement?

A shareholders agreement is a private contract between the shareholders of a company that governs their relationship and the management of the company’s affairs. Unlike the company’s constitution — which is a public document lodged with ASIC and which operates as a statutory contract under section 140 of the Corporations Act 2001 (Cth) — a shareholders agreement is confidential and can be tailored precisely to the parties’ commercial arrangements.

The agreement typically deals with:

• How decisions are made (both operational and strategic)
• How disputes between shareholders are resolved
• What happens if a shareholder wants to sell their shares
• What happens if a shareholder dies, becomes incapacitated, or is involved in a divorce
• How the company is funded and when dividends are paid
• Restrictions on competing with the company

In short, a shareholders agreement is the operating manual for the ownership relationship. It answers the questions that the Corporations Act and the company’s constitution leave open.

Why It Matters — and Why a Constitution Alone Is Not Enough

Many business owners assume that the company’s constitution (or the replaceable rules in the Corporations Act) adequately governs their arrangements. This is a dangerous assumption.

The replaceable rules are a default regime designed for a generic company. They do not account for the specific dynamics of your business. For example, the replaceable rules allow a director to be removed by a simple majority of shareholders (section 203C). If one shareholder holds 51% of shares, they can remove the other as a director without cause and without compensation. In a 50/50 company, neither shareholder can remove the other — which sounds fair until the relationship breaks down and the company is paralysed by deadlock.

A constitution helps but has limits. It is a public document that can only be amended by a special resolution (75% majority). It cannot bind shareholders in their personal capacity — only as members of the company. It cannot address matters outside the company’s internal governance.

A shareholders agreement fills the gaps. It is a private, flexible, enforceable contract. It can be amended only with unanimous consent (if drafted correctly), giving minority shareholders meaningful protection. It can impose obligations on shareholders in their personal capacity — including non-compete obligations, confidentiality, and buy-sell mechanisms.

10 Essential Clauses in a Shareholders Agreement

1. Share Capital and Ownership Structure

Document the initial shareholding structure clearly: who holds what percentage, the class of shares, any differential rights attaching to classes, and the agreed pre-money valuation (if relevant). This provides the baseline against which all future dilution, transfers, and disputes are measured.

2. Directors and Management Decisions

Specify how the board is constituted — typically, each shareholder (or shareholder group) has the right to appoint a director proportionate to their holding. Define the categories of decisions that require unanimous shareholder approval (reserved matters) as opposed to ordinary board or shareholder resolutions. Common reserved matters include: taking on debt above a threshold, making capital expenditure above a threshold, entering into material contracts, changing the nature of the business, issuing new shares.

3. Pre-Emption Rights (Right of First Refusal)

Before a shareholder can transfer shares to a third party, other shareholders must be given the first right to purchase those shares at the proposed price. This prevents unwanted third parties from becoming shareholders and gives existing owners control over who they are in business with.

4. Drag-Along Rights

If a majority of shareholders (typically above 75%) want to sell the company to a third party, they can require minority shareholders to sell on the same terms. This facilitates clean exits — a buyer almost always wants 100% of the company, and a single holdout minority shareholder can torpedo a transaction.

5. Tag-Along Rights

The inverse of drag-along: if a majority shareholder receives an offer for their shares, minority shareholders have the right to “tag along” and sell on the same terms. This protects minorities from being left behind in a new ownership structure they did not choose.

6. Deadlock Mechanisms

Deadlock occurs when shareholders holding equal voting rights are unable to agree on a material decision. Without a mechanism, the company is paralysed. Common mechanisms include a shotgun (buy-sell) clause, a casting vote for the chair, or a compulsory valuation and buyout process. See below for detail.

7. Dividend Policy

Specify the dividend policy — for example, that the company will distribute a minimum percentage of after-tax profits as dividends each year, subject to cash flow requirements. Without this, a majority shareholder who controls the board can retain all profits and pay themselves through salary and bonuses while minority shareholders receive nothing.

8. Non-Compete and Restraint of Trade

Shareholders who are also involved in the business should be subject to non-compete obligations during their involvement and for a reasonable period after exit. Without this, an exiting shareholder can immediately compete with the company they just sold.

9. Confidentiality

Shareholders are exposed to sensitive commercial information. The agreement should impose clear confidentiality obligations — both during the relationship and after exit — with appropriate carve-outs for legal and regulatory obligations.

10. Exit Provisions

The agreement should deal comprehensively with how shareholders exit the company, including: voluntary sale (with pre-emption), compulsory sale in certain events (misconduct, bankruptcy, death, divorce), and the mechanism for valuing shares on exit. This is the clause that matters most when the relationship breaks down. See below.

Common Disputes That Arise Without a Shareholders Agreement

The disputes we see most frequently at Boss Lawyers in the absence of a shareholders agreement follow a predictable pattern:

Dividend Disputes

A majority shareholder who controls the board pays themselves a generous salary and consulting fees, retains all profits in the company, and never declares a dividend. Minority shareholders — who may have invested significant capital — receive no return on their investment. Without an agreed dividend policy, this is often technically lawful.

Director Removal

In a company where shareholders are also directors, a majority shareholder uses their voting power to remove the minority shareholder as a director — stripping them of their management role and day-to-day involvement in the business they helped build. The minority remains a shareholder but is locked out.

Dilution

The company issues new shares — to the majority shareholder, to a new investor, or to a key employee — diluting the minority shareholder’s percentage without their consent. Without pre-emption rights in a shareholders agreement, this may be permitted by the constitution or replaceable rules.

Competing Business

An exiting shareholder immediately sets up a competing business, taking clients, staff, and intellectual property. Without a properly drafted restraint of trade clause in a shareholders agreement, the company’s remedies are limited and uncertain.

Deadlock

In a 50/50 company, the shareholders cannot agree on a fundamental decision — whether to hire a key employee, take on debt, enter a new market, or sell the business. Without a deadlock mechanism, the company either limps along or the shareholders find themselves in court seeking a winding up order on just and equitable grounds.

What Happens When There Is No Shareholders Agreement?

When a dispute arises without a shareholders agreement, shareholders are left with the protections — and limitations — of the Corporations Act. These include:

Oppression remedy (s 232): A shareholder may apply to the court if the conduct of the company’s affairs (or an act or omission by the company) is either contrary to the interests of shareholders as a whole, or oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder. This is a powerful but costly remedy. Litigation can take years and cost hundreds of thousands of dollars.

Winding up on just and equitable grounds (s 461(1)(k)): A shareholder may apply to wind up the company where it is just and equitable to do so — typically where the company was formed on the basis of a mutual understanding that has broken down. This is a drastic remedy that destroys the business for everyone. See our guide: Winding Up on Just and Equitable Grounds in Australia.

Derivative actions (Pt 2F.1A): A shareholder may apply for leave to bring proceedings on behalf of the company against a director or third party. This is procedurally complex and rarely the first option.

All of these remedies share one feature: they are expensive, slow, and uncertain. A well-drafted shareholders agreement costs a fraction of what litigation costs. The return on investment is obvious in hindsight — but by then it is too late.

For practical guidance on resolving shareholder disputes, see: How to Resolve a Shareholder Dispute in Australia.

Deadlock Mechanisms: How to Break a 50/50 Impasse

Deadlock in a 50/50 company is one of the most common and most destructive situations in commercial law. The most effective deadlock mechanisms are:

Shotgun (Buy-Sell) Clause

One shareholder serves a notice on the other specifying a price per share. The recipient must either buy the offeror’s shares at that price, or sell their own shares to the offeror at that price. The mechanism forces a fair valuation: if you name a price that is too low, the other party will buy you out at that price. If you name a price that is too high, they will sell to you at that price. Properly structured, this is the most commercially efficient deadlock resolution mechanism available.

Independent Expert Valuation and Forced Sale

An agreed independent expert (typically a forensic accountant or business valuator) is appointed to value the shares. The shareholder who initiated the process then elects to buy or sell at the expert’s valuation. This is slower than a shotgun clause but may be preferred where the parties have unequal financial capacity.

Escalation and Mediation

The agreement may require the dispute to be escalated to a senior representative of each shareholder, then to mediation before any court process or buy-out mechanism is triggered. This adds time but can resolve disputes at lower cost where the relationship is still functional.

Exit Provisions: Getting Out Fairly

Exit is the moment when the absence of a shareholders agreement is most painfully felt. A well-drafted agreement should address:

• Voluntary exit: Procedure, pre-emption period, valuation mechanism, payment terms
• Compulsory exit triggers: Insolvency, conviction of a serious offence, breach of the agreement, ceasing employment with the company, death or total permanent disability
• Valuation on exit: Who appoints the valuer, which valuation methodology applies (earnings multiple, net asset value, discounted cash flow), whether a discount applies for minority stakes, payment terms
• Good leaver / bad leaver provisions: A shareholder who exits for “good” reasons (death, disability, retirement) receives full value. A “bad leaver” (resignation, dismissal for cause, breach) receives a discounted amount or par value. These provisions incentivise loyalty and penalise misconduct.

Getting exit provisions right requires careful thought about the specific business, the relative contributions of each shareholder, and the likely commercial scenarios. There is no one-size-fits-all approach. The most important thing is that the parties agree before the relationship sours, not after.

How to Enforce a Shareholders Agreement

A shareholders agreement is enforceable as a contract. If a party breaches it, the remedies include:

• Injunction: To prevent a threatened or ongoing breach (e.g., to stop a share transfer in breach of pre-emption rights)
• Specific performance: To compel performance of a contractual obligation (e.g., to compel completion of a share sale under a buy-sell clause)
• Damages: Compensation for loss suffered as a result of the breach
• Declaration: A court declaration of the parties’ rights under the agreement

The practical challenge with enforcement is speed. Shareholder disputes move quickly — shares can be transferred, assets can be dissipated, and competitive damage can be done before a hearing is secured. Injunctive relief is often essential. Courts can and do grant urgent injunctions in shareholder disputes within days of an application where the evidence of imminent breach is clear.

For more information on the process for resolving shareholder disputes in Australia, see our related guide: Shareholder Disputes — Boss Lawyers.

Frequently Asked Questions

Do I need a shareholders agreement if my company only has two shareholders?

Especially if you have two shareholders. A 50/50 ownership structure is the most deadlock-prone arrangement in commercial law. Every major decision requires both shareholders to agree. Without a deadlock mechanism, a single disagreement can paralyse the company indefinitely. A shareholders agreement is not a luxury for two-person companies — it is essential infrastructure.

Can a shareholders agreement override the Corporations Act?

No. Shareholders cannot contract out of mandatory provisions of the Corporations Act. However, the Act has a large number of default provisions that apply only where the parties have not agreed otherwise. A shareholders agreement can displace those defaults and create a tailored governance regime that better reflects the parties’ actual intentions.

How is the value of shares determined on exit if there is no agreed method?

Without an agreed valuation mechanism, the parties are typically left to negotiate — which, if the relationship has broken down, is rarely productive. The alternatives are a court-ordered valuation (often as part of an oppression remedy application) or litigation over the price. Neither is quick or cheap. Agreeing on the valuation methodology upfront — and who appoints the expert — is one of the most valuable things a shareholders agreement can do.

What is the difference between a shareholders agreement and a joint venture agreement?

A shareholders agreement governs the relationship between shareholders of a company. A joint venture agreement governs the relationship between parties conducting a specific project or enterprise together — which may or may not be through a company structure. In a corporate joint venture, both documents may be relevant. An experienced commercial lawyer should advise on the appropriate structure for your specific arrangement.

Can I put a shareholders agreement in place after the company has already been operating?

Yes — and many businesses do exactly that, after a near-miss dispute or when bringing in a new investor. The process is the same as for a new company, but the negotiation may be more complex because each shareholder will have an existing position they want to protect. It is better to have a late agreement than no agreement.

What happens to my shares if I die without an exit provision?

Your shares will pass to your estate and be dealt with under your will (or intestacy rules if you have no will). Your executor will hold the shares on behalf of your estate. Depending on the company’s constitution, your beneficiaries may not have the same rights as an ordinary shareholder — for example, they may not be entitled to be registered as members. A shareholders agreement with appropriate provisions for death (including life insurance arrangements to fund the buyout) protects both your estate and your business partners.

Act Before the Dispute Arises

A shareholders agreement will not prevent every dispute. But it provides a framework for resolving disputes quickly, commercially, and without litigation. It protects every shareholder — majority and minority alike — by establishing clear rules that everyone agreed to when the relationship was still good.

At Boss Lawyers, we draft shareholders agreements for companies across Queensland and nationally, from start-ups to established businesses bringing in new equity partners. We also act for shareholders in disputes arising from the absence or breach of shareholders agreements.

If you are forming a company, bringing in a new shareholder, or currently in a dispute, contact our shareholder disputes team in Brisbane for a practical conversation about your options.

This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances before taking any action in reliance on this article. The law is stated as at the date of publication and may change. Boss Lawyers Pty Ltd ACN 143 136 645.