Directors run the company day‑to‑day. Shareholders own it.
When governance isn’t clearly defined, conflict is almost inevitable. Under s 198A of the Corporations Act 2001 (Cth) – a replaceable rule – the business of a company is to be managed by or under the direction of the directors. Shareholders, by contrast, make high-level ownership decisions such as amending the constitution, appointing or removing directors, and approving major structural changes.
A company constitution may modify some of these rules. Still, a shareholders’ agreement goes a step further — it’s a private contract setting out how owners and directors actually share power in practice.
In this guide, we break down how authority is divided between the board and shareholders, which powers can be restricted, and why clear governance clauses are essential for smooth company management.
Table of Contents
Board vs shareholders: Who actually decides what?
At its core, the board of directors manages the company’s operations such as budgeting, hiring, contracts, and general strategy. Shareholders, by contrast, focus on ownership and value protection. They approve major or structural changes, such as issuing new shares or selling the business.
While this division seems straightforward, it can quickly blur in practice. Founders often expect to retain control even after investors come in, and investors want assurances that the company can’t make critical decisions without their consent.
This is where a shareholders’ agreement becomes essential.
It can:
- Reallocate or restrict certain powers.
- Clarify the director’s decision‑making thresholds.
- Identify which matters require board approval versus shareholder sign‑off.
In essence, it creates a roadmap for governance, which defines who decides what, under what conditions, and with what level of consensus.
This clarity is especially valuable for private and early‑stage companies where personalities, ownership stakes, and expectations are still evolving.
Here’s how the distinction typically plays out in practice:
| Decision | Default position | What the shareholders’ agreement can change | Typical approval threshold |
| Hiring or firing the CEO | Board | May require shareholder approval | Majority |
| Issuing new shares | Board | Often reserved for shareholder approval or special majority | 75% or unanimous |
| Taking on large debt | Board | May require reserved matter approval | Majority or unanimous |
| Selling key assets | Board | Often treated as a reserved matter | Special majority |
| Changing business direction | Board | May require shareholder approval | Special majority |
| Amending the Constitution | Shareholders | Usually reserved for shareholders | 75% |
| Declaring dividends | Board | May require shareholder input | Majority |
| Approving the annual budget | Board | Can be reserved for shareholder review | Majority or special majority |
This balance ensures directors can act efficiently day‑to‑day, while shareholders retain control over strategic moves.
Board composition: Who gets a seat at the table?
Board composition clauses define how many directors serve and who appoints them. This can include:
- Nominee directors, appointed by specific shareholders or investor groups.
- Independent directors, sometimes included to provide neutral oversight.
- Managing director roles, who handle daily operations but remain bound by board and shareholder limits.
When shareholdings change, board composition may shift too. For instance, if an investor’s equity drops below a threshold, they may lose their right to appoint a nominee. Conversely, minority shareholders may negotiate the right to appoint at least one director to protect visibility and influence.
These details fall under governance clauses within a shareholders’ agreement in Australia and often complement the company’s constitution.
It’s worth noting that nominee directors owe their duties to the company, not to the shareholder who appointed them. This is a common source of confusion – a nominee director cannot simply act as their appointer’s delegate at the board table. They must still exercise independent judgment and comply with their statutory duties under ss 180-183 of the Corporations Act.
Appointment and removal of directors
In most Australian proprietary companies, founding shareholders initially appoint the directors when the company is incorporated. Over time, as ownership changes or new investors come on board, director appointments are adjusted through board resolutions or in accordance with the rights set out in the shareholders’ agreement.
Under the Corporations Act, the rules for removing a director depend on the company type. For public companies, s 203D provides that a director can be removed by ordinary resolution at a general meeting, and this right cannot be contracted out of. For proprietary companies, the replaceable rule in s 203C allows removal by resolution, though the company’s constitution may modify this. In either case, a shareholders’ agreement can impose additional contractual requirements or consequences around removal, but it cannot override these statutory rights.
Common rules include:
- Appointing directors: Usually by each major shareholder or by agreement among the founders.
- Removing directors: Shareholders or the appointing party may remove their nominee at any time.
- Voting thresholds: Often a simple majority, unless the agreement specifies a higher bar.
- ASIC notification: Changes must be reported to ASIC within the required timeframe (generally 28 days).
Let’s look at a practical example. After dilution in a new funding round, a founder may lose their nomination rights and, consequently, their board seat. Similarly, if an investor sells their shares, their nominated director may be required to resign under the shareholders’ deed director clauses.
Importantly, an agreement can’t override statutory rights – it only adds contractual consequences if breached. For example, even if a shareholders’ agreement purports to prevent the removal of a director, shareholders can still exercise their statutory right to remove that director. The aggrieved party’s remedy would be a contractual claim for breach of the agreement, not an injunction to reverse a validly passed resolution.
Reserved matters: Limiting director power
Reserved matters are key business decisions that directors can’t make on their own — they require shareholder approval first. These clauses sit at the heart of a shareholders’ agreement, helping balance power, manage strategic risk, and protect minority shareholder interests.
They act as a safeguard against unilateral actions on critical issues such as funding, corporate strategy, or governance changes.
Common categories of reserved matters include the following.
Capital and funding
- Issuing or buying back shares
- Raising debt beyond an agreed limit
- Granting employee share options or convertible notes
Strategy and assets
- Selling or acquiring major assets
- Changing the company’s business model or brand direction
- Entering into joint ventures or strategic alliances
Governance and people
- Appointing or removing the managing director
- Approving director remuneration and executive bonuses
- Altering key employment or service contracts
Risk and compliance
- Settling major disputes or litigation
- Entering voluntary administration or liquidation
- Making substantial tax settlements or write‑offs
Well‑drafted reserved‑matter provisions ensure that directors stay accountable, major decisions are properly considered, and all shareholders (not just those at the boardroom table) have a say in shaping the company’s direction.
Voting thresholds, quorum and deadlock mechanisms
Many founder disputes stem from unclear voting thresholds or poorly drafted deadlock clauses. A shareholders’ agreement should clearly outline how decisions are made and what level of agreement is required.
Typically, there are three main voting thresholds:
- Simple majority: More than 50% of eligible votes.
- Special majority: Often 75% of votes.
- Unanimous: All directors or shareholders must agree.
It’s important to be precise about whether a particular threshold applies to board resolutions or shareholder resolutions. These are distinct decision-making bodies with different quorum and voting rules. A well-drafted agreement will specify the required threshold for each category of decision separately.
Additionally, a clear quorum requirement ensures decisions are valid only when enough directors are present. Commonly, this means that at least one nominee from each significant shareholder group should be at the meeting.
When the board can’t reach an agreement, a deadlock arises. To avoid paralysis, agreements often include practical deadlock resolution tools such as:
- Escalation to mediation or arbitration
- A chair’s casting vote to break a tie
- Buy‑sell or “shotgun” clauses, allowing one party to buy out the other at a set value
Deadlock provisions should also address what happens if the deadlock resolution mechanism itself fails. For example, if mediation doesn’t resolve the dispute and neither party triggers a buy-sell clause, the agreement should specify a final fallback – often compulsory arbitration or, in extreme cases, winding up of the company.
Handled well, these provisions preserve business continuity and prevent disagreements from bringing operations to a standstill.
Information rights and board accountability
Even if a shareholder doesn’t have a board seat, information rights clauses keep them informed and protect their investment.
Common inclusions are:
- Regular financial and management reports
- Annual budget review rights
- Access to strategic plans and board minutes
- Early warning on significant risks
This layer of transparency strengthens accountability and reduces the scope for disputes, particularly for minority shareholder protections.
How your shareholders’ agreement interacts with your constitution
Your company constitution is a statutory document registered with ASIC that governs the company’s internal management. A shareholders’ agreement, by contrast, is a private contract between the shareholders (and often the company). The critical distinction is one of enforceability: the constitution is binding on the company, its directors, and its members by force of s 140 of the Corporations Act. A shareholders’ agreement is binding only on the parties who sign it, and only as a matter of contract law.
When these documents conflict, a corporate act done in accordance with the constitution is generally valid as a matter of corporate law, even if it breaches the shareholders’ agreement. The aggrieved shareholder’s remedy is contractual – typically damages or an injunction for breach of contract – rather than having the corporate act itself set aside. This is why alignment between the two documents is essential: if the constitution allows something the shareholders’ agreement prohibits, the prohibition may be difficult to enforce in practice.
Both documents should align to avoid inconsistency. For more information, check out this guide:Constitution vs Shareholders Agreement: What’s the Difference?
Should the company be a party to the shareholders’ agreement?
A frequently overlooked question is whether the company itself should be a party to the shareholders’ agreement. In many cases, the answer is yes.
If the company is not a party, the agreement is only enforceable between the shareholders who signed it. This means shareholders cannot directly compel the company to act (or refrain from acting) in accordance with the agreement’s terms. For example, if a reserved matter clause requires shareholder approval before issuing new shares, but the company isn’t bound by the agreement, the share issuance may still be valid as a corporate act even though it breaches the agreement between the shareholders.
Making the company a party ensures that obligations directed at the company – such as information rights, restrictions on share issues, and board composition requirements – are directly enforceable against it. Most well-drafted shareholders’ agreements in Australia include the company as a party for this reason.
Oppression remedy: A statutory backstop
Regardless of what a shareholders’ agreement says, shareholders retain the right to seek relief under ss 232-235 of the Corporations Act if the company’s affairs are conducted in a manner that is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder. This statutory remedy cannot be contracted out of.
This is relevant context for director clauses because even if a shareholders’ agreement gives directors broad powers, the exercise of those powers in a way that oppresses minority shareholders can be challenged in court. The court has wide remedial powers under s 233, including ordering the purchase of shares, appointing a receiver, or restraining specific conduct.
A well-drafted shareholders’ agreement can reduce the likelihood of oppression claims by building in protections like reserved matters, information rights, and fair exit mechanisms. But it cannot replace or limit the statutory remedy itself.
When you should get legal advice on director clauses
Director‑related provisions are most sensitive when ownership and control are finely balanced. You should seek legal advice if your company involves:
- 50/50 ownership (to draft robust deadlock clauses)
- External investors or venture capital involvement
- Minority shareholders seeking protection
- Family‑owned businesses
- Complex capital or board structures
- Scaling companies and bringing in new leadership
Lawpath offers shareholders’ agreement templates, legal review services, and custom drafting to ensure your agreement complies with Australian company law while reflecting your commercial goals.
FAQs
Can a shareholders’ agreement override the Corporations Act?
No. The Act always prevails, but the agreement can impose contractual duties that complement statutory rules.
Can shareholders remove a director they appointed?
Yes, the appointing shareholder can generally remove their nominee, subject to agreement terms and company law.
What are reserved matters in a shareholders’ agreement?
Reserved matters are key decisions directors can’t take without shareholder approval, like issuing new shares, selling the business, or taking on major debt.
Do all shareholders have to agree on major decisions?
Not necessarily. The agreement can specify a special majority (e.g., 75%) or unanimous consent for certain matters.
What happens if directors and shareholders disagree?
The shareholders’ agreement should include dispute resolution and deadlock mechanisms, such as mediation, buy‑sell clauses, or a chair’s casting vote, to ensure business continuity.
Does the company need to be a party to the shareholders’ agreement?
It’s strongly recommended. If the company is not a party, obligations directed at the company (such as information rights, restrictions on share issuances, and board composition requirements) may not be directly enforceable against it. Most well-drafted shareholders’ agreements in Australia include the company as a signatory.
Do nominee directors owe duties to the shareholder who appointed them?
No. All directors – including nominee directors – owe their statutory duties to the company under the Corporations Act, not to any individual shareholder. A nominee director must exercise independent judgment and cannot simply act as their appointer’s representative on the board.
Protect your business with a strong governance structure
A well‑drafted shareholders’ agreement gives structure to the delicate balance between board authority and shareholder control.
For growing or investor‑backed Australian proprietary companies, governance clauses form the backbone of effective corporate management. They protect both founders and investors, ensure accountability, and provide a stable foundation for business growth.
Before finalising your agreement, get tailored legal advice to confirm it aligns with your company’s constitution, the Corporations Act, and your commercial realities. A proactive approach now can save significant conflict and cost later.
