Why your business needs a Shareholders Agreement

A shareholders agreement is a private contract between the owners of a company that sets out how big decisions get made, how shares can be bought, sold or transferred, what happens when someone leaves, and how disputes are sorted before they turn into a brawl. In Australia you are not legally required to have one. Most companies with more than one shareholder still should.

Here is the part nobody enjoys hearing. The cheapest, easiest time to agree how you will split the business, value each other’s shares and handle a falling-out is right now, while everyone still likes each other. The most expensive time is later, with lawyers on both sides and a deadlocked company in the middle. This is the bit of company setup people skip because it feels pessimistic. It is the bit that saves the business when things go sideways.

What does a shareholders agreement actually do?

Put simply, a shareholders agreement turns “we’ll figure it out” into “here is exactly what we agreed”. It records who owns what, who gets to decide what, and what happens when money, people or plans change. Because it is a private contract, it never gets filed with ASIC and never becomes public.

Think of it as the rulebook for the owners. It sits on top of the law and your constitution and fills the gaps both leave open. Most of those gaps only show up under pressure: a co-founder wants out, an investor wants in, someone dies, someone stops pulling their weight, or two equal owners simply cannot agree. A good agreement has already answered each of those questions in writing, so you follow a process instead of starting a fight.

Shareholders agreement vs company constitution: which do you need?

Both, usually. Founders mix these two up constantly, and the confusion costs them. They are different documents doing different jobs.

A company constitution is the company’s internal rulebook. It replaces the replaceable rules under the Corporations Act 2001 (Cth) and governs the mechanics: share classes, director powers, how meetings run, how dividends get declared. Under section 140 of the Act, the constitution operates as a statutory contract between the company, its members and its directors. It binds everyone uniformly.

Your shareholders agreement is the owners’ private deal with each other. It covers the personal stuff a constitution skips: who can sell shares and to whom, how a leaver gets paid out, what one founder can block, and what happens in a 50/50 standoff. Here is the table founders ask for:

Feature	Company constitution	Shareholders agreement
Who it binds	The company, directors and all members	The shareholders who sign it (and often the company)
Public or private	Can be requested by members; sits with company records	Private, never filed with ASIC
Main job	Company governance and mechanics	The relationship and deal between owners
Covers exits and buyouts	Rarely in any useful detail	Yes, this is its core purpose
Covers dispute and deadlock	No	Yes
If they conflict	A well-drafted agreement includes a clause stating it prevails between the shareholders

If you want the full breakdown, read our guide on the difference between a company constitution and a shareholders agreement. The short version: the constitution protects the company’s structure, the agreement protects you.

What happens if you don’t have a shareholders agreement?

You default to the replaceable rules in the Corporations Act 2001, plus whatever your constitution says. That sounds like a safety net. It isn’t much of one.

The replaceable rules were never designed to settle a founder fallout. They are silent on the things that actually break companies. There is no agreed way to value a departing shareholder’s shares. No mechanism to force a sale or block one. No dividend policy. No tie-breaker when two equal owners deadlock. When founders ask “what does the law say happens here?”, the honest answer is usually “not much, and not in your favour”.

So the dispute goes to the expensive places instead. A shareholder can bring an oppression claim. A court can be asked to wind the company up on just and equitable grounds. Either path burns cash, time and the business itself. A shareholders agreement is the document that keeps you out of that room.

What should a shareholders agreement include?

There is no single correct form. A shareholders agreement is tailored to your company. That said, the agreements that earn their keep almost always cover the same core areas. Skip these and you have a document that looks reassuring and protects nothing.

• Who owns what. The shareholders, their share classes and exact holdings, and the rights attached to each class. Sounds basic. Get it wrong and everything downstream is wrong.
• Reserved matters. The short list of big decisions (issuing new shares, taking on major debt, selling the business, changing the constitution) that need a special majority or unanimous sign-off. This is how a minority shareholder gets real protection.
• Pre-emptive rights. Existing shareholders get first dibs before new shares are issued or someone sells to an outsider. For proprietary companies, section 254D of the Corporations Act 2001 sets a default version of this, but it is a replaceable rule, so your agreement should spell out exactly how it works for you.
• Drag-along and tag-along rights. Drag-along lets a selling majority compel the minority to sell on the same terms, so a small holdout can’t block a clean sale of the whole company. Tag-along lets the minority join a majority sale on the same price and terms, so they are not stranded with a new unknown partner.
• Leaver terms and a valuation method. What happens to a shareholder’s shares when they resign, get sacked, go bankrupt or die. Good agreements split “good leavers” from “bad leavers” and set out, in advance, how the shares get valued and paid for. The valuation method is the single most argued-over clause when there isn’t one.
• Founder vesting. Shares that earn out over time, so a co-founder who walks after six months doesn’t keep a third of the company for almost no work. A common shape is four-year vesting with a one-year cliff: leave inside the first year and you keep nothing, then your stake builds month by month after that. Startups especially regret skipping this one.
• Information and reporting rights. What financials shareholders get to see and how often. Investors expect it, and it heads off the “why am I being kept in the dark?” argument before it starts.
• Deadlock resolution. A staged process for when owners can’t agree: negotiation, then mediation, then a buy-sell mechanism if it still won’t resolve. Without it, a 50/50 company can simply freeze.
• Restraint and confidentiality. Sensible limits on a departing shareholder competing or walking off with confidential information and clients.
• Dividend policy. Whether profits get distributed or reinvested, and who decides. This quietly causes more friction than founders expect.

Deadlock clauses deserve a concrete example, because they’re the part founders find hardest to picture. One common tool is the buy-sell or “shotgun” clause. One owner names a single price per share. The other then chooses: buy the first owner’s shares at that price, or sell their own at the same price. Because the person setting the price doesn’t get to pick which side of the deal they land on, it pushes them toward a fair number and a clean exit instead of a stalemate. Brutal, but it works.

One nuance the templates rarely flag: if a shareholder holds their shares through a family trust rather than in their own name, the agreement has to name the trustee correctly. Plenty of founders own their shares via a trust for asset protection. Name the person instead of the trustee and your transfer and exit clauses bite on the wrong party. Worth getting right at the start.

What we see in Lawpath consultations

This is the part you can’t get from the legislation. Across the consultations our lawyers run every week, a few patterns repeat so often they are almost predictable.

The 50/50 handshake. Two people start a company, split it down the middle, shake hands and sign nothing. It works fine until it doesn’t. When the relationship breaks down, there is no agreed exit, no valuation method and no tie-breaker, so a buyout that should take a fortnight turns into letters of demand and a solicitor on each side. We see this one constantly, and it is almost always preventable with a single document signed at the start.

Exits are the real trigger. The briefs that actually land on our lawyers’ desks are exits: share buy-backs, a co-founder leaving, a full sale of the company, a partnership dissolution. That is exactly the moment the absence of pre-agreed transfer and valuation terms hurts most. The agreement you write on day one is really insurance for the day someone wants out.

Founders confuse the two documents. A regular one. People believe their constitution “covers it” because it replaces the default rules and feels thorough. It governs the company, not the deal between owners. When we ask a founder in dispute “do you have a shareholders agreement, a constitution, anything?”, the answer is often a long pause.

A template gets you started; a fallout needs more. A free shareholders agreement template is a genuinely good starting point for aligned founders documenting a simple cap table. Once you have investors, multiple share classes, employee equity or unusual control arrangements, that is the point to have a lawyer tailor it. Get it sorted before the money or the complexity arrives, not after.

Can a shareholders agreement override the constitution or directors’ duties?

Two limits worth knowing before you sign anything.

First, the constitution. Where the agreement and the constitution clash, a well-drafted shareholders agreement includes a clause saying the agreement prevails between the shareholders. The shareholders are then contractually bound to vote their shares to bring the constitution into line. It works, but only if that clause is actually in there.

Second, directors’ duties. A shareholders agreement cannot force a director to vote a particular way at a board meeting. Directors owe their duties to the company as a whole under the Corporations Act 2001, and a clause that tries to lock in how they must vote (“fettering their discretion”) is generally unenforceable. Shareholders can agree how they will vote as shareholders. They cannot bind a director’s judgment as a director. Keep the two hats separate.

How do you set one up, and what does it cost?

You have two real options, and the right one depends on how complex your ownership is.

• Start with a template. You can create a shareholders agreement for free on Lawpath by answering a short guided interview. Best for aligned founders with a straightforward cap table who want clear rules in place quickly.
• Have a lawyer draft a bespoke one. If you have investors, multiple share classes, vesting or anything non-standard, get it tailored. Through Lawpath, a bespoke shareholders agreement commonly starts around $2,000 plus GST. Bundle it with a tailored constitution and you are generally looking at the $4,000 to $5,000 range, usually delivered within 7 to 10 business days. You can get a fixed-fee quote upfront so there are no surprises.

Some practical points trip people up. A shareholders agreement is usually signed as a deed, and every shareholder signs (the company often signs too, so it can enforce confidentiality and other terms). If a lawyer is drafting yours, they will want your ASIC company extract, your share register, any term sheets between shareholders, and the trust deed if anyone holds shares through a trust. And watch the edges: tax and stamp duty on share transfers, and ASIC lodgement of a new constitution, are usually separate jobs from the drafting itself.

Setting up the company at the same time? Sort the agreement while you register your company, so your ownership is documented from day one rather than reconstructed later.

Frequently asked questions

Is a shareholders agreement legally required in Australia?

No. There is no law requiring one. But any company with two or more shareholders should have a shareholders agreement, because the default replaceable rules in the Corporations Act 2001 do not cover exits, share valuations, dividend policy or deadlocks.

Is a shareholders agreement legally binding?

Yes. A properly signed shareholders agreement is a binding contract between the parties who sign it, usually the shareholders and the company. Its terms are enforceable like any other contract, which is exactly why the wording matters.

When should we put a shareholders agreement in place?

At the start, while everyone is aligned and friendly. Drafting one once a disagreement has already started is far harder, because every clause is now read as a tactical move. Day one is cheap. Mid-dispute is not.

What’s the difference between a shareholders agreement and a constitution?

The constitution governs the company’s internal mechanics and binds the company, directors and all members. The shareholders agreement is a private contract between the owners covering exits, transfers and dispute resolution. If they conflict, a good agreement says it prevails between the shareholders.

Do I need a shareholders agreement if I’m the only shareholder?

Not yet. With a single shareholder there is no relationship to govern. The moment you bring in a co-founder, an investor or hand shares to a family member, put one in place before the shares change hands.

What happens to shares when a shareholder dies?

Without an agreement, the shares pass under the deceased’s will or estate, which can hand you a business partner you never chose. A shareholders agreement can require the shares to be offered back to the remaining owners at a set valuation. See our guide on what happens to shares when a shareholder dies.

How much does a shareholders agreement cost?

A template can be free. A bespoke agreement drafted by a lawyer commonly starts around $2,000 plus GST, and bundling it with a tailored constitution generally runs into the $4,000 to $5,000 range. A fixed-fee quote tells you the number before you commit.

Can a shareholders agreement force a director to vote a certain way?

No. Directors owe their duties to the company under the Corporations Act 2001, and a clause that pre-commits how a director must vote at a board meeting is generally unenforceable. Shareholders can agree how to vote as shareholders, but they cannot fetter a director’s discretion as a director.

Can you put a shareholders agreement in place after the company has started?

Yes, and plenty of companies do. Existing shareholders just sign one now. It is easiest while everyone agrees. If a dispute is already brewing, expect more negotiation, because every clause is now read as a tactical move rather than housekeeping.

Does the company itself need to sign the shareholders agreement?

Usually yes. Having the company as a party lets it enforce terms like confidentiality and share-transfer rules directly, rather than relying on the shareholders to police each other. It is signed as a deed, with every shareholder a party.

You are not behind for not having sorted this yet. Most founders haven’t, and the fix is genuinely straightforward when everyone is still on the same page. The hard version is the one where you wait until there’s a problem. The easy version is a single document, signed now, that quietly does its job for years.

Lock it in while it’s simple. Create your shareholders agreement on Lawpath today.