Most business partnerships start well. People fall out later, usually over money, workload or one partner wanting to leave. A shareholder agreement is the rulebook you write while everyone still agrees, so that a disagreement later doesn’t become an expensive dispute.
Why the constitution isn’t enough
Every company has a constitution, or relies on the replaceable rules in the Corporations Act 2001 (Cth). These cover how the company runs, but they say very little about the relationship between the owners: who does what, what happens if someone stops pulling their weight, or how a departing owner gets paid out. A shareholder agreement fills those gaps.
Decisions and deadlock
Agree which decisions the directors can make on their own and which need the shareholders’ approval, such as borrowing above a set amount, issuing new shares, selling the business or taking on a new partner. Some decisions should need everyone’s approval.
Then decide what happens if you can’t agree. In a 50/50 company there’s no casting vote by default, and a deadlock can freeze the business. A good agreement sets out a process: talk first, then mediation, and finally a way for one owner to buy the other out.
When someone wants to leave
This is where most disputes start. Agree in advance:
- whether a departing shareholder must offer their shares to the others first (pre-emptive rights)
- how the shares will be valued, for example by an independent valuer
- whether the price depends on why they’re leaving. Many agreements treat a “good leaver” (illness, retirement) differently from a “bad leaver” (serious misconduct, joining a competitor).
- how and when the payout is made, so the business isn’t drained of cash overnight.
Selling the business
If a buyer wants to purchase the whole company, a minority shareholder can block the sale by refusing to sell. A drag-along clause lets the majority require everyone to sell on the same terms. A tag-along clause does the reverse: it protects minority shareholders by letting them join a sale on the same terms the majority gets.
Money and work
Agree how profits will be paid out, whether shareholders will be asked to put in more money and what happens if one can’t, and what each owner is expected to contribute in time and work. Include confidentiality and reasonable restraints, so a departing owner can’t take clients or staff straight to a competitor.
Quick checklist
- Which decisions need shareholder approval, and which need everyone
- A process for resolving deadlock
- Pre-emptive rights, valuation method and leaver provisions
- Drag-along and tag-along rights
- Dividends, further funding and each owner’s role
- Confidentiality and restraints
