What Is a Shareholders Agreement, and Does My Business Need One?
with Ben Smith, Commercial and Disputes Lawyer at Whyte, Just & Moore
You went into business with people you trust. Everyone knows their role, the goals are clear, and right now, you’re all on the same page.
But what happens when one partner wants out? What if there’s a serious disagreement about spending, or a shareholder passes away without warning?
These are the situations a shareholders agreement is designed for. And the time to put one in place is well before any of that happens.
Quick summary
- A shareholders agreement is a legally binding contract between the shareholders of a company that sets out how the business is governed, how decisions are made, and what happens when things change.
- Every company with more than one shareholder should consider having one. Registering with ASIC gives you a constitution, but this does not cover the shareholder-specific detail that a well-drafted agreement provides.
- A shareholders agreement prepared by a commercial lawyer is tailored to your specific business. Generic templates and AI-generated agreements frequently miss critical clauses and can create costly problems down the track.
What is a shareholders agreement?
A shareholders agreement is a contract between the shareholders of a company. It sets out the governance structure and decision-making framework for the business.
It’s not necessarily about day-to-day operations, but the bigger decisions: who can approve what, how shares are transferred, how disputes are handled, and what happens if a shareholder exits or passes away.
‘It’s the backbone of how the company’s going to run,’ says Ben Smith, Lawyer at Whyte, Just & Moore. ‘It’s there to define roles, define responsibilities, and ensure more efficient and faster decision-making.’
In practical terms, it’s a physical document signed by all shareholders, typically with 20 to 40 clauses depending on the size and complexity of the company.
Does my business need a shareholders agreement?
If your company has more than one shareholder, the answer is almost always yes.
When you register a company with ASIC, you receive a constitution that covers basic governance. A shareholders agreement fills in the gaps, especially around the relationship between the shareholders themselves.
The most common scenario we see is clients arriving after something has already gone wrong: a dispute, a shareholder who wants to exit, a buyout that needs to happen. Without an agreement in place, it all becomes harder and more expensive to resolve.
Getting a shareholders agreement in place while everyone is still in agreement is much simpler than sorting it out after the fact.
What’s included in a shareholders agreement?
There’s no one-size-fits-all document that applies to all companies. Every shareholders agreement should be tailored to the business.
That said, here are a lot of areas that most shareholders agreements cover.
Decision-making and governance
Who can approve what, what thresholds apply to significant expenditure, and how the board is composed. Each shareholder may have the right to appoint a director, so getting this right from the start matters.
Share transfers and control
The rules for selling, buying, or issuing shares, and how the company’s value is determined when a transfer takes place. This typically happens through an independent valuation or the company’s accountant.
Dispute resolution
Most agreements require shareholders to work through a notice and mediation process before anyone can go to court.
‘A shareholder dispute is a very expensive thing to litigate,’ Ben says. ‘Whenever parties can resolve it themselves, that’s often the better outcome.’
Profit distribution and funding
How profits are divided among shareholders and how the company will be funded as it grows.
Restraints
If a shareholder exits, they may be restricted from working in a competing business for a defined period and within a specified area.
Death and incapacity
What happens to a shareholder’s shares if they pass away or become unable to continue. Without a clear process or succession plan, shares can end up with family members who have no familiarity with the business.
Drag-along and tag-along rights
Two protections that apply when the business is being sold.
A drag-along right allows majority shareholders to require minority shareholders to join a sale on the same terms.
A tag-along right works the other way, allowing minority shareholders to participate in a majority-led sale.
A lot more can be included in a shareholders agreement; it all depends on the company’s size, complexity, and specific clauses you’d like to put in place.
Why a lawyer should draft your shareholders agreement
AI-generated contracts and online templates have become increasingly common. We see the results frequently.
‘Clients will come in having signed an AI-generated contract, or they’ll say “what do you think about this?” And nine times out of ten, they’re pretty bad.’
Generic documents aren’t built around your specific business. If your shareholders need to hold professional licences, or you’re planning to bring in new investors, the agreement needs to reflect that.
The cost of getting it right upfront is modest compared to the cost of undoing a poorly drafted one, particularly if a dispute follows.
If you need a shareholders agreement for your business, get the process started at Whyte, Just & Moore.
What is the process of preparing a shareholders agreement?
At Whyte, Just & Moore, the process for preparing a shareholders agreement follows a few clear steps.
- Initial instructions — We chat with you and get to know your business: its structure, operations, and where the shareholders want to take it.
- Drafting — The team prepares an agreement tailored to the business, rather than a standard template.
- Review with shareholders — We walk through the agreement with all parties, explaining each clause in plain English and making sure everyone is comfortable before signing.
- Execution — Once agreed, the document is signed. Whyte, Just & Moore can manage this directly, including through electronic signature platforms.
- Ongoing review — As the business grows or new shareholders come on board, the agreement should be revisited and updated to make sure it stays current.
FAQs about shareholders agreements
What is a shareholders agreement?
A shareholders agreement is a legally binding contract between the shareholders of a company. It sets out parameters like how the company is governed, how decisions are made, how shares are transferred, and what happens in the event of a dispute, death, or shareholder exit.
Is a shareholders agreement legally binding in Australia?
Yes. A shareholders agreement is a legally binding contract. All parties who sign it are bound by its terms.
What’s the difference between a shareholders agreement and a company constitution?
A constitution is issued when you register a company with ASIC and covers basic governance rules. A shareholders agreement goes further, dealing specifically with the relationship between shareholders, including share transfers, dispute resolution, and what happens if a shareholder exits or passes away.
Does my business need a shareholders agreement if we already have a constitution?
Yes, in most cases. For a company with multiple shareholders, a shareholders agreement covers ground the constitution doesn’t, and provides a framework to resolve issues before they escalate into disputes.
Where do I start?
The first step is a conversation with a commercial lawyer. At Whyte, Just & Moore, we’ll take the time to understand your business before anything is drafted. Get in touch by requesting an appointment.
Talk about shareholders agreements with a commercial lawyer in Geelong
A shareholders agreement won’t prevent disagreements from arising. But it does give your business a clear, agreed framework for working through them.
At Whyte, Just & Moore, we work with businesses across Geelong, the Bellarine Peninsula, and the Surf Coast on shareholders agreements, contract drafting, and business structuring.
Get in touch with our team to arrange an initial conversation.
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