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Starting a business with co-founders, bringing in investors, or planning to bring family members into your company creates excitement about growth and shared success. It also creates the need for clear agreements about how the business will be owned, governed, and managed as circumstances change.
A shareholders agreement addresses the practical realities of running a business with multiple owners - decision-making authority, capital contributions, profit distribution, exit strategies, and dispute resolution. Without this framework, you're relying on assumptions that may not match what others understood, or default legal rules that may not suit your business objectives.
Working with business owners on these agreements, I've learned that most shareholder disputes don't start from hostility. They emerge from genuinely different understandings about ownership rights, decision authority, or exit processes that weren't documented clearly at the outset.
This guide explains when a shareholders agreement becomes essential, what it should address, and how to structure provisions that protect both the business and everyone involved.
Essential points about shareholders agreements:
Invest time upfront in thinking through realistic scenarios - not just the optimistic outcomes, but also what happens if someone wants out, can't contribute additional capital, or disagrees fundamentally about business direction. Work with your co-founders to document not just ownership percentages but decision-making authority, funding expectations, and exit pathways. Ensure your shareholders agreement and company constitution work together rather than creating conflicting obligations. Most importantly, address these frameworks before tensions arise - it's far easier to agree on fair processes when relationships are strong than after disagreements have emerged.
Shareholders agreements aren't legally required, but certain business situations make them practically essential for protecting both the business and its owners.
When multiple people contribute to starting a business, clarity about ownership, roles, and decision-making authority prevents assumptions from causing friction. Even when founders trust each other completely, documenting governance frameworks avoids future disputes about who has authority to make what decisions.
Co-founders often have different risk tolerances, time availability, and financial capacity to contribute. A shareholders agreement addresses these differences clearly - who contributes what, when additional funding might be needed, and what happens if someone can't or won't participate in future capital raises.
Investors typically require shareholders agreements before providing funding. They want documented protection for their investment, clear information rights, and often specific governance rights like board representation or veto powers over major decisions.
When adding new shareholders to an existing company, shareholders agreements protect both existing owners and newcomers by documenting everyone's rights and obligations. This includes addressing dilution concerns, profit distribution expectations, and exit strategies.
Family shareholders present unique considerations. Some family members may be active in the business while others are passive investors. Some may have contributed sweat equity while others provided capital. Without clear documentation, these differences can create significant tension.
Shareholders agreements for family businesses often address succession plans, transfer restrictions to keep ownership within the family, and processes for buying out family members who want to exit or who pass away.
When shareholders hold equal ownership (such as 50/50 partnerships or equal thirds), deadlock risks increase significantly. Equal shareholders may disagree on fundamental business decisions with no clear mechanism for resolution.
Well-structured shareholders agreements address this through deadlock resolution processes - whether that's mediation requirements, casting votes for certain decision types, or buy-sell mechanisms that allow shareholders to exit when agreement becomes impossible.
A comprehensive shareholders agreement addresses ownership structure, governance, funding, distributions, transfers, and dispute resolution. Each area requires careful thought about what works for your specific business situation.
Document who owns what percentage of the company and whether different share classes carry different rights. Some shareholders might hold ordinary shares with full voting rights, while others hold preference shares with priority for dividend payments but limited voting.
Share structure provisions should address whether shares can be converted between classes, what triggers conversion rights, and how new shares might be issued. If you're planning for future investment rounds, consider how existing shareholdings might be diluted and what protections exist against excessive dilution.
For businesses where shareholders contribute different things - some provide capital while others contribute expertise or intellectual property - clearly documenting these contributions and how they translate to ownership percentages prevents future disputes about who deserves what share of the business.
Specify how many board directors the company will have and how directors are appointed or removed. Address whether shareholders have the right to appoint directors (and if so, how many), or whether directors are elected by shareholder vote.
Decision-making provisions should distinguish between routine business decisions that management or directors can make independently, and major decisions requiring shareholder approval. Major decisions typically include things like taking on significant debt, selling major assets, entering new business lines, or changing the company's structure.
For decisions requiring shareholder approval, specify what constitutes sufficient approval - simple majority, special majority (such as 75%), or unanimous consent. Some decisions might require different approval thresholds depending on their significance to the business.
Address whether shareholders are expected to contribute additional capital beyond their initial investment, and if so, under what circumstances. Some agreements create binding obligations to participate in future capital raises, while others make additional contributions voluntary.
If contributions are voluntary, consider what happens when some shareholders participate in funding rounds but others don't. Does the non-participating shareholder's ownership get diluted? Do participating shareholders receive preference rights or better terms as compensation for providing needed capital?
Funding provisions might also address shareholder loans to the company, including interest rates, repayment terms, and whether loans are secured. These provisions become important when the business needs capital but shareholders prefer lending money rather than making equity contributions.
Specify how and when profits will be distributed to shareholders. Some businesses reinvest all profits for growth, paying no dividends for years. Others distribute regular dividends even while maintaining reserves for business operations.
Dividend provisions should address whether distribution decisions are discretionary (decided by directors) or formulaic (such as distributing a set percentage of profits annually). If discretionary, consider whether any shareholder has veto rights over distribution decisions.
For companies with different share classes, clarify dividend priorities - whether preference shareholders receive distributions first, and under what terms. Address whether passed dividends accumulate (must be paid later) or simply lapse if not declared in a given period.
Most shareholders agreements restrict share transfers to protect remaining shareholders from unwanted new co-owners. Common restrictions include requiring other shareholders' consent for transfers, or giving existing shareholders first right to purchase shares before they can be sold to outsiders.
Pre-emptive rights provisions specify how shares being sold must first be offered to existing shareholders, typically in proportion to their current holdings. These provisions should address the price and terms of the offer, the timeframe for existing shareholders to accept, and what happens if some but not all existing shareholders want to purchase.
Tag-along rights protect minority shareholders when majority shareholders sell their shares. If the majority shareholder receives an offer to sell, minority shareholders have the right to "tag along" and sell their shares to the same buyer on the same terms.
Drag-along rights allow majority shareholders to force minority shareholders to join a sale of the company. If the majority shareholder receives an offer to buy the entire company and wants to accept, they can "drag along" the minority shareholders, requiring them to sell on the same terms. This prevents small shareholders from blocking transactions that would benefit the majority.
Address what happens when a shareholder wants to exit the business, including valuation methodology for buying their shares. Valuation disputes are common when shareholders exit - the selling shareholder typically wants maximum value while remaining shareholders prefer lower valuations.
Valuation methodologies include independent professional valuation, agreed formulas (such as multiple of earnings), or negotiated price between parties. Each approach has advantages and challenges. Independent valuations provide objectivity but can be expensive and time-consuming. Formulas provide certainty but might not reflect actual value in all circumstances.
Buyback provisions should specify who can purchase the exiting shareholder's shares - the company itself, remaining shareholders, or both. They should address payment terms (lump sum or instalments), timeframes for completion, and what happens if buyers can't raise the required funds.
When shareholders disagree on major decisions, clear resolution processes prevent disputes from paralyzing the business. Initial dispute resolution often starts with good faith negotiations between shareholders, escalating to mediation if direct negotiations fail.
For disputes that can't be resolved through negotiation or mediation, shareholders agreements might include expert determination (having an independent expert decide technical issues), arbitration (binding private dispute resolution), or buy-sell mechanisms.
Buy-sell clauses (sometimes called "shotgun" or "Russian roulette" clauses) allow one shareholder to make an offer to buy the other shareholder's shares at a specified price. The receiving shareholder must either accept and sell at that price, or buy the offering shareholder's shares at the same price. This mechanism forces realistic pricing since the offerer risks having to sell at their own offered price.
Restraint provisions address whether shareholders can operate competing businesses, approach company clients, or solicit company employees. These provisions must be reasonable in scope, duration, and geographic area to be enforceable.
Restraint provisions often distinguish between active shareholders (those working in the business) and passive investors. Active shareholders typically face stricter restraints given their access to business information, relationships, and operations.
Confidentiality provisions complement restraints by preventing shareholders from using or disclosing company confidential information. These provisions typically continue even after a shareholder exits the business.
Would you like to discuss how these provisions apply to your specific business structure?
Consider a scenario where two business partners start a company with equal 50/50 shareholding. Both are committed to the business and trust each other's judgment. After three years of successful growth, they fundamentally disagree about expansion strategy.
One partner wants to reinvest all profits for aggressive growth, taking on debt to expand quickly while the market opportunity exists. The other partner prefers conservative growth using only retained earnings, avoiding debt given market uncertainties. Both positions are reasonable, and both partners genuinely believe their approach serves the business best.
Without documented decision-making processes and deadlock resolution mechanisms, this disagreement can paralyse the business. Neither partner has the authority to proceed with their preferred approach. Board meetings become exercises in frustration as each partner blocks the other's proposals.
This situation illustrates why shareholders agreements matter even when partners trust each other. The agreement would have specified either that certain major decisions (like taking significant debt) require unanimous approval, giving each partner veto power but forcing compromise, or that such decisions require only majority approval plus a deadlock resolution process when agreement proves impossible.
Deadlock provisions might require mediation before either partner can trigger buy-sell mechanisms. This gives time for tempers to cool and for a neutral third party to help find middle ground. If mediation fails, the buy-sell clause allows one partner to make a buyout offer at fair value, giving the other partner the choice to either sell at that price or buy the offering partner's shares at the same price.
These mechanisms don't prevent disagreement - reasonable people will continue to see strategy differently. But they provide pathways forward when disagreement occurs, preventing business paralysis and relationship destruction.
Clear actions to take:
Start conversations with co-founders or shareholders about governance, decision-making, and exit planning before tensions emerge. Even if you trust each other completely, documenting clear frameworks prevents mismatched expectations from becoming disputes years later.
Review your current company constitution and consider which commercial issues it doesn't address - funding commitments, dispute resolution processes, transfer restrictions, or deadlock mechanisms. These are typically shareholders agreement territory rather than constitutional provisions.
Think through realistic scenarios beyond the optimistic outcomes. What happens if someone wants out? If you fundamentally disagree on strategy? If additional capital is needed but not everyone can contribute? If the business succeeds beyond expectations and outside investors want to buy? The time to agree on processes is before these scenarios occur.
Red flags requiring immediate attention:
If you have equal shareholding (50/50 or equal splits among more shareholders) without documented deadlock resolution processes, address this urgently. Equal ownership without dispute resolution mechanisms creates paralysis risks when disagreement occurs.
If shareholders have made informal agreements about roles, compensation, or future equity arrangements that aren't documented in writing, get these formalised. Informal understandings rarely survive memory lapses, changing relationships, or actual implementation.
If you're bringing in investors or new shareholders without updating shareholders agreements to address their rights and protections, pause the transaction. Investors typically require documented governance frameworks before providing funds.
When to seek professional advice immediately:
Seek guidance before you finalise any share ownership structure or issue shares to new shareholders. It's far easier to document rights and obligations before shares are issued than to negotiate fair terms after people already hold ownership.
Get advice if disputes have emerged but haven't escalated to legal action. Professional guidance can help structure resolution processes and fair exit arrangements before relationships deteriorate completely and legal costs multiply.
Obtain assistance if your business is growing and the existing informal arrangements that worked with three shareholders are straining under the complexity of five or more shareholders, or if you're planning to raise external investment.
Ready to work through shareholders agreement requirements for your business?
I work with business owners to put shareholders agreements in place that protect the business while supporting long-term success and growth. These agreements serve their purpose best when they reflect how you actually want to operate together, address realistic scenarios, and provide clear pathways forward when circumstances change.
The goal isn't creating restrictions that make business operations difficult. It's documenting clear frameworks that let everyone make decisions with confidence, plan for changes, and maintain good business relationships even when facing challenges.
If you're setting up a company, restructuring ownership, or bringing in new shareholders, we can work through what makes sense for your specific situation and objectives. Let's discuss how to structure shareholders agreements that support your business goals.
A company constitution sets out the basic legal framework for how your company operates - things like share classes, director powers, and meeting procedures. It's a public document lodged with ASIC that anyone can access. A shareholders agreement is a private commercial contract between shareholders addressing the practical aspects of business ownership - governance details, funding commitments, exit strategies, and dispute resolution. The constitution provides the legal structure; the shareholders agreement addresses the commercial realities of working together.
Yes, shareholders agreements can be implemented at any time, though it's easier when done early. Existing shareholders will need to agree to the terms and sign the agreement - this can be straightforward if everyone recognizes the value, or challenging if some shareholders see proposed terms as disadvantaging them. It's worth implementing even for existing companies, particularly before bringing in new shareholders, planning for exits, or addressing emerging governance issues.
The company constitution generally takes precedence as the governing legal document for the company. However, shareholders agreements operate as binding contracts between shareholders personally. If conflicts exist, you'll want to amend one document to align with the other. Well-drafted shareholders agreements include provisions stating that they're subject to and read in conjunction with the constitution to minimize conflict risks.
For the agreement to be effective, all shareholders should sign. Some agreements allow for new shareholders to be added by having them sign a deed of accession. If a shareholder refuses to sign, the agreement can still bind those who do sign, but it won't restrict the non-signing shareholder's actions. For this reason, shareholders agreements often include provisions making signing a condition of becoming or remaining a shareholder.
Professional fees for shareholders agreement preparation vary based on complexity, number of shareholders, and specific provisions needed. A straightforward agreement for a simple company structure might cost a few thousand dollars, while complex agreements involving multiple share classes or investor rights will cost more. The investment typically represents good value given the disputes and legal costs the agreement helps prevent.
Yes, but changes typically require agreement from all shareholders unless the agreement itself specifies different amendment procedures. You might want unanimous consent for fundamental changes like transfer restrictions or dispute resolution, but allow for simpler amendments with special majority approval. The higher the threshold for amendments, the more protection shareholders have that their rights won't change without consent.
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