Shareholder agreements

What happens between shareholders when something goes wrong.

Drafting and advising on shareholder agreements for Queensland companies.

Most companies operate without a shareholders’ agreement until one is urgently needed.

The Corporations Act 2001 (Cth) provides a default framework for how a company operates. For many matters, the Act’s replaceable rules are adequate. For the relationship between shareholders, they are not. The Act does not resolve what happens when shareholders disagree about strategy, when one wants to sell and another does not, when a founder leaves, or when the business needs to be valued and nobody agrees on the number.

A shareholders’ agreement is the document that fills those gaps. It is a contract between shareholders that governs their relationship with each other and, in some respects, with the company. It operates alongside the constitution, not instead of it. Where the two conflict, the constitution governs the company’s internal affairs; the shareholders’ agreement governs the contractual obligations the shareholders have accepted.

The time to negotiate a shareholders’ agreement is before there is a dispute. Fraser Lawyers drafts and reviews shareholders’ agreements for Queensland companies.

Scope of work

What we help with

Fraser Lawyers acts on shareholder agreement matters, including:

Matter: What it usually involves
New company shareholder agreements: Governing the relationship from the start of a business.
Existing company agreements: Introducing a shareholders' agreement where none exists.
Agreement review and amendment: Updating an agreement that no longer reflects the shareholders' intentions.
Reserved matters and decision thresholds: Defining which decisions require unanimous or enhanced majority approval.
Transfer restrictions: Pre-emption rights, drag-along, and tag-along provisions.
Deadlock provisions: Mechanisms for resolving genuine disagreements between equal shareholders.
Exit and valuation mechanics: How a departing shareholder's shares are valued and acquired.
Founder vesting and leaver provisions: Protecting the company when a founder departs early.
Minority shareholder protections: Rights and protections for shareholders who do not control the board.
Joint venture shareholder agreements: Governing the shareholder relationship in a company-based joint venture.

The particular provisions that matter depend on the ownership structure. A 50/50 company has different risks from one with a single majority shareholder. The provisions that protect a minority shareholder are different from those that protect a company from a departing founder.

A shareholders’ agreement is not a standard document. It is a negotiated record of what the shareholders have agreed about the things the law does not resolve for them.

Process

What happens after you are charged.

The default position under the Corporations Act 2001 (Cth) is worth understanding before considering what a shareholders’ agreement needs to address.

For companies that have not adopted a constitution, the Act’s replaceable rules apply. Those rules provide for matters like the appointment and removal of directors, the payment of dividends, the transfer of shares, and the procedure for meetings. They do not provide for:

restrictions on who a shareholder can sell to
what happens when shareholders deadlock on a decision
how shares are valued when a shareholder wants to exit
what a departing founder must do with their shares
which decisions require the agreement of all shareholders rather than a simple majority
restraints of trade on departing shareholders
how disputes between shareholders are resolved before litigation

These are the gaps a shareholders’ agreement fills. They are not hypothetical risks. They arise in companies of every size, usually at a point when the relationship between the shareholders has already deteriorated and negotiating from scratch is very difficult.

There is no minimum size of company for which a shareholders’ agreement is appropriate. There is no maximum. The relevant question is whether the company has shareholders who have different interests, different exit timelines, or different views about how the business should be managed. Most companies qualify.

Key provisions

The provisions that matter most.

Reserved matters. A reserved matters clause identifies decisions that require the agreement of all shareholders (or a defined majority), regardless of what the board or the majority could otherwise resolve. Common reserved matters include: issuing new shares, taking on material debt, entering significant contracts, changing the nature of the business, and paying dividends. Without a reserved matters clause, the majority can make those decisions without the minority’s agreement.

Transfer restrictions. The Act’s default position is that shares in a private company are transferable, subject to the constitution. A shareholders’ agreement typically imposes restrictions. Pre-emption rights require a selling shareholder to offer shares to the other shareholders before selling to a third party. Drag-along provisions allow a majority shareholder to require minority shareholders to sell on the same terms when a buyer acquires control. Tag-along provisions allow minority shareholders to join a sale when the majority sells.

Deadlock. A 50/50 company is deadlock-prone. When two equal shareholders cannot agree on a material decision, the company is effectively unable to act. Deadlock clauses provide mechanisms for resolution: escalation to senior management, mediation, or, as a last resort, a “shoot-out” clause under which one shareholder must buy the other out at a price each has stated. Shoot-out clauses focus minds. The risk of being forced to buy at your own stated price tends to produce realistic valuations.

Exit and valuation. When a shareholder leaves, the shares must be valued and acquired. The agreement should specify the valuation method (earnings multiple, net asset value, independent valuation), the process for appointing a valuer, who bears the cost, and the payment terms. These questions are uncomfortable to negotiate at the start. They are far more contentious to resolve in litigation.

Good leaver and bad leaver provisions. Founders and key employees who hold shares may be required to sell when they leave the company. A good leaver (who leaves for reasons beyond their control, or after an agreed period) typically receives full value for their shares. A bad leaver (who is dismissed for cause, or who departs in breach of their obligations) typically receives less. The distinction is important and should be defined clearly.

Oppression

When a shareholders' agreement is not enough.

A shareholders’ agreement reduces the risk of disputes. It does not eliminate it. When a dispute does arise, the agreement is the starting point, not the end point.

Where a shareholder has been treated in a way that is oppressive, unfairly prejudicial, or that unfairly disregards their interests, they may have a remedy under s 232 of the Corporations Act 2001 (Cth). The oppression remedy is available to members of a company and allows the Court to make a broad range of orders, including requiring the majority to buy out the minority at a fair value, restraining the oppressive conduct, or winding up the company.

Common circumstances in which oppression claims arise include: exclusion of a minority shareholder from management, failure to pay dividends, diversion of business opportunities to a related entity, and the use of majority power to deprive a minority of the value they expected.

A well-drafted shareholders’ agreement reduces the likelihood of conduct that would constitute oppression. It also provides a contractual framework that supplements the statutory remedy. The two are not alternatives.

Fraser Lawyers advises both majority and minority shareholders in disputed company situations, including oppression claims and contested buyouts.

Time limits

Deadlines and risks.

There is no deadline for entering a shareholders’ agreement. The risk is that disputes arise before one is in place.

The most common scenario is a company that has operated without a shareholders’ agreement for years, during which time the relationship between shareholders was good and the document seemed unnecessary. When the relationship changes, whether through commercial disagreement, a change in personal circumstances, or a different view of the business’s direction, the absence of a framework becomes immediately apparent.

Negotiating a shareholders’ agreement after a dispute has begun is difficult. Both parties are aware of the specific issue they are trying to resolve, and each provision becomes a proxy for it. Negotiating before any dispute is much more efficient: the parties are less focused on the specific risk and more able to agree on principles that apply to a range of situations.

For oppression claims under s 232 of the Corporations Act 2001 (Cth), there is no strict limitation period stated in the Act, but delay in bringing a claim can affect the remedies available and the Court’s assessment of the conduct. Legal advice early in a deteriorating shareholder relationship is almost always worthwhile.

What we do

How Fraser Lawyers acts in these matters.

Fraser Lawyers drafts shareholders’ agreements that are designed for the specific company, its ownership structure, and the intentions of its shareholders. The work begins with understanding the business and the relationships involved, not with a template.

For existing companies without an agreement, the firm identifies the provisions that are most relevant to the current structure and any known risks, and produces a document that can be negotiated between shareholders.

For companies where one or more shareholders is instructed separately, Blake Fraser acts for that party and advises on the provisions that protect or create risk for them specifically.

For disputed situations, including oppression claims and contested valuations, the firm advises on the legal position and the practical options, including negotiated resolution, mediation, and Court proceedings where necessary.

Practical

Documents to bring.

Company constitution The current constitution, or confirmation that replaceable rules apply.
Current shareholders register Names, shareholdings, and share classes.
Existing shareholders' agreement If one exists, the current version.
Director register Current directors and any associated service agreements.
ASIC company extract Current ASIC records showing registered details.
Financial statements Recent accounts, particularly if valuation provisions are being discussed.
Ownership intentions A plain description of the intended ownership structure and each party's role.
Any existing dispute correspondence If the agreement is being prepared in response to an existing issue.

Pathway

The likely path.

Step 1 — Understanding the structure and intentions.

The starting point is understanding the company: its ownership, the roles of each shareholder, the business plan, and what each party wants from the relationship. This shapes the provisions that matter most and those that can be addressed more briefly.

Step 2 — First draft.

Fraser Lawyers produces a first draft and explains the key provisions, the decisions made in favour of one form over another, and the tradeoffs involved. The draft is written in plain English. The provisions that are standard across most agreements are explained briefly. The provisions that require a decision are flagged clearly.

Step 3 — Negotiation between shareholders.

If shareholders are separately represented, their solicitors exchange comments. If they are being advised collectively, the firm facilitates a conversation about the provisions in dispute. In most new company shareholder agreements, the number of genuinely contested provisions is small.

Step 4 — Execution.

The agreement is executed by all shareholders and by the company. Execution formalities are confirmed, copies are provided to all parties, and the document is stored with the company’s records.

Step 5 — Constitution review.

Where the shareholders’ agreement includes provisions that should be reflected in the constitution (for example, restrictions on share transfers), the constitution is reviewed and, if necessary, amended. The two documents need to be consistent. Inconsistency between them is a common and avoidable source of later dispute.

Frequently asked

Questions we hear often.

Plain-English answers to the questions clients tend to ask. If your question is not here, call us.

Get in touch

Is a shareholders' agreement legally binding?

Yes. A shareholders’ agreement is a contract between shareholders, and between shareholders and the company. It is enforceable in the same way as any other commercial contract. It is not the same as the company’s constitution: the constitution governs the company’s internal affairs and is a public document registered with ASIC. The shareholders’ agreement is a private contract. If there is a conflict between the two, the company’s constitution generally governs the company’s internal affairs, but the shareholders remain contractually bound by the agreement’s terms.

What are replaceable rules?

The replaceable rules are provisions in the Corporations Act 2001 (Cth) that apply to a company’s internal management unless the company adopts a constitution that alters or replaces them. They cover matters including the appointment and removal of directors, the conduct of meetings, the procedure for paying dividends, and the transfer of shares. A company that has no constitution operates under the replaceable rules by default. The rules are adequate for many purposes but do not address the shareholder relationship issues that a shareholders’ agreement covers.

What is a drag-along clause?

A drag-along clause allows a majority shareholder (or a defined group holding a majority) to require minority shareholders to sell their shares on the same terms when a buyer acquires control of the company. Its purpose is to allow a clean sale of 100% of the company without the buyer being blocked by a minority shareholder who refuses to sell. Without a drag-along, a minority shareholder can effectively hold the sale to ransom. The clause is usually drafted with conditions: the buyer must be acquiring at least a defined percentage, and the minority must receive no less favourable terms than the majority.

What is a tag-along clause?

A tag-along clause gives minority shareholders the right to participate in a sale when the majority sells. If a majority shareholder receives an offer to sell their shares, the minority can require that the buyer extend the same offer to them. Its purpose is to prevent a situation in which the majority exits at a premium, leaving the minority locked into a company with a new majority owner they did not choose. Tag-along and drag-along clauses are complementary: one protects the majority’s ability to sell; the other protects the minority’s ability to exit on comparable terms.

What can I do if the majority shareholder is running the company against my interests?

A minority shareholder in this position may have several options. If there is a shareholders’ agreement, the first question is whether the conduct breaches it. If so, contractual remedies apply. Under s 232 of the Corporations Act 2001 (Cth), a shareholder can apply to the Court for relief if the company’s affairs are conducted in a manner that is oppressive, unfairly prejudicial, or that unfairly disregards the interests of a member. The Court has broad power to grant relief, including ordering a buyout of the minority at a fair value. Legal advice early in a deteriorating situation tends to preserve options that are more difficult to pursue once the relationship has fully broken down.

How are shares valued when a shareholder exits?

The valuation method depends on what the shareholders’ agreement says. Common approaches include a multiple of earnings before interest and tax (EBIT or EBITDA), a net asset value basis, a discounted cash flow analysis, or a combination. Most agreements provide for an independent valuation by an agreed accounting firm if the parties cannot agree. The agreement should also address: whether a minority shareholding is valued at a discount, whether a controlling interest attracts a premium, who appoints the valuer if the parties cannot agree, and who pays the valuation costs. These questions are far easier to negotiate before a dispute than after one.

Talk to Fraser Lawyers about your shareholders' agreement.

Whether you are starting a new company, adding a shareholder to an existing one, or dealing with a dispute that has already arisen, a short conversation is usually enough to identify the position and the options. Fraser Lawyers is based at 86 Bundall Road, Bundall, and acts for shareholders across the Gold Coast and Queensland.

Call (07) 5554 6116 Send a short enquiry