Many closely held Queensland companies start with two or three people, a handshake and an ASIC registration. Not all of them sign a shareholders agreement saying what happens if one founder stops pulling their weight, wants to sell, or disagrees with the others about where the business is going.
A company is never without rules, though. If the shareholders have not written their own, the Corporations Act 2001 (Cth) supplies a default set, and those defaults shape who controls the board, who can sell shares and to whom, and how a tied vote is broken. The question is whether those rules are the ones you would have chosen.
The rules your company already has
Under the Corporations Act 2001 (Cth) s 134, a company’s internal management may be governed by the replaceable rules in the Act, by a constitution, or by a combination of both. The replaceable rules apply to companies registered after 1 July 1998, and a constitution can displace or modify any of them (s 135(2)). The full list sits in the table in s 141.
One exception is easy to miss. The replaceable rules do not apply to a proprietary company while the same person is both its sole director and sole shareholder (s 135(1)). Once a second shareholder or director comes in, the defaults apply, except so far as the constitution has displaced or modified them.
The constitution and the replaceable rules operate as a contract between the company and each member, between the company and each director and secretary, and between each member and every other member (s 140(1)). Their weakness is that they were written for every company in Australia, not for yours.
What the default rules say about control
Where they have not been displaced, a handful of replaceable rules do most of the work in a closely held company.
| Issue | Default position | Why it can matter |
|---|---|---|
| Running the business | Directors manage the business and may exercise all powers not reserved to members, including issuing shares and borrowing (s 198A) | A shareholder who is not on the board has little say in day-to-day decisions |
| Board seats | Members may remove a director and appoint another by resolution (s 203C) | A simple majority can take a minority founder off the board |
| Board votes | Majority of votes cast, and the chair has a casting vote if necessary (s 248G) | In a two-director company, the chair can decide an ordinary tied board vote |
| Members’ votes | One vote per share on a poll, and the chair has a casting vote (s 250E) | A 50/50 split is not always equal on an ordinary resolution |
| New shares | Offered first to existing holders in proportion, unless a general meeting authorises otherwise (s 254D) | A majority can authorise a particular issue without the pro rata offer |
| Selling shares | Directors may refuse to register a transfer for any reason (s 1072G) | A departing shareholder may find no buyer the board will register |
These powers are not unlimited. Directors must exercise them in good faith in the best interests of the company and for a proper purpose (s 181(1)), and a member treated unfairly has the oppression remedy discussed below. But the defaults say nothing about what happens when a founder leaves, falls out with the others, dies or wants to sell.
Constitution or shareholders agreement: what is the difference?
A constitution is the company’s own rulebook. The company can adopt, change or repeal it by special resolution (s 136(2)), which needs at least 75% of the votes cast by members entitled to vote (s 250MA). The duty in s 136(5) to lodge a copy with ASIC falls on public companies.
That threshold is measured against votes actually cast, so a shareholder with less than a quarter of the votes cannot block a special resolution if everyone else votes in favour. There are limited protections. A member who has not agreed in writing is not bound by a later change that makes them take up more shares, increases their liability to pay money to the company, or imposes or increases restrictions on transferring the shares they already hold (s 140(2)). The constitution can also require a further step before a change takes effect (s 136(3)), which is one way of entrenching a protection.
A shareholders agreement is a private contract between the shareholders who sign it, usually with the company as a party as well. Its own terms say how it can be varied, and it is common to require every party’s written agreement. That makes it the natural home for the commercial deal between the owners: the exit terms, the valuation method, and the protections a minority holder negotiated when they came in.
A priority clause in the agreement operates between the people who signed it. It does not amend the constitution or bind anyone who has not signed. So the agreement should also oblige the parties to vote to bring the constitution into line, and require any new shareholder to sign up to it before shares are issued or transferred.
Deadlock: the clause most companies need first
Deadlock is a common source of disputes in two-founder companies. If each founder holds half the shares and each sits on the board, the business can stall on every decision that matters. Where the replaceable rules apply, the chair’s casting vote under ss 248G and 250E can decide an ordinary tied vote, but only in favour of whoever is in the chair, and it does nothing for a special resolution, which still needs 75% of the votes cast.
A deadlock clause sets out an escalation path. A typical sequence is a formal notice of deadlock, a period to negotiate, mediation, and finally a mechanism that forces a result, such as:
- a buy-sell offer, where one party names a price and the other must either buy at that price or sell at it;
- a sale of all the shares to a third party, with each shareholder paid for their own shares;
- referring a defined class of decision to an independent person, such as the company’s accountant.
A buy-sell offer can favour whichever party has ready access to funds, so the choice of mechanism matters.
Exit, transfer and valuation
Because the default rule lets the directors refuse to register a transfer for any reason (s 1072G), a minority shareholder may be unable to get a buyer registered, and so have no practical exit. A well-drafted agreement replaces that discretion with a clear process:
- Pre-emptive rights on transfer. A shareholder who wants to sell must first offer the shares to the others, at a set price or a price fixed by the valuation clause, before selling to an outsider.
- Trigger events. Death, permanent incapacity or ceasing to work in the business can each oblige a shareholder (or their estate) to offer their shares to the others.
- Valuation. The agreement should say who values the shares, on what basis, and whether a discount applies to a minority holding. A price formula agreed when everyone is on good terms can reduce the scope for a valuation dispute later.
- Funding. If the remaining shareholders must buy out a deceased founder’s estate, the agreement can be paired with insurance so the purchase price is available.
Drag-along and tag-along rights
These two clauses matter when an outside buyer wants the whole company.
A drag-along right lets the holders of a stated majority require the minority to sell on the same terms when a genuine buyer offers for all the shares. It stops one small holder from blocking a sale the others want.
A tag-along right is the minority’s protection. If the majority wants to sell, it cannot complete unless the buyer makes the same offer for the minority’s shares. Without it, a minority holder can end up as a co-owner alongside a stranger.
The two are usually negotiated together, and the percentage that triggers a drag-along is one of the most important numbers in the agreement.
Reserved matters, new capital and restraints
Reserved matters. Because the directors can exercise all powers not reserved to the members (s 198A), a minority shareholder who wants a say on big decisions needs them listed. Common reserved matters include issuing new shares, borrowing above a set amount, selling a major asset, changing the nature of the business, related-party transactions, and appointing or removing directors. Each can be made subject to unanimous approval or a higher threshold than a simple majority.
New capital. The default pre-emption rule in s 254D can be set aside for a particular issue by a resolution in general meeting. The agreement can tighten that, deal with how future funding is raised, and say what happens if a shareholder cannot or will not contribute.
Restraints. Founders often expect that a departing shareholder will not set up next door and take the clients. A shareholders agreement can deal with that directly. Drafting the restraint narrowly, to what the business genuinely needs protected, reduces the room for argument about whether it can be enforced.
When there is no agreement and things go wrong
Without an agreement, a shareholder who is being shut out is left with the statutory remedies. The court may make an order where the conduct of the company’s affairs, an act or omission, or a resolution is contrary to the interests of the members as a whole, or is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member (s 232). A member can apply, as can a former member where the application concerns how they ceased to be one (s 234).
The court may make any order it considers appropriate, including an order for the company to be wound up, for the constitution to be modified, regulating the company’s affairs in future, or for the purchase of a member’s shares (s 233(1)). Court proceedings are slow and expensive, and the outcome is uncertain. A shareholders agreement settles many of those questions in advance, which can reduce uncertainty, although it cannot rule out a dispute or exclude the statutory remedies.
Published 11 November 2026.
Before you sign one
A template agreement will cover the headings, but the value is in the numbers and the triggers: the drag-along percentage, the reserved matters, the valuation method and the deadlock path. Those should be settled against the company’s existing constitution, and at the start, when everyone still agrees.
The provisions referred to in this article can be read in the current compilation of the Corporations Act 2001 (Cth) on the Federal Register of Legislation.
Related reading
- Choosing a business structure
- When does your business need a lawyer to review a contract?
- How Fraser Lawyers helps with shareholder agreements
- Commercial law at Fraser Lawyers
- Contact Fraser Lawyers
Need advice? The terms that govern a company’s owners are easiest to settle before they are needed. If you are setting up a company with others or bringing in a new shareholder, contact Fraser Lawyers to understand your rights and where you stand, with no obligation. |
This article is general information only and is not legal advice. Queensland law and the figures referred to can change, and every situation turns on its own facts. Contact Fraser Lawyers for advice specific to your circumstances.
If you would like to discuss your matter, you can book a consultation or call (07) 5554 6116.
