Beyond the Template: What Your Shareholders Agreement Really Needs to Cover

A shareholders agreement is a contract between the people who own a company, and usually the company itself. Its job is to decide, in advance, what happens when the shareholders stop agreeing with each other.

It sits alongside the constitution and operates inside the Corporations Act 2001 (Cth), which it cannot override. Most of them are signed early, filed, and not read again until that day arrives. By then the wording is fixed and you are stuck with it.

How this usually starts

Two of you started the company. You took 50% each, because that felt fair and neither of you wanted the conversation about who was worth more. Three years on, one of you is down to four days a week and spending the rest on something else, the other is carrying the business, and an offer has just come in that one of you wants to take.

Nobody has opened the agreement since it was signed. When you do, the shareholding schedule is out of date, the document was never executed by the company, and the deadlock clause gives the chair a casting vote. The chair is one of you.

That is how most shareholder disputes start. Not with a missing clause, but with a clause that was there and did not fit.

New shares, and who gets diluted

Every time the company issues shares, anyone who does not take part gets diluted. A pre-emptive rights clause deals with that: new shares have to be offered to existing holders in proportion to their holdings before they go to anyone else.

Section 254D of the Corporations Act gives proprietary companies one as a replaceable rule, but it is thin, and most agreements replace it with something workable. It applies only to proprietary companies. It operates class by class, so the directors must offer new shares of a particular class to the existing holders of that class, which means an issue of a new class, the usual mechanic for a priced round, arguably sits outside it altogether. And it can be displaced entirely by the constitution.

Check three things. That grants under your employee share scheme are carved out, or the process will stall every time you issue options. That convertible notes are dealt with, because they dilute on conversion rather than on issue. And that there is an agreed position on the shareholder who cannot fund the next round.

Who controls what

Control sits in two places. Board composition decides who appoints and removes directors and at what shareholding. The reserved matters list decides what cannot happen without shareholder approval at a set majority: issuing shares, changing the constitution, borrowing above a limit, related party transactions, selling the business, setting director pay, declaring dividends and winding up.

Two things you cannot change by agreement. A director appointed by one shareholder still owes their duties to the company under sections 180 to 184, not to the person who appointed them. The only statutory relief for a nominee sits in section 187, and it is narrow: it covers directors of wholly-owned subsidiaries acting in the holding company's interests where the constitution authorises it. It does not reach a shareholder-appointed director of a jointly owned company, which is exactly the situation your reader is in.

And where the chair is one of two equal shareholders, a casting vote gives that shareholder every contested decision. It usually goes in without anyone noticing what it does.

Getting shares out: pre-emption, drag and tag

Shares should not be transferable at will. Transfers to a related entity or family trust can be permitted, provided the transferee signs up to the agreement and has to hand the shares back if it stops being related.

Three clauses do the work:

• Pre-emptive rights. A seller has to offer the shares to the other shareholders first, at a stated price or one set by the valuation clause, before going to an outsider.
• Drag-along. Holders of a set majority who accept a genuine offer for the whole company can require the others to sell on the same terms. Without it, one holdout can stop your exit.
• Tag-along. If the majority sells, you can require the buyer to take your shares too, rather than leave you with a new owner you did not choose.

Templates set the drag threshold at 75%, because that is the number templates use. If your register is 60/40, a 75% threshold means you have no drag right at all.

What happens when a shareholder leaves?

This is the clause that ends up in dispute. It needs trigger events: death, total and permanent disablement, insolvency, unremedied breach, loss of a licence the business runs on, change of control of a corporate shareholder, a family law order over the shares, and someone ceasing to work in the business.

Then it needs to separate good leavers, bought out at full value, from bad leavers, bought out at a discount.

And it needs an irrevocable power of attorney letting the directors sign the transfer for a shareholder who refuses to. Without one, a departing shareholder who does not want to sell simply does not sign, and the argument becomes a proceeding.

How the price gets worked out

Three ways to do it. An agreed value reviewed each year, which is simple and reliably out of date. A formula, usually a multiple of EBITDA or net tangible assets, which is certain and blunt. An independent expert, which is the most defensible and the most expensive.

Whichever you choose, the argument comes from the same gap. The clause says fair market value and stops there. It does not say whether a minority discount applies, how shareholder loans and unpaid dividends are treated, whether director salaries are added back, or how to value a business whose revenue walks out with the person leaving. Two competent valuers can read that clause and come back three times apart.

Who buys the shares, and with what money

There are two routes, and they are not interchangeable.

The company can buy the shares back. A buy-back from one shareholder rather than all of them is a selective buy-back, and it is governed by Division 2 of Part 2J.1 of the Corporations Act. Section 257A requires that the buy-back does not materially prejudice the company's ability to pay its creditors, and that the company follows the Division 2 procedure. There is no solvency declaration, but the directors' duties and the insolvent trading provision in section 588G sit alongside.

Approval comes under section 257D, and there are two routes. A special resolution, with no votes cast in favour by the shareholder whose shares are being bought back or by their associates. Or a resolution agreed to at a general meeting by all ordinary shareholders. The company must send shareholders all information material to the voting decision with the notice of meeting, and must lodge a copy of that notice with ASIC before it goes out, on Form 280 or Form 281.

Read that exclusion carefully, because it does less than people assume. It stops the departing shareholder voting in favour. It does not stop them voting against. In a 50/50 company, a leaver who votes their half against will defeat a 75% special resolution, and the unanimous route is gone the moment they say no. The company buy-back is therefore not the answer in a two-way deadlock unless the leaver cooperates.

The other route is a cross-purchase, where the remaining shareholders buy the shares themselves. Where the trigger is death or disablement, buy-sell insurance is usually what makes the exit possible at all, and it funds a cross-purchase without needing anyone's resolution.

Deadlock, and how to break it

A deadlock clause should escalate. The principals talk, then mediation, then something that produces an outcome: a put and call, a shotgun clause where one of you names a price and the other chooses to buy or sell at it, a sale of the whole company, and winding up last.

Shotgun clauses look even-handed and are not. They favour whoever has access to cash, regardless of who is right about the underlying disagreement.

Courts will enforce a good faith negotiation step if you draft it with enough certainty, so specify the steps, the people and the timeframes rather than gesture at cooperation. What no clause can do is stop a shareholder bringing an oppression claim under sections 232 and 233, or applying to wind the company up on just and equitable grounds under section 461(1)(k). Worth knowing that the remedies a court can order under section 233 include an order that shares be purchased. An oppression claim can produce the same buy-out your agreement was meant to deliver, just slower and at considerably greater cost.

Restraints and IP

A restraint given by a shareholder to protect the goodwill of the business gets more latitude than one in an employment contract, but it still has to go no further than is reasonably necessary.

Only New South Wales lets a court read a restraint down rather than strike it out, under section 4(1) of the Restraints of Trade Act 1976 (NSW), which makes a restraint valid to the extent it is not against public policy. Two things follow. That protection depends on the restraint being governed by NSW law, so your governing law clause is doing work you may not have intended. And it is not a licence to over-draft: under section 4(3), a person subject to a restraint can apply to the Supreme Court, and where the drafter has manifestly failed to attempt a reasonable restraint, the Court may order it invalid altogether. If your people are spread across states, you cannot rely on any of it.

There is a change coming. The Federal Government's announced ban on non-compete clauses for workers earning under the Fair Work Act high income threshold is intended to start in 2027 and to operate prospectively. The threshold is $190,100 for 2026-27, set by regulation 2.13 of the Fair Work Regulations 2009 (Cth) and indexed each 1 July. Restraints given on the sale of a business sit outside the ban. Treasury's consultation closed on 5 September 2025, and as at September 2026 no exposure draft and no Bill has been introduced. If your shareholders are also employees, which document the restraint sits in is going to matter.

On IP, confirm the company owns everything created for it, and deal separately with what the founders built before the company existed. Without a written assignment, that is still theirs.

Where a shareholders agreement template runs out

Everything above is generic, which is why a template handles it reasonably well. What a template cannot do is know anything about you.

• Holding structures. Shares held through a family trust or an SMSF raise questions about who is actually bound. For an SMSF, the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 (Cth), the prohibition on acquiring assets from related parties in section 66, and the in-house asset rules in Part 8 can make an otherwise standard buy-out unworkable. Shares in a private company are ordinarily in-house assets unless the structure falls within regulation 13.22C.
• Tax. A transfer of shares to another shareholder is a CGT event A1 under section 104-10 of the Income Tax Assessment Act 1997, and the market value substitution rule in section 116-30 matters where the price is not arm's length. A company buy-back is taxed differently: under Division 16K of Part III of the Income Tax Assessment Act 1936, the part of the price not debited against share capital is taken to be a dividend, with the balance a return of capital. The 2023 amendments removing that split apply only to listed public companies. The franking position often decides which route the parties actually take. Whether a rollover or the small business concessions are available depends on your circumstances.
• Duty. Landholder duty does not turn simply on whether the company owns property. It turns on the value of the company's landholdings exceeding the relevant state threshold and on the size of the interest being acquired.
• Working and passive shareholders. Most disputes start when one owner steps back, keeps the shares and the votes, and the others keep building value for them.
• Your other contracts. Change of control clauses in customer agreements, leases and finance documents can turn your drag-along right into an event of default.
• Your constitution. An agreement that contradicts it leaves you with two sets of rules, and one of them has to change.

There is also a plainer problem. A good share of the agreements we are asked to review are unsigned, undated, not executed by the company that has obligations under them, or lifted from a US precedent that has no operation here. Our piece on the hidden costs of DIY contracts covers the same failure in a different setting.

Where to start

If you do not have an agreement yet, answer these before anyone drafts anything. Who does what, and what happens to their equity if they stop. Who funds the next round, and what happens to whoever cannot. Who decides what, and at what threshold. How the price is worked out when someone leaves. Who buys the shares, and with what money.

A template will not ask you any of that. If the structure itself is still open, our guide to choosing between a sole trader, partnership or company covers the decision that comes before this one.

Common questions

Do we need a shareholders agreement if we already have a constitution?

They do different jobs. The constitution governs the company and is a public document. The shareholders agreement governs the relationship between the owners, stays private, and covers the things a constitution does not, including leaver treatment, valuation, drag and tag rights and deadlock. Where a proprietary company has no constitution, the replaceable rules in the Corporations Act apply by default under section 135, and they are not a substitute for either.

Is a free shareholders agreement template good enough?

As a starting point, often. A template covers the clauses every company needs, and there is no sense paying someone to reinvent them. What it cannot cover is your cap table, your holding structures, your constitution or your other contracts, and that is where disputes usually begin.

What happens if one shareholder refuses to sell when the agreement says they have to?

If the agreement includes an irrevocable power of attorney, the directors can sign the transfer on their behalf and the transaction completes. If it does not, you are looking at proceedings for specific performance, which will cost more than the drafting would have.

Can a shareholders agreement stop a shareholder taking us to court?

No. A dispute resolution clause controls the process, and the courts will hold you to it if it is drafted with enough certainty. It cannot remove the right to bring an oppression claim under sections 232 and 233 of the Corporations Act, or to seek a winding up on just and equitable grounds.

When should we put one in place?

Before the second shareholder comes on the register, or as soon after as you can manage. The agreement is easiest to negotiate while everyone still agrees, and hardest once someone can see how a particular clause will affect them.

Talk to us before you sign

If you have an agreement in front of you, or one you have never had checked, we will read it against your cap table, your constitution and your holding structures, tell you what does not fit and what is missing, and hand it back marked up. Fixed fee, agreed before we start, so you know the cost before you commit.

Book a free introductory call and we will tell you what your agreement needs and whether we are the right people to do it.