Three founders split the shares evenly and get to work. The Shareholders Agreement is the thing they plan to sort out once the business settles down. Then one founder wants out, wants to sell, or simply stops turning up, and nothing on paper says what happens next.

A Shareholders Agreement is the contract between a company’s owners that sets how decisions are made, what happens to a departing owner’s shares, and how disputes are resolved before they reach court. It is not required by law, which is why founders skip it, and why the gap only shows up at the worst possible moment.

What governs your company without a Shareholders Agreement

Without a Shareholders Agreement, an Australian company is only governed by the Corporations Act 2001 (Cth) (Corporations Act) and either its own constitution or the replaceable rules (the default provisions that apply when a company has no constitution). These cover the basic mechanics of running a company, but say nothing about founder exits, share valuation, vesting, or how to break a deadlock.

The replaceable rules deal with things like how directors are appointed, how meetings are called, how shares are transferred and how dividends are declared. They do not decide the things founders actually fall out over: what a departing founder must do with their shares, how those shares are valued, whether a founder has to earn their equity over time, or how a deadlock is broken when owners cannot agree. On those questions the default position is silence, and silence tends to favour whoever is happiest with the status quo.

When the relationship breaks down badly, the main recourse left is the oppression remedy in the Corporations Act (sections 232 to 235). That means court proceedings, and in closely held companies the usual outcome is an order that one side buy the other out at a value the court decides. It is a slow and expensive way to answer questions a few clauses could have settled up front.

What happens when a shareholder exits

A shareholder who stops working, is asked to leave, or falls out with the others generally keeps their shares. Nothing in the Corporations Act forces a sale or sets a price. A Shareholder Agreement fixes this with provisions outlining share transfer rights, leaver provisions, and founder vesting, so equity does not stay locked with someone who has left the business.

The result of doing nothing is a company where a slice of equity sits with someone who no longer contributes, cannot be removed as an owner, and may still hold a say over decisions that need their consent.

What to decide: whether shares vest and over what period, what counts as a “good” or “bad” leaver, and who has the right to buy a departing founder’s shares and how the price is set.

Who actually decides

A 50/50 split means that if two owners disagree, the company is effectively deadlocked and the Corporations Act offers no reliable way to break it. A Shareholder Agreement sets who decides what, and how a stalemate is resolved.

A paralysed company can be as damaging as an insolvent one, and nothing in the Corporations Act gives you a reliable way out. Even where ownership is not evenly split, control is not as simple as it looks.

What to decide: which decisions need more than a simple majority (issuing new shares, taking on debt, selling the business, changing what the company does), how a genuine deadlock is resolved, and what each founder is actually committing to in time and role (supported by an employment or contractor agreement with appropriate KPIs).

What happens to shares on a sale or investment

Shares in a private company are not freely tradeable like listed shares, and without controls in a Shareholder Agreement a founder can sell to an outsider you never agreed to work with, or an incoming investor can secure rights that squeeze the others later. A Shareholder Agreement manages this through pre-emptive rights and through drag along and tag along provisions, which is also the first thing investors check on due diligence.

Pre-emptive rights give the existing owners the first chance to buy shares before they can go to an outsider. Drag along and tag along rights manage a sale of the whole company, so the majority can complete a deal while the minority is not left stranded. Because these are the provisions investors look for first when they conduct due diligence, having them in place makes the company easier to raise money against and easier to sell.

What to decide: how shares can be sold to outsiders and on what conditions, how new funds are raised, and how a sale of the whole company is handled if not everyone agrees.

Where this leaves you

A Shareholder Agreement is cheapest and easiest to put in place at the start, when the founders are aligned and no one has a reason to hold out. It gets harder, and more expensive, precisely when you need it, such as when there is money on the table or a relationship has soured. The three decisions worth settling now are what happens when a founder wants to leave, who controls the key decisions, and what happens to shares on a sale or investment.

In corporate advisory matters we have advised on, from preparing shareholders agreements for co-founders to resolving disputes when a co-founder exits, the pattern is the same: the agreement costs far less to put in place than the fallout from going without one.

If you are setting up a company with others, or you are already running one on a handshake, Camber Law & Advisory can help you put a shareholders agreement in place that fits how you actually work. Get in touch for a 30 minute consultation.

Frequently asked questions

Is a Shareholders Agreement legally required in Australia?

No. A company can be registered and run without one. In its absence the company is governed by the Corporations Act 2001 (Cth) and either its constitution or the replaceable rules, none of which address founder exits, share valuation, vesting, or deadlock. The agreement is optional, but the problems it prevents are not.

What is the difference between a Shareholders Agreement and a company constitution?

A constitution sets the internal rules of the company and binds it and its members. A Shareholders Agreement is a private contract between the owners that can go further, covering vesting, leaver terms, decision rights, pre-emptive rights and exit mechanics. The two work together, and a shareholders agreement usually deals with what a constitution does not.

Can we put a Shareholders Agreement in place after the company has started?

Yes. It can be signed at any time while the owners agree to its terms. The catch is that it is easiest to agree early, before anyone has a reason to hold out. Once money is on the table or a relationship has soured, the same terms become far harder to negotiate.