Two founders, one company and the shareholders agreement clauses that prevent deadlock

You and your co-founder have filed the incorporation forms, and the company is registered. In the paperwork that came back there is a constitution, and somewhere, either from the accountant or from an online template, a draft shareholders agreement. The template is full of clauses about majority shareholders, minority protection and board appointment that assume one person is clearly in charge. Neither of you is.

A shareholders agreement is a private contract between the shareholders of a company. It sits alongside the constitution, and together they govern how the company runs. Under the Corporations Act 2001 (Cth), the constitution and the default replaceable rules already operate as a contract between the company and its members, and between members themselves, under s 140, but those defaults are generic. For two founders holding 50% each, the defaults are also the problem: both of you are directors with one vote, board decisions are made by a majority of the votes cast, and any split is a deadlock. The shareholders agreement is where you write the rules that make a fifty-fifty company workable. This article walks through the clauses that matter, the drafting choices behind them, and the traps that cause problems later.

The essential clauses in a two-founder shareholders agreement

Roles, day-to-day control and reserved matters

Under the default rules, the directors manage the business of the company and can exercise all of its powers, including issuing shares and borrowing money (s 198A of the Corporations Act 2001 (Cth)). With two directors, every operational decision needs a majority of the votes cast, and if the directors elect one of their number to chair meetings, the chair gets a casting vote (s 248G). The practical effect is that day-to-day control is up for grabs unless you decide who does what.

The shareholders agreement should do two things. First, allocate roles: who runs day-to-day operations, who handles finance, what each founder can decide alone and what needs the other's agreement. Second, list the reserved matters that require both founders' written consent, no matter how small the company. The usual list covers:

New shares and fundraising: issuing shares, options or convertible notes to anyone.
Debt and security: borrowing above an agreed dollar amount, or giving a guarantee.
Big commitments: signing leases, buying or selling assets above a threshold, entering a major contract.
People: hiring and firing, especially the founders themselves and senior staff.
The company itself: changing the business, changing the constitution, paying dividends, winding up.

The trap is drafting the list too narrowly. If it only covers fundraising and borrowing, a founder can still bind the company to a five-year lease or a contract that changes the business. Most disputes in two-founder companies start because a reserved matter was missing from the list, not because the list was ignored.

Issuing new shares and protecting against dilution

Dilution is the fear that keeps founders awake. If one founder can cause new shares to be issued, the other's 50% can shrink to a minority without a dollar changing hands.

The default law gives some protection. Under s 254D, a replaceable rule, the directors of a proprietary company must offer new shares to existing shareholders in proportion to what they already hold before issuing them to anyone else. But it is a replaceable rule: the constitution can displace it, and a general meeting resolution can authorise an issue that skips the pre-emption right altogether (s 254D(4)). Directors otherwise control the issue of shares as part of their management power.

A two-founder shareholders agreement should therefore:

require both founders' consent before any new issue of shares, options or convertible notes;
set the pre-emption mechanics: offer in proportion to holdings, a minimum acceptance period, and what happens to shares not taken up;
state how the price of new shares is worked out, typically market value as agreed or as determined by an independent accountant if the founders disagree.

The drafting choice that matters most is consent, not price. A clause that lets one founder issue shares once a price is agreed is really a clause that lets one founder dilute the other. If you plan to raise capital, the agreement should also say whether the founders' pre-emption rights can be waived for a particular investor round.

Selling shares and the first right of refusal

Under the Corporations Act 2001 (Cth), a share is personal property and is transferable as the company's constitution provides (s 1070A). With two equal shareholders, a sale by one founder can hand half the company to a stranger. The standard protection is a right of first refusal: a founder who wants to sell must first offer the shares to the other founder on the same terms, and only if the offer is refused can the shares go to a third party.

Two traps trip up most first-refusal clauses:

The constitution problem: A shareholders agreement binds only the people who sign it. A buyer is not a party to it, so a restriction that exists only in the agreement may not stop a sale. The transfer restriction also needs to be in the constitution, because the constitution binds every member as a statutory contract under s 140.
The family transfer gap: Founders often want to transfer shares to a spouse or a family trust without triggering the first-refusal process. If the agreement does not define permitted transfers, a founder may be stuck asking permission for a routine estate-planning move, or the clause may be drafted so broadly that a transfer to a family trust counts as a sale to a third party.

Where one founder's shares pass to their estate on death, the agreement should say what happens: a right for the surviving founder to buy the shares, a forced sale to the surviving founder, or continuation with the estate. Life insurance is the usual way to fund that buy-out, and the agreement should require the policies to be in place.

If the founders have not paid market value for their shares, or the company is a startup where the value is yet to be built, vesting is worth including. Shares vest over time, typically three to four years, so a founder who leaves in the first year keeps only the shares that have vested and loses the rest.

The mechanics usually turn on whether the founder is a good leaver or a bad leaver:

Good leaver: leaves because of illness, incapacity, redundancy of role or an agreed exit, and keeps vested shares at market value.
Bad leaver: resigns to compete, is dismissed for cause, or breaches the agreement, and must sell vested shares at a discount or at their issue price.

The unvested shares need a home: a transfer to the continuing founder, or a buy-back by the company. The agreement also needs to say when vesting accelerates, for example on a sale of the company, so a founder is not incentivised to block an exit.

Events of default and forced buy-outs

An events of default clause sets out the circumstances in which one founder can compel the other to sell their shares. The usual triggers:

Insolvency and incapacity: bankruptcy, a personal insolvency agreement, or mental incapacity.
Breach of the law: a breach of the duties directors owe under the Corporations Act 2001 (Cth), including the duties of care and diligence (s 180), good faith and proper purpose (s 181), and the criminal offences for dishonest conduct (s 184).
Harm to the company: conduct that brings the company into disrepute.
Breach of the agreement itself: a material breach that is not remedied within a cure period.

The consequence is usually a compulsory transfer of the defaulting founder's shares to the other founder, often at a discount to market value, so the clause operates as a penalty. The drafting traps are vagueness and reach. "Material breach" needs definition and a cure period, and the events of default should not be so wide that any disagreement can be dressed up as a default. A clause that can be triggered at the other side's will is a weapon, not a protection.

The deadlock and buy-sell clause

This is the clause that makes a fifty-fifty company workable, and the one most templates get wrong.

With two equal shareholders, every contested decision fails. At board level, resolutions pass by a majority of the votes cast, so a one-to-one split defeats the resolution unless a chair has been elected and uses a casting vote. At member level, changing the constitution needs a special resolution, passed by at least 75% of the votes cast by members entitled to vote (s 250MA), so neither founder can change the rules of the game alone. If the agreement removes the casting vote, as many two-founder agreements do, the company simply cannot move on a disputed matter.

The buy-sell clause, sometimes called a shotgun clause, gives the deadlock an exit. One founder names a price per share. The other founder must then either buy the first founder's shares at that price, or sell their own shares at that price. The person setting the price does not know which side of the deal they will end up on, which keeps the price honest. Variants include:

a neutral third party, such as an independent accountant, valuing the company and giving each founder the right to buy at that value;
a casting vote for an independent director or chair;
mediation with a buy-out right if mediation fails.

The traps are in the mechanics. The agreement must set the timeframes, the valuation method if an expert is used, how the price is paid and whether the buyer must fund it up front, and what happens to restrictions like pre-emption when the buy-sell clause is triggered. A buy-sell clause that one founder cannot afford to exercise is a clause that hands the company to the other.

Dispute resolution before the courts get involved

However well drafted the agreement is, the founders may still disagree. A dispute resolution clause sets the path the disagreement follows before anyone can sue: negotiation between the founders, then mediation with an independent mediator, and only then court proceedings. For disputes about value, expert determination is faster and cheaper than litigation.

The clause matters because the alternative is a court application, and for a deadlocked two-founder company the court options are blunt instruments. A founder can apply to wind the company up on the ground that it is just and equitable to do so (s 461(1)(k)), or apply for relief from oppressive or unfairly prejudicial conduct (s 232), where the court can order that one founder's shares be bought by the other (s 233). Those remedies work, but they are slow, expensive and usually fatal to the business. The dispute resolution clause is the founders' attempt to avoid needing them.

Termination, restraints and confidentiality

The agreement should say when it ends: a sale of all the shares, a public listing, an agreed termination, or the winding up of the company. It should also say what survives termination, because the departing founder's obligations are the point of the exercise.

For a founder leaving the company, the usual protections are a restraint on competing with the company for a defined period and within a defined area, a restraint on soliciting the company's clients and employees, and a continuing confidentiality obligation covering the company's information.

Restraints of trade are only enforceable to the extent they protect a legitimate interest of the company and are reasonable in duration, area and scope. A restraint attached to the sale of shares, where the seller is paid for the value of the business, is treated more favourably by the courts than a restraint on an employee. The traps are the opposite problem: a restraint so broad that it is unenforceable, or so narrow that it lets the departing founder walk off with the client list. The clause should run from the date of departure, cover the clients and staff the founder actually dealt with, and be drafted so an over-broad part can be cut out without destroying the rest.

Optional clauses worth considering for two founders

Not every company needs every clause. The following are worth thinking about when the trigger applies:

Tag-along rights: if one founder sells to a third party, the other can join the sale on the same terms, so you are not left in business with a stranger.
Drag-along rights: if a founder has a buyer for the whole company, the other founder must sell too, which stops one founder blocking an exit the other wants.
IP assignment: a clause confirming the company owns the intellectual property the founders develop for it, which matters when the company's value sits in software or a brand.
Dividend policy: how profits are distributed or reinvested, so one founder cannot force the company into dividends the other does not want, or the reverse.
Key-person insurance: policies funding a buy-out if a founder dies or is incapacitated, so the surviving founder can actually pay for the shares.

How an Artificer Legal lawyer reviews a two-founder shareholders agreement

A lawyer's review of a two-founder shareholders agreement usually starts with the reserved matters list, because that list decides who can do what without the other. We check that the list covers fundraising, borrowing, major contracts, hiring and firing, and changes to the business, and that the day-to-day delegation is clear enough that the company is not calling a board meeting to approve every invoice.

We then work through the transfer machinery: the first-refusal clause and the mirror provisions in the constitution, so a restriction in the agreement also binds a future member under s 140. We check the events of default for proportionality, the buy-sell clause for workable mechanics, and the restraints for reasonableness. The order matters, because the price and valuation clauses are only worth negotiating once the structure of who can force a sale is settled.

If you are drafting from a template, the clauses to treat with suspicion are the ones that assume a majority: a majority shareholder's right to appoint directors, drag-along rights that one 50% founder can exercise against the other, and pre-emption provisions that do not fit an equal split. A lawyer's job in this document is to make the deadlock machinery work and to make sure the agreement and the constitution do not contradict each other. That review is worth doing before either of you signs, because the agreement is what the two of you will rely on if the relationship sours.

The clause that decides who walks away

The clause that most often decides whether a two-founder shareholders agreement works is the buy-sell clause, because it is the only clause that gives either founder a way out of a deadlock that does not run through a courtroom. A well-drafted reserved matters list and a first-refusal clause stop the avoidable fights, but when the relationship is genuinely over, only the deadlock machinery determines who owns the company and at what price. That is the question the agreement exists to answer, and the clause most templates get wrong.

The key points from this article: the Corporations Act 2001 (Cth) defaults assume a company with a clear majority, which a fifty-fifty company is not. The agreement should allocate roles, list reserved matters requiring both founders' consent, protect against dilution through consent over new issues, and put first-refusal rights in both the agreement and the constitution. Events of default should be defined and proportionate, deadlock needs a workable buy-sell mechanism, restraints need to be reasonable, and the dispute resolution clause should push disagreements to mediation before the court options of winding up and oppression relief become the only remedies left.