What a Shareholders Agreement Should Cover, a Clause-by-Clause Guide

You have just registered a company with your business partner, or you are about to bring in an investor who wants something in writing. Somebody hands you a draft shareholders agreement and tells you it is standard. It is not. A shareholders agreement is a tailored contract, and the choices you make inside it will determine what happens when you disagree, when someone wants out, or when an offer to buy the company lands on the table.

A shareholders agreement is a private contract between some or all of the shareholders of a company. It governs how shareholders and directors interact, who gets to make which decisions, and what happens to shares when circumstances change. It sits alongside the company's constitution and the replaceable rules in the Corporations Act 2001 (Cth) (the Act). Under s 134 of the Act, a company's internal management may be governed by replaceable rules, a constitution, or a combination of both. However, a properly drafted shareholders agreement can, and often should, override both on the matters it covers. For most proprietary companies with more than one shareholder, it is the document that matters most.

Who gets a seat at the board

This clause sets the minimum and maximum number of directors and establishes who can appoint them. In a two-founder startup, each founder might have the right to appoint one director. In a company with an external investor, the investor might negotiate the right to appoint a director once their shareholding reaches a certain percentage.

The drafting choice that matters most is whether appointment rights are fixed or proportional. A fixed right (for example, "Founder A may appoint one director") survives dilution. A proportional trigger (such as "a shareholder holding 15% or more may appoint one director") falls away if the shareholder is diluted.

On removal, the replaceable rule in s 203C of the Act allows a proprietary company to remove any director by ordinary resolution of the shareholders. For a public company, s 203D requires two months' notice and contains protections for directors appointed to represent particular shareholders. A shareholders agreement can raise the removal threshold for a proprietary company:

Requiring a special resolution (75%) rather than an ordinary resolution (50% plus one vote)
Requiring the consent of the shareholder who appointed the director
Limiting removal to specific grounds, such as fraud or incapacity

The trap is drafting removal rights that conflict with the Act. Section 203D for public companies states that a director may be removed "despite anything in the company's constitution or an agreement"; accordingly, a shareholders agreement cannot strip shareholders of this statutory power in a public company. For proprietary companies, the position is more flexible because s 203C is a displaceable replaceable rule.

What the shareholders decide, and what the board decides

A shareholders agreement draws a line between matters reserved for the board and matters that require shareholder approval. Without this line, directors can make decisions that fundamentally alter the business without consulting the people who own it.

The core of this clause is a schedule of reserved matters: decisions the company cannot make unless a specified percentage of shareholders (commonly 75% or 85%) approves them. The schedule typically includes:

Issuing new shares or altering share rights
Borrowing above a set dollar threshold
Selling or acquiring material assets
Changing the nature of the business
Appointing or removing senior management
Entering into related-party transactions

The drafting choice is the approval threshold. Setting it too high creates paralysis: a single minority shareholder can block routine decisions. Setting it too low strips minority shareholders of meaningful protection. The right threshold turns on the number of shareholders and the gap between the largest and smallest holdings. In a company with three equal shareholders, 75% means any decision needs at least two of them. In a company with one 80% shareholder and one 20% shareholder, 75% gives the majority effective control, and the minority shareholder needs a different strategy, such as a narrower set of matters requiring unanimous approval only on the issues that most affect them.

The variant the other side will usually push for is a lower threshold, because the majority or the investor wants flexibility. The drafting minimum is defining what counts as approval: a resolution at a shareholders meeting, a written resolution signed by all shareholders, or a combination that allows written resolutions for routine matters.

Bringing in new money: issuing shares

When the company needs capital, who gets first access to the new shares? A preemptive rights clause says existing shareholders must be offered new shares in proportion to their current holdings before the company can issue them to anyone else.

Without this clause, the replaceable rules give directors broad discretion over share issuance. A majority shareholder who also controls the board could issue shares to themselves and dilute the minority. A preemptive rights clause prevents that.

The minimum drafting requirements for this clause are:

The period of the offer: how long existing shareholders have to respond, typically 14 to 30 days.
The mechanism for notifying shareholders: how the offer is communicated and what information must accompany the notice.
What happens to shares not taken up: whether they can be offered to third parties, and on what terms.
The price: at a minimum, the same price offered to any outside party; sometimes a formula or independent valuation.

The trap is forgetting that some shareholders will not have the cash to take up their entitlement. If three founders each own a third and the company needs $300,000, one founder who cannot contribute $100,000 faces dilution. The clause should address this: can other shareholders take up the shortfall, or can the company issue the unsubscribed shares to an outside investor? If the answer is that outsiders can take them up, the remaining founders may end up with a partner they did not choose.

Getting out: selling and transferring shares

Shares in a proprietary company are not freely tradeable, and most shareholders do not want to find themselves in business with a stranger because a co-shareholder sold their stake to one. This clause controls who can become a shareholder and how.

A standard transfer clause has several layers. First, it restricts transfers outright: no shareholder may transfer shares without complying with the procedure. Second, it sets out permitted transfers (typically to family members, family trusts, or related entities of the shareholder) so that estate planning and structuring do not trigger the full sale procedure. Third, it establishes a right of first refusal: a shareholder who wants to sell must first offer the shares to the other shareholders pro rata.

The valuation mechanism is where these clauses most often fail. Three common approaches:

A formula: simple, but rarely keeps pace with the business. A formula set at three times EBITDA might have been right at the start and deeply unfair five years later.
An independent expert valuation: more accurate, but expensive and slow. The clause should say who appoints the valuer and who pays.
The price offered by a bona fide third-party buyer: this works where there is an actual buyer, but provides no mechanism when a shareholder simply wants to exit and no buyer exists.

The variant the exiting shareholder pushes for is a "put" right, compelling the company or the other shareholders to buy their shares at a defined price. The remaining shareholders usually resist this because it forces a cash outflow the business may not be able to sustain. The compromise is sometimes a deferred payment mechanism or a requirement that the company first satisfy the solvency test in s 254T before funding a buyback.

When you cannot agree: deadlock and dispute resolution

Deadlock is what happens when directors or shareholders are evenly split on a decision and neither side has the votes to prevail. A shareholders agreement without a deadlock clause leaves the company in paralysis; the only exit is a costly oppression proceeding under ss 232 to 234 of the Act.

A deadlock clause typically defines what counts as a deadlock (a board vote tied after a specified number of attempts, or a shareholder vote failing to reach the required threshold) and prescribes an escalation path. The escalation might include:

The matter is referred to the respective principals of each shareholder for direct negotiation
If unresolved after a set period, mediation by an agreed mediator
If mediation fails, expert determination or arbitration on specified issues
As a last resort, a buy-sell mechanism

The buy-sell mechanism is where the sharpest drafting choices sit. The most common form in Australian proprietary companies is the Russian roulette clause: one shareholder serves a notice specifying a price for their shares, and the other shareholder must either buy the shares at that price or sell their own shares at that same price. In Krupace Holdings Pty Ltd v China Hotel Investments Pty Ltd [2018] NSWSC 862, the Supreme Court of New South Wales considered the validity of a Russian roulette notice issued under a shareholders deed and held it invalid because the responding shareholder's time to respond had been improperly shortened. The case illustrates that the procedural detail (notice periods, response deadlines, and amendment mechanisms) is as important as the commercial structure of the clause itself.

The trap is a deadlock clause that does not actually resolve the deadlock. A clause that says "the parties will negotiate in good faith and, failing agreement, refer the matter to mediation" is an agreement to keep talking. It is not a resolution mechanism.

The money: dividends

A shareholders agreement can set out a dividend policy: when dividends are declared, how much is distributed, and who decides. The Act constrains the company's ability to pay dividends. Under s 254T, a company must not pay a dividend unless its assets exceed its liabilities before the dividend is declared, the payment is fair and reasonable to shareholders as a whole, and the payment does not materially prejudice the company's ability to pay its creditors.

The Act does not, however, require a company to pay dividends at all. A minority shareholder in a profitable company may watch the majority reinvest every dollar year after year and never see a distribution. A dividend policy in the shareholders agreement can address this by requiring that a set percentage of net profit be distributed as dividends each year, or that the board consider a dividend at each annual general meeting. The drafting choice is between a mandatory distribution obligation and a soft obligation to consider; the majority will almost always resist the former.

What directors must do, and what they must not

The Act already imposes core duties on directors. Section 180 requires care and diligence; s 181 requires good faith and proper purpose; s 182 prohibits improper use of position; and s 183 prohibits improper use of information. These duties are owed to the company, not to the shareholder who appointed the director.

A shareholders agreement can build on these statutory duties in two useful ways. First, it can clarify that a director may represent the interests of the shareholder who appointed them, subject to the overriding duty to the company. Many shareholders in small companies assume their appointed director works for them, and this clause manages the tension between statutory duty and commercial expectation. Second, it can impose additional obligations: regular financial reporting to shareholders, pre-approval for transactions above a threshold, or a prohibition on competing with the company.

Optional clauses worth considering

These provisions address specific risks, so include the ones that match how your company is actually run and owned:

Drag-along rights: include these if you anticipate a trade sale. A drag-along allows a specified majority of shareholders to compel the minority to sell their shares on the same terms offered by a third-party buyer. Without it, a single holdout can block a sale.
Tag-along (co-sale) rights: include these if a minority shareholder risks being left behind when a majority shareholder sells. A tag-along lets the minority join the sale on the same price and terms.
Key-person clauses: include these when the business depends heavily on one founder. The clause addresses what happens if that person dies, becomes incapacitated, or leaves: typically a compulsory buyout of their shares, funded by insurance.
Restraint of trade: include this when shareholders are also operators. A restraint prevents a departing shareholder from competing with the company or soliciting its customers and employees for a defined period and within a defined geographic area. The restraint must be reasonable in scope to be enforceable; an unreasonably wide restraint will be struck down.

How an Artificer Legal practitioner approaches a shareholders agreement

When we review, negotiate, or draft a shareholders agreement at Artificer Legal, we start with two questions: who are these particular shareholders, and what are they actually trying to achieve? A template agreement written for two equal founders will fail a company with one 80% shareholder and two 10% shareholders. An agreement written without an exit mechanism will cost multiples of the drafting fee the first time a shareholder wants out.

The clauses we push back on most often are one-sided deadlock mechanisms that give one faction a structural advantage, valuation clauses that defer to "agreement between the parties" (because in a dispute there will be none), and transfer clauses that omit permitted transfers to family trusts; an omission that traps shareholders in their own company during ordinary estate planning.

The order in which we negotiate reflects what matters most. We start with the exit and deadlock provisions because they determine who wins when the relationship breaks down. Then we move to decision-making thresholds, because they determine how the company operates while the relationship works. Director appointment and board composition come next. Boilerplate and mechanical provisions come last; they matter, but they should not consume negotiating capital that belongs on the clauses that will actually be tested.

The trap we see most often is a shareholders agreement copied from a template, signed without tailoring, and filed in a drawer until a dispute reveals that it answers none of the questions that particular company's shareholders needed it to answer.

The exit clause is the one that gets tested

A shareholders agreement signed in good times will be read for the first real time in bad ones; and in bad times, the clause that gets read is the exit clause. How shares are valued. Who can buy them. What happens if nobody wants to. Whether a departing shareholder gets cash now or a promise of cash later. These provisions are drafted last and tested first. They are worth the time it takes to get them right, because they are the only part of the agreement that determines whether a shareholder dispute ends in a clean separation or in proceedings under ss 232 to 234 of the Act.

The key points introduced in this article cover the essential anatomy of a shareholders agreement: who sits on the board and how they get there, where the line falls between board and shareholder decision-making, how new shares are issued and existing shares transferred, what happens when shareholders deadlock, how dividends are paid, and how director duties interact with shareholder expectations. Each of these clauses reflects a choice, and each choice has commercial consequences that outlast the day the agreement is signed.