What is a Shareholders Agreement and Why Does It Matter?

Co-authored by Vishaal Kudupudi

KEY INSIGHTS:

•  A shareholders agreement is a private contract between business owners that sets out how the company will be run, separate from the formal rules in the company constitution

• Most shareholders agreements are put together when relationships are strong, which is exacly the right time, since they’re designed to protect everyone if things later go wrong.

• Without shareholders agreements, disagreements between shareholders are resolved by default rules under the Corporations Act and the company’s constitution, which often don’t reflect what the owners intended

• Exit and deadlock provions are some of the most overlooked clauses, but they’re often the ones that matter most when a relationship between owners break down.

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What is a Shareholders Agreement?

A shareholders’ agreement is a private contract entered into between the shareholders of a company, setting out how they agree the company will be owned, managed, and run. It sits alongside, rather than replaces, the company’s constitution. In NSW, it operates within the broader framework of the Corporations Act 2001 (Cht).

If your business has more than one owner, whether that’s co-founders, family members, or investors, a shareholders’ agreement is likely something you should have, even if the relationship currently feels straightforward. It exists to set expectations early, before there’s a dispute to negotiate around.

 

Where Shareholders Agreements Matter Most 

Shareholders agreements aren’t just relevant to large companies. In practice, the situations where they matter most are often quite ordinary:

• Two or more co-founders starting a business together, without yet having agreed on what happens if one wants to exit.

• A family business bringing the next generation in as shareholders, without clarity on decision-making or succession.

• A business bringing on an investor or silent partner, where ownership and control need to be clearly separated.

• An existing company with multiple shareholders that has never formally documented how decisions get made.

If any of these situations apply to you, even in a broad sense, a shareholders’ agreement should be treated as a priority, not something to deal with later.

 

What a Shareholders Agreement Covers 

While every agreement is tailored to the specific business, most shareholder agreements address a consistent set of core legal and commercial issues.

It usually covers:

Ownership structure:

Who holds what percentage of shares, how those shares are allocated, and the rights and obligations attached to each shareholding interest.

Decision-making rules:

How key decisions are made within the business, including the distinction between day-to-day operational decisions and significant matters such as taking on debt, issuing new shares, or selling or restructuring the business.

Exit arrangements:

What happens if a shareholder wishes to sell, transfer, or otherwise dispose of their shares? This includes any restrictions, procedures, or valuation mechanisms that apply.

Deadlock provisions:

How the parties deal with situations where shareholders reach a genuine stalemate and are unable to agree on fundamental business decisions, and the mechanisms used to resolve or break the deadlock

Dispute resolution:

The process that must be followed if a dispute arises between shareholders typically requires certain steps to be taken before any court or formal legal proceedings are commenced.

A shareholders agreement is not something that governs day-to-day operations. Its real value lies in establishing clarity, certainty, and a clear framework for dealing with both expected and unforeseen events from the outset, rather than being frequently relied upon in practice.

 

What Happens Without a Shareholders Agreement

If your company doesn’t have a shareholders agreement, disputes between shareholders don’t go unresolved; they’re resolved by default. The company’s constitution and the Corporations Act 2001 (Cth) fill the gap, but these default rules are general by design and rarely reflect what the specific owners of a specific business intended.

This matters because, without an agreement, decisions like removing a shareholder, valuing their shares on exit, or resolving a deadlock can end up governed by rules nobody chose, rather than the terms the owners agreed to.

 

A Simple Clause Businesses Often Overlook

One of the most common pages in shareholders agreements, where one exists at all, is the absence of clear Exit and Deadlock provisions. Founders often focus heavily on how the business will run day-to-day and far less on what happens if a shareholder wants to leave, passes away, or simply stops agreeing with the others on key business decisions.

Without these provisions clearly drafted, a shareholder wanting to exit can be left without a clear process or a clear valuation method, which often turns a simple departure into a drawn-out and expensive dispute. Getting this right at the outset, while everyone is still aligned, is far simpler than trying to negotiate it once a relationship has already broken down.

 

Why Getting This Right Matters

A shareholders agreement is, in many ways, an insurance policy for relationships between business owners. It’s drafted when everyone is getting along, precisely so that it’s already in place if that ever changes

Businesses with a properly drafted agreement tend to resolve internal disagreements faster and at lower cost, simply because the process for resolving them was agreed in advance rather than fought over in the moment. Put simply, the agreement matters most in exactly the situations nobody wants to think about when this business is going well.

 

How to  Start the Process of Getting a Shareholders Agreement

If you’re setting up a business with other owners, or realise your existing company doesn’t have a proper agreement, a few good habits make the process far smoother:

• Have the conversation early, ideally before the business starts trading, while expectations are still easy to align.

• Be honest about worst-case scenarios, including what happens if someone wants out, can’t contribute anymore, or passes away

• Get the agreement properly drafted rather than relying on a generic template, since the value of the agreement comes from how well it reflects your specific business.

• Revisit the agreement as the business grows, since ownership structures and priorities often change over time

A Commercial Lawyer can assist by drafting or reviewing the agreement in detail to ensure it reflects the parties’ intentions and identifies any gaps or unclear obligations. Furthermore, it places clear protections in place, so the business is properly structured from the outset.

 

How Can Coutts Help You?

A shareholders agreement is one of the most important documents a multi-owner business can have, and one of the easiest to put off until it’s needed.

If you’re starting a business with others, bringing on a new shareholder or realising your existing company doesn’t have a proper agreement in place, getting the right advice early can make all the difference.

Speak with our Commercial Law team today to understand your options. Every business and ownership structure is different, and your shareholders agreement should be too.