Most shareholder disputes were entirely avoidable. Not because the people involved had bad intentions, but because they never had the conversation — about what happens when one person wants to leave, or what they would do if they fundamentally disagreed on the direction of the business.
A shareholder agreement forces that conversation at a point when it is productive, rather than at the point when it is already a dispute. It is a contract between the shareholders of a company that sets out how the company is owned, how decisions are made, and what happens when things change. It sits alongside the Corporations Act and the company constitution — and it fills the gaps that both of those documents leave open.
Co-own a company without a shareholder agreement? The rules between the people who own the business are worth writing down — before anyone needs to enforce them.
Book a Free Consultation →What Happens Without One
Without a shareholder agreement, shareholders are left with the protections — and limitations — of the Corporations Act and the company constitution (if one exists). The Corporations Act provides a set of default governance rules called the replaceable rules. They cover basics like director removal and meeting procedures, but they do not address the questions that actually matter when a relationship breaks down.
The replaceable rules allow a director to be removed by a simple majority of shareholders. In a company where one person holds 51%, they can remove the other as a director without cause and without compensation. In a 50/50 company, neither shareholder can remove the other — which sounds fair until the relationship breaks down and the company is paralysed by deadlock, with no mechanism to resolve it.
Without an agreed valuation mechanism, the exit price becomes its own dispute. Without a deadlock clause, a single disagreement can paralyse the company indefinitely. Without a pre-emptive rights clause, shares can be transferred to third parties without the other shareholders having any say.
What a Shareholder Agreement Should Cover
A well-drafted shareholder agreement addresses the situations the founders would want covered if they thought about them — which most don't, until it is too late. The essential provisions include:
- Decision-making: Which decisions require unanimous agreement and which can be made by majority. Capital expenditure thresholds, new borrowings, changes to the business, and key appointments.
- Exit and buyout: What happens when a shareholder wants to leave. How the buyout price is calculated — whether by formula, independent valuation, or a shotgun clause. Pre-emptive rights requiring shares to be offered to existing shareholders first.
- Deadlock: A mechanism for breaking a deadlock where shareholders with equal voting power cannot agree. This might be a shotgun clause, compulsory mediation, or a casting vote provision. Without one, the only options are negotiated buyout, an oppression application under section 232, or winding up the company on just and equitable grounds under section 461.
- Death and incapacity: What happens to shares when a shareholder dies or loses capacity. Whether the remaining shareholders can acquire them, at what price, and on what terms. The Corporations Act default is rarely what the founders would have chosen.
- Non-compete and restraint: Restrictions on shareholders competing with the company during and after their involvement.
- Dividend policy: When and how profits are distributed — particularly important where some shareholders are also working directors drawing a salary.
The Three Gaps Most Agreements Miss
Even businesses that do have a shareholder agreement often find it does not cover the situation that actually arises. Three specific gaps account for most disputes:
1. Buyout pricing. Without an agreed formula or valuation method, there is no mechanism for determining a fair price. The dispute about what the shares are worth becomes a separate, expensive problem on top of the dispute that triggered the exit.
2. Deadlock. A 50/50 company is the most deadlock-prone arrangement in commercial law. If neither shareholder can outvote the other and neither will compromise, the company cannot function. A deadlock mechanism is not optional for equal-ownership structures.
3. Shares on death or incapacity. If a shareholder dies, their shares pass to their estate. The surviving shareholders may find themselves in business with the deceased's executor or beneficiaries — who may have no interest in, or understanding of, the business. A buy-sell provision triggered by death or permanent incapacity addresses this before it happens.
How Phan Campbell & Associates Can Help
At Phan Campbell & Associates in Footscray, our commercial law team drafts and reviews shareholder agreements for small and medium businesses across Melbourne and Victoria.
Because we are a combined legal and accounting firm, we also advise on the tax and structural implications of the provisions — particularly around share valuations, buyout structures, and the interaction between the agreement and the company's tax position. One engagement covers both sides.
Frequently Asked Questions
1. What does a shareholder agreement cover?
A shareholder agreement typically covers decision-making processes, what happens when a shareholder wants to leave, how shares are valued for a buyout, deadlock-breaking mechanisms, non-compete obligations, and what happens to shares on death or incapacity. It sits alongside the Corporations Act and the company constitution.
2. Do I need a shareholder agreement if I trust my co-founder?
Trust is not a substitute for a framework. A shareholder agreement is not a sign of mistrust — it is a document that sets out what happens in situations neither party has thought about yet. The time to negotiate these terms is when the relationship is strong, not during a dispute.
3. What are the Corporations Act replaceable rules?
The replaceable rules are default governance provisions in the Corporations Act that apply unless displaced by a constitution or shareholder agreement. They cover basics like director removal and meeting procedures but do not address buyout pricing, deadlock, or exit rights. Most co-owned businesses need more than the defaults provide.
4. When is the right time to put a shareholder agreement in place?
As early as possible — ideally at incorporation. The cost of drafting a shareholder agreement at the start is a fraction of resolving a dispute without one. If you already co-own a company without an agreement, it is not too late. Book a free consultation with Phan Campbell & Associates.