What is a Shareholders Agreement?

What is a Shareholders Agreement?

A Shareholders Agreement is a legally binding contract between two or more Shareholders of a company, commonly also signed by the company, that records their agreed rights and obligations as owners. It can set out how important decisions will be made, how ownership changes are dealt with and the processes that apply when circumstances between Shareholders change.

Why should I read this page?

Read this page if you are an Australian business owner or Shareholder who wants to understand what a Shareholders Agreement is and how it works before deciding what you need.

If you think you need to put a Shareholders Agreement in place, read about our Shareholders Agreement Legal Services and fixed-price options, including Template, Customised and Tailored Shareholders Agreements.

Do you need a Shareholders Agreement?

If two or more people own shares in your company, I recommend putting a Shareholders Agreement in place to document the arrangements between the owners.

Blaze Business & Legal offers three levels of service depending on the arrangements you need documented: a Template Shareholders Agreement, Customised Shareholders Agreement and purpose-written Tailored Shareholders Agreement.

See our Shareholders Agreement Lawyer Brisbane and fixed-price Shareholders Agreement Legal Services if you are ready to have a Shareholders Agreement prepared.

In my experience

My clients sometimes come to me believing they have already agreed everything because they have known each other for years or have successfully worked together before. Once we work through the decisions required for a Shareholders Agreement, we often identify issues they have never discussed. That does not indicate a problem with their relationship. It means they are now agreeing how ownership of the company will work beyond the circumstances they face today.

What is a Shareholder?

A Shareholder is a person or entity that owns one or more shares in a company. A Shareholder’s ownership interest and rights depend on the shares held and the rights attached to them.

Shareholders and Directors are not the same thing, although the same person can be both. Shareholders own shares in the company. Directors are responsible for managing the company’s business and affairs and have legal duties arising from their position as Directors.

That distinction is particularly relevant in privately owned businesses, where two founders may each be a Shareholder, Director and employee of the same company. A Shareholders Agreement principally regulates their relationship as Shareholders. Other agreements may be needed for their employment or other roles.

In my experience

My clients often use “Shareholder”, “Director” and “business owner” interchangeably because the same people perform all three functions. When I advise on or draft a Shareholders Agreement, I separate those capacities because a person can stop being an employee or Director without automatically ceasing to own their shares. That distinction can materially affect the provisions the Shareholders need.

What is the purpose of a Shareholders Agreement?

The purpose of a Shareholders Agreement is to record the arrangements Shareholders have agreed for their ownership relationship and establish processes for circumstances that can arise while they own a company together.

Share ownership alone does not answer every commercial question between co-owners. Shareholders need to decide how important decisions will be made, what happens if additional funding is required, how ownership can change and what happens if a Shareholder wants or needs to leave.

A Shareholders Agreement records those decisions and the contractual processes Shareholders have agreed will apply.

In my experience

As a Commercial Lawyer, I find the most important discussions usually happen before I start drafting. My clients can agree completely about the business they want to build while holding quite different assumptions about authority, financial contributions, working involvement and exit. I identify those differences, help my clients reach clear commercial instructions and draft the Shareholders Agreement to record them accurately.

Do I need a Shareholders Agreement if I am the only Shareholder?

A company with only one Shareholder does not need an agreement between Shareholders because there is no second Shareholder with whom to make one.

The position changes before another person acquires shares. Introducing another Shareholder creates an ownership relationship and raises decisions about control, voting, funding, share transfers and exit that did not exist while one person owned all the shares.

If you intend to introduce an investor, employee Shareholder or business partner, I recommend negotiating the Shareholders Agreement before that person becomes a Shareholder.

In my experience

When my client owns 100% of a company and proposes to issue or transfer shares to another person, I prefer to deal with the Shareholders Agreement as part of that transaction. My client can then negotiate the basis on which another person becomes an owner before the ownership change occurs.

I am a Director but not a Shareholder. Do I need a Shareholders Agreement?

Being a Director does not make you a Shareholder or, by itself, mean you need to be a party to a Shareholders Agreement.

A Shareholders Agreement principally regulates the relationship between people or entities that own shares in the company. A Director has a different legal role and responsibilities. The particular Shareholders Agreement and company arrangements still need to be checked because they can contain provisions affecting Directors and company governance.

If a Director is going to acquire shares, the Shareholders Agreement should be considered as part of that ownership change.

In my experience

When I draft a Shareholders Agreement, I do not use it as a substitute for documents governing someone’s separate position in the business. If a Shareholder is also a Director or employee, I identify which rights and obligations belong to the ownership relationship and which need to be dealt with elsewhere.

Is it a legal requirement to have a Shareholders Agreement?

There is no general legal requirement for a privately owned Australian company with two or more Shareholders to have a Shareholders Agreement.

However, I recommend that companies with two or more Shareholders document the arrangements between their owners rather than rely on conversations, assumptions or informal understandings.

A Shareholders Agreement gives those owners a contractual framework for the issues they have agreed should govern their relationship.

In my experience

I recommend Shareholders Agreements because of the changes that can occur during the life of a business. Ownership relationships have to accommodate changes in people, money and circumstances. Agreeing the process before those events occur gives my clients a documented position to work from later.

How do Shareholders Agreements work?

A Shareholders Agreement works as a contract between the parties who sign and execute it. It records rights, obligations and processes applying to their relationship as Shareholders.

For example, a Shareholders Agreement can specify the approval required for particular decisions or establish a process when a Shareholder wants to transfer shares. When an event covered by the Shareholders Agreement occurs, its provisions determine what the parties contractually agreed to do.

The legal effect of each provision depends on its drafting and the circumstances in which it applies.

In my experience

When I advise on and draft Shareholders Agreements, I test important provisions against the actual ownership structure rather than reviewing clauses in isolation. A voting threshold or exit mechanism that appears reasonable on the page can operate quite differently once I apply the Shareholders’ percentages, financial positions and agreed rights. I draft the provision to produce the commercial arrangement my clients have instructed me to document.

What does a Shareholders Agreement usually cover?

The subjects covered by a Shareholders Agreement depend on the company, its Shareholders and the arrangements they have agreed.

Common areas include:

• ownership and changes to shareholdings;
• decision-making and control;
• funding and financial arrangements;
• rights and obligations between Shareholders;
• Shareholders joining or leaving the company; and
• processes for disputes and significant changes in circumstances.

The detailed provisions can differ substantially between businesses. A standard list of clauses does not establish what a particular company requires.

Read our Shareholders Agreement Clauses and Key Provisions guide for a detailed explanation of the provisions that can be included in a Shareholders Agreement.

In my experience

When I draft a Shareholders Agreement, I am more interested in whether each important commercial arrangement has been dealt with properly than how many clauses the finished document contains. I have reviewed lengthy agreements containing extensive standard drafting that still failed to address an arrangement that was particularly important to my client. Length and complexity are poor measures of whether a Shareholders Agreement is suitable for a business.

When should you put a Shareholders Agreement in place?

A Shareholders Agreement should preferably be negotiated and executed when two or more people establish their ownership relationship, or before a new Shareholder acquires shares in an existing company.

At that stage, the relationship is usually professional and Shareholders can calmly agree processes for future disputes, exits and changes in circumstances. Once an actual dispute or proposed exit arises, Shareholders are more likely to become invested in their existing positions. It can then be considerably harder to agree to a provision that disadvantages one person in the circumstances that have already developed.

Businesses that already have two or more Shareholders can still put a Shareholders Agreement in place. Our Shareholders Agreement Legal Services page explains the available options for an existing business.

In my experience

As a Lawyer, I prefer to negotiate Shareholders Agreements before there is a problem to solve. Once Shareholders are already in dispute, positions tend to harden and provisions that could have been agreed calmly at the start are assessed against the immediate conflict. Drafting before that happens gives the parties much greater scope to agree processes for events that have not yet occurred.

What happens if you do not have a Shareholders Agreement?

Without a Shareholders Agreement, Shareholders do not have a contract recording the specific arrangements they would otherwise have agreed between themselves.

The gap usually becomes apparent when circumstances change. Shareholders may discover that they have different views about an exit, additional funding, a significant business decision or another ownership issue, without a previously agreed contractual process for dealing with it.

A company can operate without a Shareholders Agreement, but Shareholders cannot later rely on an agreement they never made to determine how those circumstances should be handled.

In my experience

My clients rarely disagree about an informal understanding while everyone still wants the same result. Difficulties arise when circumstances change and two people genuinely remember or interpret an earlier discussion differently. A written Shareholders Agreement gives my clients an agreed document to work from rather than having to reconstruct what each person believes was discussed months or years earlier.

Is a Shareholders Agreement legally binding?

A Shareholders Agreement that has been properly prepared, signed and executed is intended to create legally binding contractual obligations between its parties.

The rights and obligations created depend on the wording of the particular Shareholders Agreement, and individual provisions must comply with applicable law. Shareholders should understand the legal and commercial effect of important provisions before executing the document.

In my experience

When advising my clients before execution, I focus on what important provisions will actually require them to do if the relevant event occurs. This is particularly important with voting, compulsory transfers, exits and other provisions affecting control or ownership. A Shareholder should understand the consequence of agreeing to a provision before signing rather than discovering its effect when somebody later seeks to rely on it.

A Shareholders Agreement should reflect the actual ownership and business arrangements

A Shareholders Agreement should reflect how the people who own the company have agreed their ownership relationship will operate.

Two people can own equal shares without contributing equal amounts of money or working the same hours. One Shareholder may run the business while another is primarily an investor. Shareholders may have different expectations about future funding, remuneration, control or how long they intend to remain involved.

Those arrangements need to be identified clearly before I draft provisions to document them.

In my experience

When I entered a business relationship with Shannon, I was both the Lawyer drafting our Shareholders Agreement and one of the Shareholders who would be bound by it. I had to work through the same questions I ask my clients: what each of us was contributing, how we would make decisions, what we expected from each other and what should happen if either person’s involvement changed. Being the person signing the document gave me a different perspective on how clearly those arrangements need to be discussed before they are committed to writing.

How much does a Shareholders Agreement cost?

Shareholders Agreement costs depend on the document and Legal Service being purchased and the amount of individual legal drafting required.

A Lawyer-prepared Template Shareholders Agreement, a Customised Shareholders Agreement with selected amendments and a purpose-written Tailored Shareholders Agreement involve different levels of legal work. Price comparisons are more meaningful when the scope of each service is compared as well.

Read How Much Does a Shareholders Agreement Cost? for published fixed prices and an explanation of the different Shareholders Agreement service levels.

In my experience

I do not recommend purpose-written drafting where my clients’ arrangements fit an appropriate Lawyer-prepared Template. Where the ownership arrangement requires different provisions, I identify the changes and quote that work. My clients can then choose a Template, Customised or Tailored Shareholders Agreement based on the drafting their arrangements require.

FAQs about Shareholders Agreements

1. Does every Shareholder need to sign a Shareholders Agreement?

The Shareholders who are intended to have contractual rights and obligations under a Shareholders Agreement ordinarily need to become parties to it. The company is also commonly a party. The particular Shareholders Agreement should establish how existing and future Shareholders become bound.

2. Can a Shareholders Agreement be changed later?

A Shareholders Agreement can be amended in accordance with its terms and applicable law. Changes to ownership, investment or arrangements between Shareholders are also sensible times to review whether the existing Shareholders Agreement still reflects what the owners require.

3. Can a Shareholders Agreement be prepared before the business starts trading?

A Shareholders Agreement can be prepared before the business starts trading. This is often an appropriate time to negotiate and execute it because the proposed Shareholders can agree their ownership arrangements before operating the business together and before a dispute or proposed exit affects their respective positions.

Ready to put a Shareholders Agreement in place?

If two or more people own your company, or you are about to bring another Shareholder into it, Blaze Business & Legal can prepare a Shareholders Agreement for your ownership arrangements.

Choose a Template Shareholders Agreement for straightforward arrangements, a Customised Shareholders Agreement where selected provisions need to change, or a purpose-written Tailored Shareholders Agreement where the ownership and commercial arrangements require individual drafting.

Work directly with our Senor Commercial Lawyer Rachelle Hare, and ask for a fixed price quote for the Shareholders Agreement services she provides through Blaze Business & Legal.