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What is a shareholders agreement?

February 18, 2017

Some say that 9/10 businesses fail in the first year. Others suggest that it is really just 50% that struggle to reach their first anniversary.

In any case, the reason most often cited for business breakdown is a general inability to turnover a profit or at minimum, to meet outgoing expenses. A lesser discussed, albeit very real cause for winding up or deregistering a venture is similar to that of celebrity divorce, ‘irreconcilable differences’.

It is common for businesses to have a complaints handling or dispute resolution process for customers but it can be easily overlooked as a necessity among company members or business partners. The creation of a shareholders’ agreement, in a company context, can tangibly assist to prepare for the worst but hope for the best.

What is it?

A shareholders’ agreement is a contract between members that falls outside of the governance of the company constitution and the Corporations Act 2001 (Cth). It is a private legal arrangement that details the rights, obligations and specific business relationships between the shareholders. As an example, it may outline a specific process for the sale of a member’s shares and an acceptable person or entity to purchase them.

Why should we have one?

It is not a legal requirement to have a shareholders’ agreement in place. That said, it is a valuable resource and is advised by many legal practitioners and corporate advisers. It may set out the precise roles of each shareholders, the timing of directors’ and general meetings, retirement provisions, profit distribution and the liability of each shareholder when debt is incurred. Importantly, it can also provide a framework for issue management and conflict resolution. Should there be a future disagreement among shareholders, one can turn to this agreement to dictate how this must be broached, handled and hopefully resolved.

When should it be drafted?

A shareholders’ agreement is ideally prepared by a specialist legal practitioner prior to company registration or in the early stages of business operation. It is best practice for each shareholder to seek independent legal advice before signing and agreeing to the terms of the shareholders’ agreement.


This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting.

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