Do You Need a Shareholders Agreement? A Queensland Founder's Guide

Starting a company with a co-founder can feel straightforward. You agree on the idea, divide the shares, register the company, and get to work.

The difficult questions often come later:

• Who makes the final decision when founders disagree?
• What happens if one founder stops contributing?
• Can a shareholder sell their shares to a competitor?
• How will a new investor affect control and ownership?
• What happens if the company needs more funding?
• Can one founder force an exit, or block a sale?

These issues are often left unresolved because the business is new, money is tight, and everyone is working well together. That can be a serious mistake. A shareholders agreement is most useful before there is a dispute, while the founders still trust one another and can negotiate sensibly.

For Queensland startups and small companies, obtaining early advice from a business lawyer in Brisbane or a lawyer experienced in startup and commercial agreements can help prevent a disagreement from becoming an expensive legal problem.

Is a shareholders agreement legally required?

No. An Australian proprietary company does not generally have to have a shareholders agreement.

A company must, however, be governed by either:

• the replaceable rules in the Corporations Act 2001 (Cth),
• a company constitution, or
• a combination of a constitution and replaceable rules.

The Australian Securities and Investments Commission explains that the replaceable rules provide default governance arrangements for many proprietary companies. They cover matters such as directors, meetings, shares, dividends, and access to company books.

Those rules are a starting point, not a complete plan for the relationship between founders.

A shareholders agreement is a private contract between some or all of the shareholders, and often the company itself. It can deal with commercial and relationship issues that the replaceable rules, and a standard constitution, may not address in enough detail.

What happens if you do not have one?

Without a shareholders agreement, the company may have to rely on its constitution and the replaceable rules in the Corporations Act 2001. You can read the current legislation on the Federal Register of Legislation.

That does not mean there are no rules. It means the rules may not reflect what the founders actually intended.

For example, the replaceable rules may provide a framework for voting at meetings, director appointments, share transfers, and dividends. They do not necessarily answer practical questions such as:

• How many hours should each founder work?
• What happens to a founder’s shares if they leave after six months?
• Is a founder entitled to keep all their shares if they stop contributing?
• Who can approve a major loan or a new share issue?
• What process applies if two equal shareholders cannot agree?
• How should shares be valued when a shareholder must exit?
• Must shareholders contribute further money to keep the company operating?

When the founders remain aligned, these gaps may not cause immediate trouble. When the relationship breaks down, they can become the central dispute.

A court process may involve urgent applications, negotiations, expert valuation evidence, shareholder oppression claims, contractual arguments, or a dispute about the company’s records and decisions. Even where the underlying issue is simple, the cost can increase quickly because the dispute affects both the company and the personal relationship between the shareholders.

A well-considered agreement will not prevent every disagreement. It can, however, reduce uncertainty about what happens next.

What should a shareholders agreement deal with?

A useful shareholders agreement should be tailored to the company. It should not simply be a generic document downloaded online. The right provisions will depend on the number of shareholders, the company’s funding model, the founders’ roles, and the intended growth or exit strategy.

1. Decision-making and reserved matters

The agreement should explain how decisions are made at both board and shareholder level.

This may include:

• who can appoint or remove directors,
• how board meetings are called,
• voting thresholds,
• matters requiring unanimous approval,
• matters requiring a special majority,
• spending or borrowing limits, and
• access to company information.

Some decisions are often treated as “reserved matters”. These may include issuing new shares, changing the company’s business, taking on significant debt, selling major assets, entering related-party transactions, appointing senior employees, or winding up the company.

Clear decision-making provisions can help prevent one founder from making a significant decision without the knowledge or approval of the others.

2. Deadlocks

A deadlock can arise where shareholders have equal voting power, or where an important decision requires a level of approval that cannot be reached.

The agreement should set out a practical process for resolving it. Depending on the company, this might include:

1. a meeting between the founders,
2. referral to an independent adviser,
3. mediation,
4. a casting vote in limited circumstances, or
5. a buy-sell or exit mechanism.

A clause that simply says the parties must “negotiate in good faith” may not be enough. Founders should consider what happens if negotiation fails, how long each stage lasts, and who pays the costs.

3. Share classes, vesting, and founder departures

Founders often assume that owning 50 per cent of the shares means contributing 50 per cent of the work indefinitely. That assumption may not survive a departure.

A shareholders agreement can address:

• different classes of shares,
• voting and dividend rights,
• founder vesting or reverse vesting,
• good leaver and bad leaver treatment,
• what happens if a founder dies or becomes incapacitated,
• compulsory transfers, and
• the treatment of unvested shares.

Vesting arrangements may allow a founder’s equity to build over time, rather than being fully secured on day one. This can protect the company if a founder leaves before delivering the work that justified their original allocation.

These provisions should be drafted carefully. The company’s share structure, tax position, employment arrangements, and any investor documents may also need to be considered.

4. Funding, dilution, and dividends

Early-stage companies commonly need more money than the founders expected. The agreement should address how further funding will be handled.

Questions include:

• Must shareholders contribute more capital?
• Will funding be provided through loans, equity, or both?
• What happens if one shareholder cannot contribute?
• Can the company issue shares to an outside investor?
• Will existing shareholders have pre-emptive rights?
• How will dilution be managed?
• When can dividends be declared?

The agreement should also distinguish between money advanced as a shareholder loan and money invested in return for shares. Confusing the two can create problems when the company later raises capital or a shareholder seeks repayment.

5. Exit and buy-sell mechanics

Shareholders should consider how an exit will work before an exit becomes necessary.

Common mechanisms include:

• rights of first refusal,
• restrictions on transfers,
• compulsory transfers following death, incapacity, bankruptcy, or a founder departure,
• tag-along rights for minority shareholders,
• drag-along rights for a sale approved by the majority,
• agreed valuation processes, and
• payment terms for a departing shareholder.

Valuation is often the most difficult part. The agreement may provide for an independent valuer, a particular valuation method, or different treatment depending on the reason for the exit.

A workable mechanism should be clear enough to use under pressure. It should also consider whether the buying shareholder, the company, or another party is legally able to fund the purchase.

6. Dispute resolution

A dispute clause can provide a structured way to address problems before court proceedings begin.

A typical process may require:

• written notice of the dispute,
• a meeting between authorised representatives,
• mediation in Queensland,
• a defined timeframe for each step, and
• court or arbitration proceedings only if earlier steps fail.

The clause should not prevent a party from seeking urgent court orders where necessary. For example, urgent relief may be needed to protect company assets, confidential information, intellectual property, or the company’s records.

Shareholders agreement versus company constitution

A company constitution and a shareholders agreement are not the same document.

A constitution is the company’s formal internal rulebook. Under section 140 of the Corporations Act 2001, it has contractual effect between the company, its members, and certain officers. It may cover governance, director powers, meetings, shares, and dividends.

A shareholders agreement is a private contract. It usually focuses more closely on the commercial relationship between shareholders, including founder obligations, funding, vesting, transfers, exits, and dispute resolution.

The documents can work together:

• the constitution deals with the company’s formal governance,
• the shareholders agreement records the shareholders’ agreed commercial arrangements, and
• the Corporations Act 2001 remains the overriding legal framework.

A shareholders agreement cannot override a mandatory provision of the Act. It should also be checked against the constitution so that the documents do not create avoidable inconsistency.

For some companies, it may be appropriate to update both documents when the shareholders agreement is prepared.

When should you put one in place?

The best time is before shares are issued, or shortly after the company is established and before the business becomes more complex.

You should also review or put an agreement in place when:

• a new co-founder joins,
• an investor is admitted,
• shares are issued or transferred,
• the company adopts a new share class,
• a founder’s role changes,
• the company begins raising significant debt, or
• the founders’ working relationship changes.

It is much easier to agree on difficult issues when everyone is focused on building the business. Once a dispute has started, each party may have a different view of what is fair, what was promised, and what the company can afford.

How Capricorn Legal and Consulting can help

Capricorn Legal and Consulting provides practical legal advice and business support to Queensland founders, startups, and small businesses.

We can help you:

• assess whether a shareholders agreement is appropriate,
• identify the issues your founders need to resolve,
• prepare or review a shareholders agreement,
• coordinate the agreement with your company constitution,
• consider founder vesting, transfers, funding, and exits, and
• establish a clearer process for managing disagreements.

If you are looking for startup legal advice in Brisbane, a contract lawyer in Brisbane, or small business legal services in Queensland, obtaining advice early can be a sensible investment in the company and the founder relationship.

This article is general information only. It is not legal advice, and the appropriate documents will depend on your company, shareholders, and circumstances.