Could a single disagreement between shareholders put your business at risk?
It happens more often than you’d think. A minor misunderstanding escalates. Partners who started with aligned visions find themselves on opposite sides of a decision. And because nothing was documented clearly, the business grinds to a halt.
Without a comprehensive shareholder agreement, that’s exactly where you’re headed.
A robust shareholder agreement isn’t a formality you tick off during company setup. It’s a strategic tool for risk management, conflict prevention, and business continuity. When shareholders understand their rights, obligations, and the pathway for resolution before disputes arise, most conflicts never get off the ground.
This guide walks you through the essential elements every shareholder agreement needs, based on what we’ve seen work (and fail) in hundreds of commercial disputes.
Key Takeaways
- Director appointment rights must specify which shareholders can nominate or remove directors, preventing power struggles before they start
- Decision-making thresholds should clarify which decisions require board approval, simple majority, or unanimous consent to avoid operational deadlock
- Share transfer mechanisms need clear valuation methods and approval processes for transfers, death, insolvency, or employment termination
- Dispute resolution frameworks with defined pathways and timelines ensure conflicts are resolved efficiently without destroying the business
- Information access rights balance shareholders’ entitlement to company performance data with confidentiality and competitive concerns
- Funding obligations and shareholder loans should be documented upfront to prevent later disputes over capital calls or loan terms
Why Shareholder Agreements Matter: What Most Business Owners Get Wrong
Here’s what we hear constantly: “We’re all on the same page. We don’t need anything formal.”
That works brilliantly until it doesn’t.
You start a business with people you trust. Maybe it’s a co-founder you’ve worked with for years. Maybe it’s family. The relationship is good, so formal agreements feel unnecessary, even pessimistic.
But businesses change. Markets shift. Personal circumstances evolve. Someone wants to expand aggressively while another prioritises cash flow. Someone’s partner gets involved. Someone wants out.
And suddenly, that trust you built the business on isn’t enough to resolve a fundamental disagreement about direction.
The companies that avoid shareholder disputes aren’t lucky. They documented the rules when everyone was still aligned.
Think of it this way: you wouldn’t start a business without knowing who owns what percentage. A shareholder agreement simply extends that logic to every other material aspect of the relationship.
The best time to document shareholder rights and obligations is when everyone agrees. Once a dispute emerges, negotiating these terms becomes exponentially harder, and more expensive.
What is a Shareholder Agreement and When Do You Need One?
A shareholder agreement is a private contract between shareholders that governs their relationship, sets out decision-making processes, and establishes what happens when circumstances change.
It sits alongside your company’s constitution but goes much further. The constitution is a public document with relatively standard provisions. Your shareholder agreement addresses the specific dynamics, risks, and commercial realities of your business.
Do you need one?
If your company has more than one shareholder, yes. Even if you’re starting with just two people. Even if it’s family. Even if you’re equal partners who trust each other completely.
Here’s why: disputes rarely emerge from bad faith. They emerge from ambiguity. From different assumptions about what “equal partnership” actually means. From one person believing they have authority the other person never agreed to.
A shareholder agreement eliminates that ambiguity.
It’s not about planning for relationships to break down. It’s about ensuring that when commercial decisions need to be made, everyone knows the process, the thresholds, and their rights.
Can you add one later, after the company is already operating?
Yes, but it’s harder. Once patterns are established and everyone has developed their own interpretation of how things should work, aligning on formal terms becomes a negotiation. Better to do it upfront when everyone’s focus is on building the business, not protecting their position.
If you’re acquiring shares in an existing company, insist on reviewing (or creating) a shareholder agreement before completion. What the current shareholders have informally agreed amongst themselves won’t protect you as the new entrant.
Director Appointment and Removal Rights: Who Controls the Board?
One of the most common triggers for shareholder disputes is confusion over who has the right to appoint or remove directors.
You’d be surprised how often this isn’t documented clearly.
A shareholder owns 30% of the company and assumes they’re entitled to appoint a director. The majority shareholders believe all appointments require their approval. No one confirmed it in writing. The relationship deteriorates, and suddenly the composition of the board becomes a contested issue.
Your shareholder agreement must be explicit about director appointment rights. Which shareholders or classes of shares have the authority to nominate directors? How many directors can each shareholder appoint? What’s the process for removing a director, and does it require cause or can it be done at will?
These aren’t theoretical questions. In many disputes, control of the board determines control of the business. If you’re a minority shareholder without a documented right to appoint at least one director, you’re entirely reliant on the majority’s goodwill for any insight into company operations.
What to Document About Director Appointments
Specify which shareholders have nomination rights and whether those rights are proportional to shareholding or fixed. For example, the agreement might provide that any shareholder holding more than 25% can appoint one director, or it might give specific shareholders the right to appoint a named number of directors regardless of their percentage holding.
Clarify whether shareholders themselves have the right to become directors or whether they can only nominate others. This matters particularly where shareholders are also employees, terminating someone’s employment shouldn’t automatically strip them of their director role if that’s not the intention.
Address the process for selecting the board chair. In a deadlocked board, the chair’s casting vote can decide major issues. Rotating the chair, having shareholders elect the chair, or tying it to a specific investor are all options, what matters is that it’s documented.
And finally, set out the removal process. Can directors be removed without cause, or only for specific reasons? Does removal require a simple majority, a special majority, or must it align with the same threshold used for appointment? What’s the notice period and process?
Director appointment rights are a form of control. A shareholder agreement that gives a minority shareholder the right to appoint one director can be the difference between having visibility into company operations and being entirely frozen out of decision-making.
Decision-Making Authority: Board vs Management and Voting Thresholds
Not every decision should require shareholder approval. In fact, most shouldn’t. But some decisions are material enough that they should never be made by management or even the board alone.
The shareholder agreement needs to define this clearly.
Reserved Matters: What Requires Shareholder Approval
Reserved matters are decisions that cannot be made without shareholder consent, regardless of what the board or management wants to do. These typically include:
- Issuing new shares or varying share rights
- Amending the company’s constitution
- Acquiring or disposing of substantial assets
- Taking on debt above a specified threshold
- Entering into related party transactions
- Selling or winding up the company
- Changing the nature of the business
For each reserved matter, specify what level of approval is required. Does it need a simple majority (more than 50%), a special majority (often 75%), or unanimous consent?
This is where you protect minority shareholders. If major decisions require a 75% vote and you hold 30%, you have a blocking stake. The majority can’t fundamentally change the business without your agreement.
But there’s a balance. If too many decisions require high thresholds, you create gridlock. A well-drafted agreement gives minority shareholders protection on truly material matters while allowing the business to operate efficiently on day-to-day issues.
Board Authority and Delegations
Clarify which decisions are reserved for the board and which may be delegated to management. The agreement should set out the process for delegating authority, the scope of delegated powers, and any limits or oversight mechanisms.
For board decisions, specify what constitutes a quorum (the minimum number of directors required for a valid meeting), how often the board must meet, and what voting threshold applies to different types of decisions.
Some decisions might require unanimity at board level, particularly in early-stage companies with only two or three directors representing different shareholder groups. Others might require only a simple majority.
If the board can’t reach a decision, what happens? The agreement should outline the escalation path, does it go to shareholders, or is there a deadlock resolution mechanism?
Banking and Financial Authority
Your shareholder agreement should detail who has authority over the company’s banking arrangements and financial commitments. Which directors are authorised signatories? Are there limits on their authority, for example, requiring two signatures for transactions above a certain amount?
Set financial thresholds for board or shareholder approval. Management might have authority to approve expenditure up to $50,000, the board up to $500,000, and shareholders for anything beyond that. The specific thresholds depend on your business scale and risk appetite, but documenting them prevents later disputes about whether someone exceeded their authority.
Financial authority limits aren’t just about control, they’re about protection. If a director commits the company to a contract beyond their documented authority, the company may not be bound by it, and the director could face personal liability.
Information Access Rights: What Shareholders Are Entitled to Know
Shareholders are entitled to timely and accurate information about the company’s performance. But how much information, how often, and in what format?
If you’re actively involved in the business, you probably have daily visibility into operations. But what if you’re a passive investor? What if you’re a minority shareholder who isn’t on the board?
The shareholder agreement should establish clear information rights to prevent disputes over access.
Standard Information Entitlements
Specify what financial and operational information will be provided to shareholders and how often. Common provisions include:
- Monthly or quarterly management accounts
- Annual audited financial statements
- Copies of board minutes (or summaries of key decisions)
- Business plans and budgets
- Material contracts or commitments above certain thresholds
- Notice of any litigation or regulatory issues
The frequency and format should be realistic for your business. A small startup might provide quarterly updates, while a larger business with multiple investor groups might commit to monthly reporting.
Balancing Access with Confidentiality
Not all shareholders should have unrestricted access to all information, particularly if they’re involved in competing businesses or have left the company but retained shares.
The agreement can include reasonable limitations, such as:
- Information provided on a confidential basis with appropriate undertakings
- Restrictions on sharing information with third parties
- Redaction of commercially sensitive details in certain circumstances
- Access to premises or records by appointment rather than on demand
The key is balancing legitimate information rights with protection of the company’s competitive position. A shareholder can’t be frozen out entirely, but neither should they have carte blanche to access information that could harm the business if misused.
If a shareholder requests information beyond the standard reporting, what’s the process? The agreement should outline how requests are made, reasonable timeframes for response, and any associated costs (particularly if extensive record retrieval is required).
Information asymmetry fuels suspicion and disputes. Shareholders who feel frozen out of information will assume the worst, even when nothing problematic is happening. Clear information rights, documented and honoured, prevent that spiral.
Annual Budget and Business Plan Approval Process
Who decides how much the company spends, where it invests, and what the strategic priorities are for the year ahead?
In many businesses, this is assumed to be the board’s prerogative. But shareholders often have strong views about capital allocation, growth strategy, and risk tolerance, particularly if they’ve invested significant capital.
Your shareholder agreement should define the process for approving annual budgets and business plans, and what happens if shareholders can’t agree.
Budget Approval Thresholds
Determine whether the annual budget requires board approval, shareholder approval, or both. For example, the board might approve budgets within certain parameters (total expenditure, capital investment limits, headcount growth), but any budget exceeding those parameters requires shareholder sign-off.
Specify what level of shareholder approval is required. A simple majority? Special majority? Unanimous consent? The threshold you choose affects how much influence minority shareholders have over strategic direction.
Also address what happens if a budget isn’t approved by the start of the financial year. Does the prior year’s budget continue on a rolling basis? Is there a reduced interim budget? Without clarity, the business can be paralysed while shareholders argue.
Business Plan and Strategic Direction
If shareholders have invested based on a particular business model or growth strategy, they’re entitled to some say in whether that strategy fundamentally changes.
The agreement should require the board to present an annual business plan for shareholder approval, or at least to consult shareholders on material strategic shifts.
This doesn’t mean shareholders micromanage. It means they have visibility and a voice on the big decisions: entering new markets, pivoting the business model, making a major acquisition, or scaling back operations.
Deadlock on Budget Approval
What if shareholders simply can’t agree on the budget or business plan?
If you’ve set a high approval threshold (75% or unanimous consent), deadlock is a real risk. The agreement should provide a mechanism to break it: escalation to mediation, a casting vote held by a specific shareholder or independent party, or, in extreme cases, triggering a buyout or exit process.
Deadlock provisions feel pessimistic when you’re drafting the agreement, but they’re essential. Without them, a budget dispute can drag on for months, paralysing the business and destroying value.
Build in a timeline for budget approval, for example, the board must present a draft budget 60 days before the financial year starts, and shareholders have 30 days to approve or reject it. Tight timelines force decisions and prevent delays from becoming a negotiating tactic.
Share Transfer Restrictions: Controlling Who Can Own the Business
One of the most critical functions of a shareholder agreement is controlling who can become a shareholder.
Without restrictions, a shareholder could sell their shares to anyone, a competitor, someone with conflicting interests, or a party the other shareholders simply don’t want to be in business with.
Share transfer restrictions protect the existing shareholders and maintain the integrity of the ownership structure.
Pre-Emptive Rights and Rights of First Refusal
Most shareholder agreements include a right of first refusal (ROFOR) or pre-emptive rights mechanism. If a shareholder wants to sell their shares, they must first offer them to the existing shareholders.
The process typically works like this: the selling shareholder receives an offer from a third party. Before accepting, they must notify the other shareholders, who have a defined period (often 30 days) to match the offer. If existing shareholders don’t take up the shares, the sale to the third party can proceed.
Pre-emptive rights prevent value leaking to outsiders and give existing shareholders the opportunity to increase their stake.
Drag-Along and Tag-Along Rights
Drag-along rights allow majority shareholders to force minority shareholders to join in a sale of the company. If a buyer wants 100% of the shares and the majority shareholders want to sell, they can “drag” the minority along on the same terms.
This prevents a minority shareholder from blocking a genuine exit opportunity for everyone else.
Tag-along rights work in reverse. If majority shareholders are selling their stake to a third party, minority shareholders have the right to “tag along” and sell their shares on the same terms.
This protects minorities from being left in a company with new majority owners they didn’t choose, particularly if those new owners have less capital or a different vision.
Both drag and tag rights need clear thresholds and processes documented in the agreement.
Permitted Transfers
Some transfers should be allowed without triggering pre-emptive rights, such as:
- Transfers between existing shareholders
- Transfers to family trusts or related entities controlled by the shareholder
- Transfers to family members (often with some restrictions)
The agreement should specify which transfers are permitted and whether they require consent from other shareholders or the board.
Valuation Mechanisms for Share Transfers
When shares are being sold or bought back, how are they valued?
This is one of the most contentious issues if it’s not documented upfront. The agreement should specify the valuation method, such as:
- Independent expert valuation (often a chartered accountant or business valuer)
- Formula-based valuation (e.g., multiple of EBITDA, net asset value)
- Fair market value determined by the board
- Pre-agreed price or price adjustment mechanism
Different valuation methods suit different businesses. High-growth startups might use revenue multiples, while established businesses might use profit multiples or net assets. What matters is that everyone agrees on the method before they need to use it.
Also address who pays for the valuation and how disputes over valuation are resolved (e.g., if the buyer and seller each appoint a valuer and they disagree, a third independent valuer makes the final determination).
Share valuation disputes can destroy businesses. Document the method clearly, and if you’re using independent valuers, specify their qualifications and the standard they must apply (e.g., fair market value, net asset value). Don’t leave it vague.
Compulsory Transfer Events: When Shareholders Must Sell
Certain events should trigger a compulsory transfer of shares, regardless of whether the shareholder wants to sell.
These are often called “good leaver” and “bad leaver” provisions, though the terminology varies.
Death, Incapacity, or Bankruptcy
If a shareholder dies, their shares typically pass to their estate and then to beneficiaries under their will. That might mean the remaining shareholders are suddenly in business with the deceased’s spouse or children, who may have no interest in or capability to contribute to the business.
The shareholder agreement should give the remaining shareholders (or the company) the right to buy back shares in the event of death, with a clear valuation mechanism and payment terms.
Similarly, if a shareholder becomes bankrupt or incapacitated, the agreement should allow (or require) the company or other shareholders to buy back the shares. These aren’t punitive provisions, they’re about business continuity.
Termination of Employment
Many shareholder agreements involve shareholders who are also employees or directors. If that person leaves the business, should they retain their shares?
The agreement should specify what happens to shares when a shareholder’s employment ends, and it should distinguish between different types of departure:
- Resignation or retirement: Often the departing shareholder retains their shares, or there’s a right (not an obligation) for the company to buy them back.
- Termination for cause (bad leaver): The company typically has the right to buy back shares at a reduced valuation (sometimes par value or a discount to fair market value).
- Redundancy or termination without cause (good leaver): The departing shareholder usually retains full value, either keeping the shares or selling them back at fair market value.
If you don’t document this, you risk a situation where someone who was terminated for serious misconduct retains a significant shareholding and all the associated rights (information access, voting, dividends). That’s rarely a workable outcome.
Breach of Restrictive Covenants
If a shareholder breaches non-compete or confidentiality obligations, the agreement can give the company or other shareholders the right to compulsorily acquire their shares, often at a discounted valuation.
This acts as both a deterrent and a remedy. It removes the conflicted party from the ownership structure without requiring lengthy court proceedings.
Compulsory transfer provisions must be drafted carefully to comply with the Corporations Act and general law. Get legal advice on the specific wording, poorly drafted clauses can be unenforceable, leaving you without protection when you most need it.
Restrictions on Encumbering Shares
Encumbering shares means using them as security for a loan or other obligation. A shareholder might pledge their shares to a bank as collateral for a personal loan, for example.
If that shareholder defaults, the bank could become a shareholder in your business, probably not someone you’d choose to be in partnership with.
Most shareholder agreements prohibit shareholders from encumbering their shares without the consent of other shareholders or the board. This prevents the ownership structure from being destabilised by a shareholder’s personal financial arrangements.
The agreement should specify:
- An outright prohibition on encumbering shares, or
- A requirement to obtain prior written consent from other shareholders or the board, and the grounds on which consent might reasonably be refused
There may be exceptions. For instance, if a shareholder is a holding company or trust, it might be standard practice for that entity to grant security over all its assets (including shares) as part of corporate financing arrangements. The agreement can allow encumbrances in those circumstances, provided the lender agrees not to enforce against the shares without first offering them to existing shareholders.
Encumbrance restrictions protect all shareholders, not just the majority. If you’re a minority shareholder and the majority pledges their shares to a bank, you could end up with a financial institution as your business partner, one with very different priorities.
Shareholder Funding Obligations and Loans to the Company
What happens when the company needs more capital?
If shareholders are expected to contribute additional funding, the shareholder agreement should set out the process, timing, and consequences of failing to participate.
Capital Calls
A capital call provision requires shareholders to contribute additional funds when the company needs capital, usually in proportion to their shareholding. The agreement should specify:
- The process for making a capital call (board resolution, shareholder vote, notice period)
- The maximum amount shareholders can be called upon to contribute
- The timeframe for payment
- What happens if a shareholder refuses or can’t pay
If a shareholder doesn’t meet a capital call, the consequences might include:
- Dilution of their shareholding (the other shareholders fund their portion and receive shares in return)
- Loss of voting or other rights until the capital is paid
- Compulsory transfer of shares at a reduced value
Capital call provisions are common in early-stage businesses or businesses with planned growth that will require further capital. But they need to be realistic. Calling for capital a shareholder genuinely can’t provide may force them out of the business, which might not be the intended outcome.
Shareholder Loans
Sometimes shareholders provide funding by way of loan rather than equity. The shareholder agreement should address the terms of such loans, including:
- Interest rate (if any)
- Repayment terms and priority
- Whether the loan is secured
- Whether shareholder loans rank equally or if certain shareholders’ loans take priority
Also clarify whether shareholder loans are required to be offered to all shareholders proportionally, or whether individual shareholders can provide loans on negotiated terms.
External Funding Priority
Will the company seek funding from shareholders before approaching external lenders or investors, or vice versa? This sequencing can be commercially significant, particularly if bringing in external investors dilutes existing shareholdings or introduces new governance layers.
The agreement should document the company’s approach to external vs shareholder funding and any approval thresholds for taking on external debt or equity.
Shareholders often assume they won’t need to provide more funding after the initial investment. That’s rarely realistic. If you can’t commit to future capital calls, negotiate a different role in the business or accept that your shareholding may be diluted over time.
Director and Shareholder Remuneration, Dividends, and Distributions
Money is personal. How shareholders are compensated, whether through salaries, director fees, or dividends, is one of the most common sources of tension.
The shareholder agreement should set clear expectations about remuneration and profit distribution.
Director Fees and Remuneration
If shareholders are also directors, the agreement should clarify how their remuneration as directors is determined. Is it set by the board, by shareholder resolution, or by an independent remuneration committee?
Will all directors be paid the same, or will remuneration vary based on time commitment or seniority? What’s the process for reviewing and increasing director fees?
These questions matter because shareholders often have different views about what’s reasonable. If one shareholder is working full-time in the business and another is a passive investor, paying both the same director fee might not feel fair, but neither does a process where the active shareholder unilaterally sets their own pay.
Employee Shareholder Salaries
Where a shareholder is employed by the company, the shareholder agreement should clarify that their salary is governed by their employment contract, not the shareholder agreement, and that salary decisions are made by the board (or a remuneration committee) in the usual way.
This separation prevents shareholder disputes from bleeding into employment terms.
Dividend Policy
Dividends are discretionary. There’s no legal obligation to pay them, and the board decides whether to declare a dividend and how much.
But shareholders often have expectations. If you’ve invested in a profitable business, you expect to see some return. If the business is instead reinvesting all profit back into growth, you might feel differently depending on whether that was the plan.
The shareholder agreement should document the company’s dividend policy, or at least set expectations about the approach to distributions. For example:
- The board will consider paying dividends annually, subject to the company’s cash flow and capital requirements.
- A target payout ratio (e.g., 50% of distributable profit will be paid as dividends).
- Dividends will only be paid once the company achieves certain financial milestones.
You can’t contractually bind the board to pay dividends, doing so might breach directors’ duties. But you can document the intended approach and give shareholders comfort about the distribution strategy.
Tax Distributions
If the company is taxed as a flow-through entity (e.g., a trust or partnership structure), shareholders may have personal tax liabilities on company profits even if no cash is distributed. In those cases, the shareholder agreement often requires the company to make minimum distributions sufficient to cover shareholders’ tax obligations.
Dividend disputes are rarely about the absolute amount, they’re about unmet expectations. Shareholders who expected regular distributions and get none, or who see the company spending heavily while they receive nothing, feel aggrieved. Clear documentation of the dividend approach prevents that mismatch.
Non-Compete, Confidentiality, and Restraint of Trade Provisions
If a shareholder also works in the business, you need to consider what happens if they leave.
Can they immediately set up a competing business? Can they solicit your clients or employees? Can they use confidential information or intellectual property they accessed as a shareholder or director?
Non-Compete Clauses in Shareholder Agreements
Non-compete provisions restrict a shareholder from engaging in competitive activity during and after their involvement with the company.
These clauses need to be reasonable in scope, duration, and geography to be enforceable under Australian law. A blanket prohibition on working in the same industry worldwide for five years won’t be upheld by a court.
A reasonable restraint might be:
- 12 to 24 months duration
- Limited to the geographic area where the company operates
- Focused on the specific services or products the company provides
The restraint should also distinguish between shareholders who are actively involved in the business and passive investors. A passive investor who isn’t involved in operations shouldn’t be subject to the same restraints as a founder or executive shareholder.
Confidentiality Obligations
All shareholders should be subject to confidentiality obligations, whether in the shareholder agreement or a separate deed. This protects the company’s commercially sensitive information, customer lists, financial data, and strategic plans.
Confidentiality obligations typically survive the shareholder relationship, they continue even after a shareholder exits.
Non-Solicitation of Employees and Clients
Even if a shareholder isn’t prohibited from competing, they can be restricted from soliciting the company’s employees or clients for a period after they leave.
Non-solicitation provisions are generally easier to enforce than outright non-compete clauses because they’re narrower and more directly protect the company’s legitimate interests.
Employment Agreement vs Shareholder Agreement
Where a shareholder is also an employee, restraint provisions often sit in the employment agreement rather than the shareholder agreement. But they should be consistent. If the employment agreement has a 12-month non-compete and the shareholder agreement is silent, there’s ambiguity about what applies if the person leaves their employment but retains shares.
Ideally, the shareholder agreement cross-references the employment agreement and confirms that restraints apply regardless of whether the shareholder sells their shares when they leave.
Restraint clauses fail most often because they’re too broad, not because they’re inherently unenforceable. Work with a lawyer to draft restraints tailored to your business, your market, and the specific role the shareholder plays. A well-drafted clause can be the difference between protection and a costly court fight.
Dispute Resolution Process: Avoiding Court When Possible
Even with the most comprehensive shareholder agreement, disputes happen. Markets change, priorities shift, personalities clash. What matters is how you resolve those disputes.
A well-designed dispute resolution framework ensures that conflicts are dealt with efficiently and cost-effectively, without destroying the business in the process.
Tiered Dispute Resolution
Most shareholder agreements include a tiered dispute resolution process that escalates in formality:
The agreement should specify timeframes for each step. For example, the parties have 14 days to negotiate, then 30 days to complete mediation, before they can escalate to arbitration or court.
Tight timeframes prevent disputes from dragging on and costing the business productivity and money.
Mediation
Mediation is often the most effective dispute resolution tool in shareholder disputes. It’s confidential, relatively quick, and preserves relationships better than adversarial processes.
The shareholder agreement should require mediation before arbitration or litigation can commence, and it should specify how the mediator is selected (often by agreement between the parties, or failing agreement, by nomination from an independent body like the Australian Disputes Centre).
Expert Determination
For technical disputes, such as share valuation, accounting treatment, or interpretation of financial terms, expert determination can be more appropriate than mediation or arbitration.
The parties appoint an independent expert (e.g., a chartered accountant or business valuer), who makes a binding determination on the specific issue in dispute.
Expert determination is faster and cheaper than court, and the expert’s decision is usually final and binding (with limited grounds for appeal).
Arbitration vs Litigation
Some shareholder agreements require disputes to be resolved by arbitration rather than court proceedings. Arbitration is private, often faster, and the parties can choose an arbitrator with specific expertise in commercial or shareholder disputes.
However, arbitration is still formal, expensive, and adversarial. It’s not a “cheaper” option in the way mediation is.
If the agreement doesn’t specify arbitration, disputes will be resolved in court under the Corporations Act oppression or other shareholder remedy provisions.
Deadlock Mechanisms
What if shareholders simply can’t agree and none of the dispute resolution processes resolve it?
The agreement should include a deadlock mechanism, a final pathway when all else fails. Common options include:
- Shotgun clause: One shareholder makes an offer to buy the other’s shares at a specified price. The other shareholder must either accept the offer or buy the first shareholder’s shares at the same price. This forces a decision and ensures one party exits.
- Put and call options: One party has the right to force the other to buy their shares (a “put”), or to buy the other’s shares (a “call”), at a pre-determined valuation.
- Winding up: In extreme cases, if the company is genuinely deadlocked and cannot continue, the agreement might provide for voluntary winding up and liquidation of the business.
Deadlock mechanisms feel harsh, but they’re essential. Without them, shareholders can remain locked in a dysfunctional relationship indefinitely, destroying the business value for everyone.
Dispute resolution processes only work if they’re clear, mandatory, and time-bound. Vague provisions like “the parties will attempt to resolve disputes amicably” are unenforceable and useless. Be specific: who, what, when, and what happens if the process fails.
When to Review and Update Your Shareholder Agreement
A shareholder agreement isn’t a static document. Your business changes, shareholders change, markets change. What made sense at incorporation might not make sense five years later.
You should review your shareholder agreement:
- When new shareholders join or existing shareholders exit
- When the business reaches certain milestones (e.g., hitting revenue targets, achieving profitability, or raising external capital)
- When there’s a material change to the business model or strategy
- When legislation affecting shareholders or companies changes (e.g., reforms to the Corporations Act)
- At regular intervals (every two to three years) even if nothing specific has changed
An outdated shareholder agreement can be worse than no agreement at all, because it creates false comfort. If your agreement still references a shareholding structure that changed three years ago, or gives decision rights to people who are no longer shareholders, it won’t hold up when you need it.
Treat your shareholder agreement like you’d treat your insurance. Review it annually, check it still covers the risks you face, and update it when circumstances change. Don’t wait until you’re in a dispute to discover it’s out of date.
Common Mistakes in Shareholder Agreements
We see the same mistakes repeatedly in shareholder agreements drafted without specialist advice. Here are the most common:
Using a Template Without Customisation
Generic templates miss the nuances of your business. Every company has different risks, different shareholder dynamics, and different commercial priorities. A template agreement downloaded from the internet won’t address any of them.
Vague Decision-Making Thresholds
If the agreement says “major decisions require shareholder approval” without defining what “major” means, you’ve created ambiguity, not clarity.
No Valuation Mechanism
“Fair market value” sounds reasonable until you’re in a dispute and realise no one agrees on what fair market value actually is or who determines it.
Unenforceable Restraints
Non-compete clauses that are too broad, too long, or cover too wide a geographic area will be struck down by a court. You need restraints tailored to your business and tested against the legal standard for enforceability.
No Deadlock Resolution
If shareholders can’t agree, and there’s no mechanism to force a resolution, the business is paralysed. Deadlock provisions feel uncomfortable to include, but they’re essential.
Failing to Update When Circumstances Change
An agreement that made sense with two equal shareholders at incorporation doesn’t make sense when a third shareholder joins with 40% of the equity and different commercial priorities.
The cost of getting the shareholder agreement wrong is vastly higher than the cost of getting it right. We’ve seen businesses with millions in revenue collapse because their shareholder agreement wasn’t fit for purpose. Don’t let that be your outcome.
Final Thoughts: Get the Foundations Right
Shareholder relationships are built on trust. But trust isn’t enough when commercial interests diverge or circumstances change.
A comprehensive shareholder agreement doesn’t undermine trust. It protects it. It ensures that when difficult decisions need to be made, everyone knows the rules, the process, and their rights.
The companies that avoid shareholder disputes aren’t lucky. They documented the essential terms when everyone was aligned, before any conflict emerged.
If you’re starting a business with co-founders, bringing in investors, or buying into an existing company, the shareholder agreement is the foundation everything else is built on.
Get it right.
At Aptum, we work with business owners and shareholders to draft shareholder agreements that are clear, enforceable, and tailored to the specific dynamics and risks of your business. We don’t use templates. We don’t draft agreements that sit in a drawer and get ignored.
We draft agreements that work when you need them.
If you’re setting up a new business, reviewing an existing agreement, or dealing with a shareholder dispute, contact us for tailored guidance.
Disclaimer: This article provides general information only and does not constitute legal advice. Every shareholder relationship is different, and the terms that suit your business depend on your specific circumstances, risks, and commercial objectives. You should seek professional legal advice before entering into any shareholder agreement or making decisions that affect your shareholding.
