Shareholders Agreement for a Small Company: What It Covers and How It Fits the Constitution

A shareholders agreement is a written deal between the owners of a company about how it is run and what happens when someone wants to sell, leave or block a decision. The company’s constitution, or the replaceable rules in the Corporations Act, set the basic rules for running the company. ASIC’s list of the replaceable rules contains nothing on valuing shares, drag-along, tag-along or deadlock, so a shareholders agreement is where the owners settle those points while everyone still agrees.

Claim Done drafts a shareholders agreement for a small company from your answers for a flat A$129, together with a directors’ resolution for the company to sign it. It is built for a private company with two to five shareholders who are individuals.

Constitution, replaceable rules and a shareholders agreement

According to ASIC’s page on company rules and constitutions, every company must be governed by either a constitution or a set of rules called the replaceable rules. The replaceable rules are in the Corporations Act 2001 and are the default for proprietary companies. If a company uses all of them, it does not need a constitution. To change some or all of them, the company must have a constitution, and where a constitution does not deal with a topic covered by a replaceable rule, the replaceable rule applies. The replaceable rules do not apply to a proprietary company whose sole director is also its sole shareholder.

ASIC describes a constitution as a contract between the company and its shareholders, directors and secretary, and between the shareholders. Changing it, or adopting one after the company is registered, takes a special resolution, which ASIC says needs at least 75% member support at the meeting.

What the default rules leave you with

It helps to know what happens if you have no agreement. ASIC’s list of the replaceable rules includes these:

• The business is managed by or under the direction of the directors.
• Directors’ resolutions pass by a majority of votes cast, and the chair has a casting vote if necessary.
• Before issuing new shares of a class, the directors of a proprietary company must offer them to existing holders of that class in proportion to what they hold, unless the shareholders authorise a particular issue at a general meeting.
• The directors of a proprietary company may refuse to register a transfer of shares for any reason.
• If a shareholder dies, the company recognises only their personal representative, who may be registered as the holder or transfer the shares.
• The directors may pay dividends as they see fit, subject to the terms of the shares.

Nothing in that list sets a price for a leaving shareholder’s shares, lets the others buy them, makes a minority sell with the majority, or breaks a deadlock. ASIC also notes the rules can change, so check the current Corporations Act.

What a shareholders agreement usually covers

• The board and decision making. How directors are appointed and removed, how the board votes, and whether the chair has a casting vote.
• Reserved matters. Big decisions, such as issuing shares, borrowing, selling the business or changing what it does, that need the shareholders’ approval at a set majority.
• Issuing new shares. New shares offered to existing shareholders first, in proportion to their holdings (pre-emptive rights).
• Transferring shares. A shareholder who wants to sell offers to the others first, with a set time to accept.
• Drag-along. If holders of a set percentage accept an offer for all the shares, the rest must sell on the same terms.
• Tag-along. If a sale would give a buyer control, the others can sell to that buyer on the same terms.
• Leaving. What happens if a shareholder dies, becomes bankrupt, loses capacity or seriously breaches the agreement.
• Valuation. How fair market value is worked out, for example by an independent valuer.
• Deadlock and disputes. A meeting, then mediation, before anyone goes to court.
• Dividends, confidentiality and any restraint on competing or poaching after leaving.

The structure of the agreement

This is how the Claim Done agreement is laid out, so you know what you are reviewing:

1. Date, parties and background: each shareholder, then the company, and what the business does.
2. Definitions and relationship with the constitution: how the agreement sits beside your constitution or the replaceable rules.
3. The business and the board: how directors are appointed and removed, and how the board votes.
4. Reserved matters: the approval needed, with the list in Schedule 2.
5. New shares and funding: offers to existing shareholders first, and no one has to put in more money unless they agree in writing.
6. Dividends.
7. Transfer of shares, tag-along and drag-along (the last two only if you choose them).
8. Leaving shareholders and valuation.
9. Deadlock and dispute resolution.
10. Restraint (if chosen), confidentiality, new parties, ending the agreement and general terms.
11. Schedule 1: who holds what shares. Schedule 2: the reserved matters.

A separate directors’ resolution records the company’s decision to enter into the agreement. Both come as PDFs with signature blocks for each shareholder, the company and each director.

Director duties sit alongside it

Whatever the shareholders agree, directors still have their own legal duties. ASIC’s guide to director obligations says these apply to all directors, including of small companies:

• Care and diligence (section 180 of the Corporations Act).
• Act in good faith, in the best interests of the company and for a proper purpose (section 181).
• Do not misuse your position or information (sections 182 and 183). Opportunities that arise through the company belong to the company.
• Keep proper financial records (section 286).
• Prevent insolvent trading (section 588G).

ASIC also says to be careful about taking money out, such as dividends or director loans, when cash is tight, and that related party transactions must be justifiable as in the company’s best interests. Officeholders must also disclose any material personal interest and put the company’s interests first. Keep that in mind when the directors act on a dividend target or a deal with a shareholder.

If you already disagree

ASIC says disputes in small proprietary companies are often about ownership, management or control, and that its role is limited to recommending legal advice. It recommends legal advice or mediation, and suggests the Law Society in your state or territory if you need help finding a lawyer. ASIC also says it does not get involved in disputes about the running of proprietary companies. That is the best reason to write the agreement now, while you still agree.

Mistakes to avoid and when to get advice

• Leaving valuation vague. “A fair price” with no method is the start of an argument.
• Choosing an approval level that lets one shareholder block everything, or lets the majority do anything.
• Letting the share register drift from the agreement. Schedule 1 should match the register.
• Ignoring a constitution that says something different. The Claim Done agreement has the shareholders agree to vote to fix any conflict, but you need to read both.
• Assuming the agreement covers tax. It does not.

Get professional advice instead of, or as well as, this agreement if a shareholder is a company or a trustee (the Claim Done agreement is not for that), if you are bringing in an investor, setting up vesting or an employee share scheme, if tax or stamp duty is a concern, if a restraint matters a lot to you, or if a dispute has already started.

If your company has two to five shareholders who are individuals and you are ready to write down what you have agreed, start your shareholders agreement now. You answer plain questions, review both documents, and sign when you are happy.