Shareholders Agreement NSW: Key Clauses for Your Company

A shareholders agreement in NSW is a private contract between the shareholders of a company, and often the company itself, that sets out how the business will be owned, run and, eventually, exited. Many Sydney business owners incorporate with only the default rules and assume that is enough. It rarely is once the owners disagree, one wants to leave, or an outsider wants to buy in. This article explains, in general terms, what a shareholders agreement covers and why it matters.

Shareholders agreement vs company constitution

Every company in Australia is governed by the Corporations Act 2001 (Cth) and, in addition, either the replaceable rules in that Act, a tailored constitution, or both (see section 135). Section 140 gives these rules contractual effect between the company, its directors and its members. A shareholders agreement, by contrast, is a private contract that can deal with commercial terms the owners want to keep between themselves.

The replaceable rules are generic. They say little about what happens if two 50 per cent shareholders cannot agree, how a departing owner is paid out, or whether a shareholder can sell to a competitor. A shareholders agreement fills those gaps.

Why a shareholders agreement is worth having

Disputes between owners of small companies are common, and they are expensive. Without an agreement, a dissatisfied shareholder may have to rely on general remedies, such as the oppression provisions in sections 232 and 233 of the Corporations Act, which are case-by-case and can be slow and costly. A clear agreement made when relations are good gives everyone a predictable process when they are not.

Key clauses in a shareholders agreement

Share capital and contributions

The agreement should record who holds how many shares, what each owner has contributed, and what happens if the company needs more money. Think about whether shareholders must contribute further funds, whether existing owners get the first chance to take up new shares, and how loans from shareholders are treated.

Management and decision-making

Decide who can appoint and remove directors, and which decisions need more than a simple majority. These are often called reserved matters and might include borrowing above a set amount, selling the business, issuing new shares, changing the nature of the business or hiring and firing key people. Without them, a majority shareholder may be free to make major decisions alone.

Dividends and remuneration

Owners who work in the business and owners who only invest often have different expectations. The agreement can set out when profits will be paid as dividends, when they will be retained, and how working shareholders are paid.

Restrictions on selling shares

Most agreements deal with share transfers in several ways:

• Pre-emption rights: a shareholder who wants to sell must first offer the shares to the other owners.
• Tag-along rights: if a majority sells, minority shareholders can require the buyer to purchase their shares on the same terms.
• Drag-along rights: if a set majority wants to sell the whole company, the others can be required to sell too, so a buyer can acquire 100 per cent.
• Transfer approval: shares cannot be sold to outsiders without consent.

Deadlock

Where owners are evenly split, a deadlock can paralyse the business. Agreements commonly provide a staged process, for example escalation to the owners, then mediation, and in some cases a buy-sell mechanism or a sale of the business. The right option depends on the business and the owners.

Exit, death, incapacity and bad leaver provisions

The agreement should say what happens when a shareholder leaves, retires, becomes incapacitated, dies, becomes bankrupt or breaches their obligations. Typical terms include a right or obligation for the others to buy the shares, a method for valuing them and a payment timetable. Many agreements distinguish between a good leaver and a bad leaver, with different pricing for each.

Confidentiality and restraints

Owners usually agree to keep business information confidential and, sometimes, not to compete with the company or solicit its customers and staff after leaving. Courts will only enforce restraints that go no further than is reasonably necessary to protect a legitimate business interest, so they need to be drafted carefully rather than copied from a template.

Dispute resolution and governing law

A staged dispute clause, such as negotiation, then mediation, then court or arbitration, can help resolve problems early and keep legal costs down. The agreement should also state that NSW law governs it.

When to put a shareholders agreement in place

The best time is when the company is formed or when a new shareholder joins. It is much harder to agree on exit terms after a relationship has broken down. If your company already operates without an agreement, it is still worth putting one in place, particularly before new investors, family members or key employees take up shares.

Frequently Asked Questions

Is a shareholders agreement legally required in NSW?

No. The Corporations Act does not require one. However, without it the company relies on the default statutory rules or its constitution, which may not address the issues that matter most to the owners.

What is the difference between a shareholders agreement and a constitution?

A constitution is the company's governing document under the Corporations Act. A shareholders agreement is a private contract between the owners. Many companies have both, and they should be consistent.

Can a shareholders agreement be signed after the company is operating?

Yes. All shareholders need to agree to its terms, so it is easier to do while relationships are good. If existing owners cannot agree, it may be necessary to negotiate and obtain advice on what is fair for each of them.

What happens if a shareholder breaches the agreement?

The remedies depend on the wording. They may include damages, a court order requiring compliance, or a forced sale of shares at a set price. A well-drafted agreement spells out the consequences so there are fewer arguments later.

This article is general information only and is not legal advice. Laws and processes change, and every situation is different. Speak to a lawyer about your circumstances before you act.