Why Every NSW Business Needs a Shareholders Agreement
Starting a business with other people is exciting. You share the vision, spread the workload, and combine your strengths. But what happens if one of you wants out, disagrees with a major decision, or can’t contribute anymore?
That’s where a shareholders agreement becomes critical. It’s one of the most important documents a company in NSW can put in place, yet many businesses overlook it until it’s too late.
In this article, we’ll cover:
- What a shareholders agreement is.
- Why it’s important in NSW.
- Key issues every agreement should address.
- The risks of not having one.
- How to get one tailored to your business.
What is a Shareholders Agreement?
A shareholders agreement is a private contract between the shareholders of a company. While every company must have a constitution under the Corporations Act 2001 (Cth), that constitution is often generic and doesn’t deal with practical realities.
A shareholders agreement gives the owners of the business control over:
- How decisions are made (for example, whether unanimous consent is needed for big financial commitments).
- When and how dividends are paid.
- Exit strategies — what happens if a shareholder wants to sell their stake.
- Dispute resolution procedures.
Unlike a company constitution, a shareholders agreement does not need to be filed with ASIC. It’s a private document that reflects the specific needs of the business owners.
Why is it important in NSW?
In New South Wales, many small to medium enterprises (SMEs) are set up as proprietary limited companies with two or three directors. Often these companies are family businesses, partnerships between friends, or joint ventures between professionals.
Without a shareholders agreement, disputes are resolved by relying on the default rules in the Corporations Act, which are broad and often not aligned with the day-to-day realities of running a business.
Some common NSW business scenarios where a shareholders agreement makes all the difference include:
- Family businesses in which parents and children are shareholders — what happens if one family member wants to cash out?
- Professional practices (like trades or consultancies) where unequal workloads or contributions may arise.
- Investment ventures where outside investors want assurance about how their funds will be used.
Key issues to cover in a Shareholders Agreement
Every shareholders agreement should be tailored, but some common provisions include:
1. Decision-making rules
Should every shareholder have one vote regardless of shares held, or should votes be weighted by shareholding? Will certain decisions (like borrowing more than $50,000) require unanimous consent?
2. Dividend policy
Will profits be reinvested into the company, or distributed regularly? Setting expectations early avoids disputes later.
3. Exit and sale of shares
Can a shareholder sell their shares to anyone, or must they first offer them to existing shareholders? Will there be a mechanism for valuing shares fairly?
4. Death, disability, or insolvency
If a shareholder dies, do their shares pass to their family, or are they bought out by the remaining shareholders? What if a shareholder becomes bankrupt?
5. Dispute resolution
Having a clear dispute resolution process — such as mediation or arbitration — can prevent expensive court battles.
Risks of not having a Shareholders Agreement
Without one, you risk:
- Deadlock — two shareholders disagreeing with no way forward.
- Unwanted shareholders — for example, if a shareholder sells their shares to a stranger.
- Uncertainty — about profits, decision-making, or succession.
- Litigation — disputes that could have been resolved privately.
In the worst cases, these disputes can end with businesses collapsing or being sold under distress.
How to get a Shareholders Agreement in NSW
The process is straightforward but requires careful tailoring. Typically, it involves:
- Meeting with a commercial lawyer to discuss the business structure and goals.
- Identifying key concerns of each shareholder.
- Drafting the agreement with clear, plain-English provisions.
- Reviewing and signing the document.
This is not a one-size-fits-all document — online templates often fail to deal with the nuances of NSW law or the specifics of your business.
Final thoughts
If you’re running a company with more than one shareholder in NSW, a shareholders agreement is essential. It protects relationships, clarifies expectations, and prevents disputes from spiralling out of control.
Think of it as an insurance policy for your business partnership — one that pays off the moment there’s a disagreement or change in circumstances.
Call 1800 000 566 to discuss whether you need a shareholders agreement, or to get one drafted and checked by someone who has seen how they are tested in court. You can also book a free consultation using our online calendar, or fill in the form below.