Ask the owners of a two-person company what happens if one of them dies, wants out, stops working, or simply disagrees with the other about everything — and the usual answer is a pause. The company’s constitution won’t say. The Corporations Act supplies default rules built for no one in particular. Everything the owners assume — that they’d buy each other out fairly, that profits follow effort, that nobody would sell to a stranger — is assumption, not agreement.
A shareholder agreement is where those assumptions become enforceable. Done properly, it answers the questions owners hope never to face:
Decisions. Which choices need everyone, which need a majority, and which can one director simply make? Silence here is how companies deadlock — and deadlocked companies destroy value with remarkable efficiency.
Money. How profits are distributed, when owners can be required to contribute more, and what happens when one owner can fund growth and another cannot.
Exits. The heart of the document. Can a shareholder sell to anyone? Must shares be offered to the others first, at what price, determined how? What happens on death, incapacity, or when an owner simply stops contributing? A valuation mechanism agreed while everyone is friends is worth many times the same clause negotiated during a falling-out.
Defaults and deadlocks. What happens when an owner breaches the agreement — and the mechanism (buy-out rights, shotgun clauses, third-party determination) that resolves a genuine stalemate without a courtroom.
Restraints and protections. What departing owners can and cannot do afterwards, and the protection of the company’s information, clients and staff.
Two features distinguish agreements that work from agreements that decorate a drawer. First, they are bespoke: a document that reflects how these particular owners actually operate, not a precedent with the names changed. Second, they agree with the other documents — the constitution, any trust deeds, the owners’ estate plans and any insurance funding buy-outs. A shareholder agreement that contradicts the will of a deceased shareholder is not a plan; it is litigation with a head start.
The best time to put a shareholder agreement in place is at the start. The second-best time is now, while relationships are good and hypotheticals are still hypothetical. The worst time — the only genuinely bad time — is once the dispute has arrived.
General information only
This article is intended as general information only and does not constitute legal advice. You should seek independent professional advice tailored to your individual circumstances before acting on any of the information contained in this article.