Do you need a Shareholders Agreement for your company?

When preparing a comprehensive Shareholders Agreement, the following information highlights the issues to be included:

1.   Key Security-holders

What is a “Key Security-holder”?

“Key Security-holders” are significant security-holders that have important rights – ie: (i) each Key Security-holder has the right to appoint/remove one director; and (ii) the company cannot undertake certain actions without the prior written approval of all, or a majority of, the Key Security-holders.

Threshold voting power

The Key Security-holders will be:  (i) each of the current security-holders, for so long as it controls greater than, or equal to, a specified percentage of the voting rights; and  (ii) any later incoming security-holder whose voting power exceeds that threshold.

The threshold voting power to be a Key Security-holder will be the percentage of the total available votes that a security-holder will at least need to control to be a “Key Security-holder”.

What is the threshold voting power to be a Key Security-holder?

>  This number will be the percentage of the total available votes that a security-holder will at least need to control to be a “Key Security-holder”.

2.  Calculating voting power

Voting power

IMPORTANT NOTE: This agreement works such that, where an entitlement of a security-holder is linked back to its proportionate ownership, its proportionate ownership is calculated by reference to its voting power (ie, not its economic interest).

If the economic interest of a security-holder does not match its voting power, and you would like to take the economic interests into account, then please contact us.

Why is this important?

In this agreement, most of the important rights of the security-holders are linked back to their proportionate ownership.

This includes determining: (i) which security-holders qualify as “Key Security-holders”, which in turn determines which security-holders have director appointment and other important approval rights; and (ii) the proportionate entitlements of the security-holders in respect of the pre-emption rights on transfers and new issues of securities.

Approaches to calculating voting power

At a given moment in time, the voting power of the security-holders can be calculated in one of two ways – either:  (i)  Typical approach – actual voting rights only:  by reference only to the votes that are actually capable of being cast at that time, without assuming that any options, convertible notes or other similar rights are exercised; or  (ii) Alternative approach – notional voting rights on a fully-diluted basis:  by reference to the votes that would be capable of being cast if all of the outstanding options, convertible notes and other similar rights to acquire voting securities were immediately exercised.

3.   Business and non-compete


Do you want to include non-compete provisions? If so: For how long?   The geographic scope?

The non-compete provisions will only apply to the parties to this agreement.  Accordingly, if any individuals who need to be bound by the non-compete provisions are investing through nominee entities, those individuals will need to be added as parties to this agreement.  Alternatively, if those individuals are engaged as employees/contractors of the business, it may be appropriate for non-compete provisions to be included in their terms of engagement.  If you would like any assistance with this, please contact us.

Description of the Business

Describe the business of the venture.

The company will not be permitted to materially change the business of the venture from that which you describe here without the approval of the Key Security-holders.  The scope of this description of the business will impact upon the scope of the non-compete obligations.

4.   Board of directors

Frequency of board meetings

Do you want to set a minimum frequency for board meetings?

Do you want to set a maximum length of time between board meetings?

Notice of board meetings

Except in cases of emergency, notice of a board meeting must be sent to all directors a specified minimum number of hours before the meeting starts, unless all of the directors consent.

Number of votes per director

Typically, each director has one vote – however, you can instead opt to make the voting power of the directors mirror the voting power of the security-holders.  In that case, each director will have the same proportionate voting power as the security-holder that nominated him/her.

5.   Approach to voting by the board

Typical approach – votes actually cast

Typically, resolutions of the board of directors are passed if a majority of the votes cast by directors who are present and voting approve the resolution.  Notice of the board meeting must be given to all directors, but not all of the directors will necessarily be present and voting.

Alternative approach – votes capable of being cast

Instead of the typical approach described above, you can require that a board resolution will only be passed if it is approved by a majority of the votes cast by appointed directors who are entitled to vote on.

6.   Further funding

You can make it so that the security-holders are obliged to put in further capital by way of the subscription for additional securities.  If you choose to do so, the agreement will work as follows:

Maximum aggregate commitment:  You can specify an aggregate maximum amount of capital that the security-holders together are required to contribute.

Obligation to subscribe in respective proportions:  If the amount that the venture is requesting, when added to all amounts that it has raised previously, is less than or equal to that maximum amount, each security-holder will be required to subscribe for at least its respective proportion of the securities.

Business plan:  The security-holders will only be obliged to subscribe where the venture proposes to use the funds in accordance with an agreed business plan.

7.   Buy/Sell Insurance

Death or incapacity of a security-holder

In this agreement, by default, death or incapacity of a security-holder will not trigger a right for the other parties to buy out that security-holder.  If you choose to add buy/sell insurance provisions into the agreement, then death/incapacity will be added as a trigger event requiring the affected party to offer its securities for sale to the remaining security-holders.

What is buy/sell insurance?

In short, life and permanent disability insurance is taken out in relation to the security-holders at the cost of the company. The company pays the insurance premiums. Then, if a security-holder is required to offer its securities for sale to the remaining security-holders as a result of death or permanent disability, the proceeds of the relevant insurance policy are used to assist the remaining shareholders in buying those securities.

8.   Leaver / Bad Leaver provisions

Events of Default and employment/consultancy

If an Event of Default occurs in respect of a security-holder, that security-holder can be bought out by the non-defaulting security-holders. In this agreement, the starting presumption is that: (i) termination of employment/consultancy with the company will not trigger an Event of Default; and (ii) the price for the buy-out will be market value of the defaulting party’s securities.

Good Leavers and Bad Leavers

If you choose to add Good Leaver/Bad Leaver provisions into the agreement, then termination of employment/consultancy – in any circumstances and for any reason – will be added as an Event of Default.

The employee/consultant will be a “Good Leaver” if they leave employment/consultancy: (i) as a result of death or permanent disability; or (ii) their employment/consultancy is terminated by the company other than as a result of wrongdoing or breach by the employee/consultant.

If a departing employee/consultant is not a Good Leaver, then he/she is a Bad Leaver.

Buy-out price

For a Good Leaver, the price for the buy-out will be the standard position – ie, the market value of the defaulting party’s securities. If the departing employee/consultant is a Bad Leaver, the price will be only 80% of the market value.

9.   Approval of important actions

Decide which of the following important actions will require the majority, or unanimous, approval of the Key Security-holders:

Buy/Sell Insurance

  • Determine the amounts for the buy-sell insurance policies:

Ownership of the venture

  • Varying the constitution of the company:
  • Issuing new securities:
  • Buying back any securities in the venture entity:

The business plan

  • Approving or varying the business plan:
  • Changing the nature of the business of the venture entity:
  • Winding up the venture entity:

Buying and selling assets

  • Buying or selling assets above a certain value:
  • Acquiring any securities in another entity:
  • Licensing any of the venture entity’s intellectual property rights:

Borrowing and lending money

  • Borrowing any money above a certain threshold:
  • Lending any money above a certain threshold:

Unusual transactions

  • Any non-arm’s length transactions:
  • Guarantees and indemnities not in the ordinary course of business:
  • Creating any encumbrances over the venture entity’s assets:
  • Security controls for bank accounts:

Accounting and dividends

  • Changing accounting policies:
  • Appointing or removing an auditor:
  • Approving dividends and other distributions:


  • Bringing or settling any legal claims above a certain threshold:

Officers and employees

  • Hiring or terminating any employee whose remuneration exceeds a certain threshold:
  • Remunerating any employee above a certain threshold:
  • Delegating any powers of the board of directors:
  • Determining the remuneration of any director:
  • Establishing any employee incentive schemes:

Special resolutions

The Corporations Act 2001 (Cth) requires that certain actions by a company or registered scheme require the approval of at least 75% of the votes cast by security-holders that are entitled to vote.   Those statutory approval requirements are mandatory – the approval requirement that you set here will be in addition to those statutory approval requirements.

10.   Dispute resolution

Major disagreements

There can be circumstances in which a party disagrees so strongly with a decision of the Key Security-holders – ie, a decision made by the Key Security-holders in accordance with the approval mechanics that you just chose on the previous page of this form – that the party no longer wishes to be a co-owner, or wishes to buy out one or more of the other co-owners.

An important question is whether the agreement should contain any mechanics to deal with such a situation.  On the one hand, the approval rules are there for a reason and should be left to operate as intended; but on the other hand, where there is a genuine, bona fide disagreement about an extremely fundamental issue, it may be useful to provide a formal process for the parties to part ways with one another.

Matters that can trigger the deadlock resolution mechanics

Please note that, if you choose to add any dispute resolution mechanics into this agreement, by default a disagreement about any of the matters listed on the previous page of this form can constitute a deadlock that triggers those mechanics. If you would like the dispute resolution mechanics to only be triggered by disagreements in respect of some, but not all, of the matters listed on the previous page of this form, then that will require some further manual tweaking after the document has been generated.


One way to try get the parties to work through any disagreement amicably is to force them into a structured mediation process before any court proceedings can be brought.

Dispute buy-out procedures

The question then is, what should happen if the mediation process doesn’t lead to an agreement?  You can choose to include formal mechanics for one or more of the parties to be bought out so that only agreeing parties remain.

Important Notes

They are, by their nature, very draconian and can give rise to disputes of their own. Hard-coding any kind of deadlock buy-out mechanics is always potentially dangerous, regardless of the structure adopted, and the use of any such provisions should be carefully considered in light of the commercial relationship between the parties.

If there are only two Key Security-holders, then there is a very high risk of a deadlock because it will not be possible to get majority or unanimous approval unless both Key Security-holders agree.

How the dispute buy-out mechanics work

The mechanics we use are a combination of the processes commonly referred to as “Russian Roulette” and “Texas Shoot-Out”.  These mechanics have been carefully designed to disincentivise the parties from resorting to them (in general, they should be an absolute last resort only), whilst also incentivisng any party that submits a notice to specify a fair market price. There is a lot of economic game theory behind this.

11.   Transfers of securities

Pre-emption rights

This agreement includes pre-emption rights in favour of existing security-holders in the event of any proposed: (i) issue of new securities by the venture entity; or (ii) transfer of securities by a security-holder.  Security-holders are, however, permitted to transfer securities to certain related parties without needing to comply with the pre-emption rights.

How the pre-emption rights on transfers work

In this agreement, if the remaining security-holders do not offer to purchase all of the sale securities, the seller then has a choice – it can either: (i) complete the sale to the accepting security-holders, and then sell the left-over securities to a third party if desired; or (ii) not complete the sale to the accepting security-holders, but only if it sells all of the sale securities to a third party.

Tag-along and drag-along rights

If desired, you can also include tag-along and/or drag-along rights.  In the event of a proposed sale by a security-holder:

Tag-along rights:  tag-along rights give non-selling security-holders the right to sell alongside the selling security-holder (ie, the selling security-holder can’t complete its sale unless the proposed purchaser also offers to buy out the tagging security-holders); and

Drag-along rights:  drag-along rights give the selling security-holder the right to force the non-selling security-holders to also sell to the proposed purchaser.  This is particularly important where the proposed purchaser will only complete if it gets 100% ownership.

Consent of Key Security-holders for transfers

If a security-holder wishes to transfer any securities, then – unless the transfer is made pursuant to the pre-emption rights (or tag/drag rights, if applicable) or the exceptions for permitted transfers to related parties – the prior written consent of the Key Security-holders will be required.

12.   Other provisions

Confidentiality and non-disparagement

Do you want to include a confidentiality clause?

Do you want to include a non-disparagement clause?

Default interest

Do you want to include a default interest clause?


How will costs be handled?

Governing law

The laws of which state/territory will govern the agreement?

13.   Initial parties

The company will be a party, in addition to the security-holders that you specify.  You can specify up to 10 security-holders.

The Company

Company name:



The Security-holders

Are Security-holders an individual or a company?

Are Security-holders an Australian company?

Are Security-holders acting as the trustee of a trust?

14.   Important Notices


This agreement does not include detailed provisions that govern the distribution VS retention of profits by the venture entity.  You may also wish to specify a customised order in which dividends and other distributions are to be allocated between the investors (otherwise known as a “distribution waterfall”).

If you would like to include such provisions, please contact us.

Access to information

This agreement does not include detailed provisions governing the preparation of audited and/or management accounts, or the provision of financial information to investors.

If you would like to include such provisions, please contact us.

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