A Simple Guide to Shareholders’ Agreements

A well-drafted Shareholders’ Agreement is more than just a legal document — it’s a blueprint for long-term success and harmony in your business.

What is a Shareholders’ Agreement?

1. A legal framework that defines the rights, responsibilities, and expectations of business owners.
2. Promotes alignment, prevents disputes, and supports sustainable enterprise value.
3. Enables strong governance by going beyond just who owns what.

Why They Matter in Business

1. Unspoken governance already exists in most businesses — but unspoken rules often break down under pressure.
2. Family or friendship dynamics can blur the lines between legal and moral ownership.
3. A good agreement removes emotion from difficult issues such as:
   1. In-law participation;
   2. Profit sharing and personal goals; and
   3. Exit paths and succession plans.

When Should You Have One?

1. Early — before issues arise. Ideally when someone else is (or will be) a shareholder.
2. Agreements are most effective before tension arises — when everyone’s still aligned.

Risks of Not Having One

1. Disputes around roles, exit, or money can damage both the business and family relationships.
2. Without an agreement, you rely on default legal provisions — which rarely suit a private business.

When They’re Most Valuable

1. At entry – Aligns expectations and avoids surprises.
2. During operation – Sets clear ground rules, boosting performance and governance.
3. When things go wrong – Pre-agreed processes reduce conflict and protect relationships.

Valuation Concepts

Shareholders’ Agreements help manage risk, and reducing risk increases value.

1. Understand key concepts, for example:
   1. Market value vs enterprise value;
   2. Minority discounts, control premiums, illiquidity discounts; and
   3. The value of your interest depends on your position (majority, minority, or deadlock).

What Should Be Covered?

Your agreement should function like a rule book for running the business, and include:

1. Roles and contributions;
2. Decision-making and voting thresholds;
3. Access to information;
4. Raising and contributing capital;
5. Exit strategies and valuation methods;
6. Restraints and profit distributions; and
7. Dispute resolution mechanisms.

Final Thought

Every shareholder sits in a unique position — majority, minority, or deadlock,  and each comes with risks. It is important to understand your perspective and plan to protect your interests and preserve relationships.

Contact Us

If you or a client of yours requires the preparation of a shareholders agreement, or has a shareholder related dispute, contact our commercial law experts today for a confidential discussion on (03) 9481 2000 or info@tauruslawyers.com.au.