In short
A shareholders agreement is a private contract between some or all of a company's shareholders. It is enforceable between them by damages, injunction and specific performance, but a breach of it does not make a corporate act void, and it does not bind a shareholder who has not signed it. Protections that must survive a falling out belong in the constitution as well, entrenched under s 136(3) of the Corporations Act 2001 (Cth).
- The constitution binds the company, each member, and each director and secretary, under s 140. The shareholders agreement binds only its parties.
- A supremacy clause allocates risk between the people who signed it. It does not invalidate a resolution passed in accordance with the constitution.
- A 75% special resolution can change the constitution under s 136(2). Only a further requirement entrenched under s 136(3) defeats that.
- Every incoming shareholder must sign a deed of accession before the transfer is registered, or the agreement quietly stops covering the register.
- Directors can commit the board to a specific agreed transaction. They cannot hand over the general management of the company in advance.
Three documents govern a company, and only two of them are public
Every Australian company is run by some combination of three things, and most disputes we see turn on the relationship between them rather than on the wording of any one. The first is the Corporations Act 2001 (Cth), which applies whether anyone has read it or not. The second is the company's constitution, or, where it has none, the replaceable rules the Act supplies in its place. The third is the shareholders agreement, which is a private contract and is the only one of the three that never reaches ASIC.
That last point is why shareholders agreements exist at all. A constitution is filed and can be inspected. A shareholders agreement setting out what each founder is paid, what happens if one of them stops working, and who has to consent before the company borrows, stays between the people who signed it.
| Source | Binds | Changed by | Public |
|---|---|---|---|
| Corporations Act | Everyone, always | Parliament | Yes |
| Constitution and replaceable rules | The company, each member, each director and secretary, per s 140 | Special resolution, 75%, under s 136(2) | Yes, for a public company; a proprietary company lodges on request |
| Shareholders agreement | Only the people who signed it | Whatever the agreement itself says, usually unanimity | No |
The middle row is where the trouble starts, and the third column of that row is the reason. A constitution can be changed by a 75% majority. A shareholders agreement usually cannot be changed without everyone. So a minority shareholder who wants a right that survives a falling out puts it in the agreement, and then discovers that the agreement does not do what they were told it does.
What section 140 binds, and what it leaves out
Section 140(1) of the Corporations Act gives the constitution the force of a contract, and it names exactly three relationships. The constitution and any applicable replaceable rules have effect as a contract between the company and each member, between the company and each director and company secretary, and between a member and each other member, under which each person agrees to observe and perform the constitution and rules so far as they apply to that person.
Two things are missing from that list. There is no contract between one director and another in their capacity as directors. And nothing in s 140 reaches a person who is not a member, a director or the secretary, which includes an incoming investor who has agreed terms but has not yet been issued shares.
Section 140(2) then protects a member against certain later changes. A member is not bound by a modification made after they became a member, so far as it requires them to take up additional shares, increases their liability to contribute to share capital or to pay money to the company, or imposes or increases restrictions on the right to transfer shares they already hold, unless they agree in writing. The transfer limb carries two narrow exceptions, for a change from public to proprietary company and for the insertion of proportional takeover approval provisions. That subsection is narrower than people assume. It does not protect a member against a change to voting rights, to dividend policy, to board composition, or to almost anything else the majority may want to alter.
What this means for you
If the protection you care about is not one of the three things in s 140(2), the constitution will not hold it for you against a 75% majority. That is the gap a shareholders agreement is bought to fill, and the next section is about how well it fills it.
The supremacy clause does not do what its name says
Almost every shareholders agreement in the Australian market contains a clause saying that if its terms conflict with the constitution, the agreement prevails. Clients are routinely told that this clause makes the agreement the senior document. It does not, and a New South Wales decision says so in terms.
Supreme Court of New South Wales
In the matter of Maleny Tricorp Hotel Pty Ltd [2020] NSWSC 1699
HeldThree founders had agreed that no director would be appointed or removed without the unanimous agreement of all of them. A general meeting later removed one of them as a director, in accordance with the constitution and whatever the position under that promise. Emmett AJA held that the removal was valid. A shareholders agreement is enforceable by the ordinary contractual remedies, but a breach of it does not make the corporate act void.
The reasoning is not confined to that clause. His Honour accepted that by a separate agreement members may bind themselves to act independently of the constitution, and that such an agreement, clearly expressed, will be enforced by injunction restraining conduct in breach of it or compelling specific performance. It is, in principle, enforceable by all of the normal contractual remedies, including damages, mandatory and restraining injunctions and specific performance. Then came the limit:
The fact that the action might be a breach, however, would not invalidate or render the action itself void or ineffective.
In the matter of Maleny Tricorp Hotel Pty Ltd [2020] NSWSC 1699 (Emmett AJA)
One of the shareholders who voted to remove the director had never signed the shareholders agreement. That fact is the clearest way to see why the supremacy clause cannot work as advertised. It would be a curious consequence, his Honour said, if a resolution she had validly voted for under the constitution were invalidated by a contract to which she was not a party. That consequence, he said, "emphasises the fallacy of the contention that the validity or effectiveness of a resolution passed in accordance with the Constitution might be impugned by a contract to which some shareholders are not parties and to which the Company itself is not a party".
What a supremacy clause actually is
A Western Australian judgment in 2025 read one of these clauses word by word, and the reading is worth having. In Cycliq Research & Development (HK) Ltd v Cycliq Group Ltd [2025] WASC 179 the clause required the constitution to reflect the agreement, said the agreement would prevail on any inconsistency, and obliged the parties to move promptly to amend the constitution. Cobby J made three points about it. It does not import the terms of the agreement into the constitution. It does not itself amend the constitution. And by identifying what the parties must do about an inconsistency, it contemplates that the two documents may be inconsistent at times. His Honour then noted that the parties had taken no step to address the inconsistency for more than seven years.
That is what a supremacy clause actually is. It is a promise to go and amend the constitution, and it sits unperformed in a great many companies.
One qualification worth knowing
Cobby J also accepted that a shareholders agreement may operate to amend a company's constitution through the Re Duomatic principle, under which the informal but unanimous assent of every member can do what a formal resolution would have done. Australian authority is not settled on the point and there is a decision the other way. Where every member is a party to the agreement the position may therefore be stronger than this section suggests, but it is not a foundation to build a structure on.
So a supremacy clause allocates risk between the people who signed it. If someone breaches the agreement, the others have a claim against that person for breach of contract. What they do not have is a void resolution. The board has changed, the shares have been issued, the company has borrowed, and the remedy is a lawsuit rather than an undo button.
Four ways to make the agreement actually bite
The answer to Maleny Tricorp is not a better supremacy clause. It is to stop relying on the agreement alone. Four mechanisms do the work, and a well built structure uses all of them rather than choosing between them.
The four mechanisms
- Mirror the mechanics in the constitution. Anything that has to bind the company itself, or to survive a shareholder who never signed, belongs in the constitution as well as in the agreement. Board composition, pre-emption on transfer and the quorum rules are the usual candidates.
- Make the company a party. A company that has not signed is a stranger to the contract. A company that has signed is bound, but only so far as a company can be: it cannot contract away its own statutory powers, and a promise by the company never to alter its constitution does not stop it altering the constitution by special resolution. What binds is the shareholders' promise to each other about how they will vote, which is why this mechanism works with the first and third and not instead of them.
- Entrench under s 136(3). The constitution may provide that a special resolution has no effect unless a further requirement specified in the constitution has been complied with. That further requirement can be the consent of a named shareholder or of a class. Under s 136(4), unless the constitution provides otherwise, the further requirement can itself be removed only by complying with it. This is the only mechanism in the list that genuinely defeats a 75% majority.
- Enforce accession on every transfer. The agreement must require any transferee to sign a deed of accession before the transfer is registered, and the constitution must give the directors the power to refuse registration until that happens.
The fourth is the one that fails most often, and it failed in Maleny Tricorp itself. The agreement there did require a transferee to enter an agreement to be bound before the transfer was registered, and that was not done when the shares moved. Deeds of accession were signed thirteen years later, after the dispute had erupted, and the court did not have to decide what they achieved. What mattered was simpler: one shareholder on the register had never signed at all, and her vote was as good as anyone's.
What this means for you
An accession clause is only as good as the transfer register. Before any share moves, someone has to check that the transferee has signed, and the directors have to be willing to refuse registration until they have. If that discipline is not in place, the agreement quietly stops covering the whole share register, and nobody notices until there is a dispute.
Who controls the board
Board control is usually the most valuable thing a shareholders agreement allocates, and the default position depends on whether the company is proprietary or public. The Act treats the two very differently, and an agreement drafted for one does not work for the other.
For a proprietary company, s 203C is a replaceable rule: the members may by resolution remove a director and appoint another in their place. Because it is replaceable, a constitution can displace it, which is what makes entrenched board seats possible in a private company. For a public company, s 203D allows the members to remove a director by resolution despite anything in the constitution, in an agreement between the company and the director, or in an agreement between any or all of the members and the director. That third limb is the shareholders agreement, named in the section and overridden by it. Section 203D does provide that where a director was appointed to represent the interests of particular shareholders or debenture holders, the removal does not take effect until a replacement representing those interests is appointed. Section 203E makes void any resolution, request or notice of the directors purporting to remove a director or require them to vacate office. In a public company the members' power to remove is not something a private contract can take away.
Alongside this sits s 249D. The directors must call and arrange to hold a general meeting on the request of members with at least 5% of the votes that may be cast. A minority holder with 5% therefore has a statutory route to put a resolution to the members, whatever the agreement says about how meetings are called.
| Question | Proprietary company | Public company |
|---|---|---|
| Members remove a director | s 203C, replaceable, so the constitution may modify it | s 203D, and it applies despite the constitution AND despite a shareholders agreement |
| Directors remove a director | Possible only if the constitution allows it | Void under s 203E |
| Requisition a meeting | Members with 5% of the votes, under s 249D | |
The nominee director, and the limit on instructing one
An investor who takes a board seat almost always wants the person in it to act on their instructions, and this is where a great deal of Australian shareholders agreement drafting is quietly unenforceable. The common advice is a flat no: a director owes duties to the company and cannot be told how to vote. That is close to right, and it is too blunt in both directions.
It is too strict because a nominee may legitimately represent the interest that appointed them. The court in Maleny Tricorp, drawing on Levin v Clark and Re A & BC Chewing Gum Ltd, put it this way: while the directors of a company must act in the interests of the company, it may be in the interests of the company that there be a member of the board who represents an interest outside the company, such as a mortgagee or a particular shareholder, and who acts solely in the interests of that third party, and who may nevertheless be regarded as properly acting in the interests of the company as a whole.
It is too lax because a wholesale surrender of discretion is void. The general rule, as Cobby J stated it in Cycliq, is that directors must not fetter their powers and discretions by contract or promises to other persons, and parties cannot enter a shareholders agreement fettering the discretion of a director in their capacity as director. Beach J had earlier held, in Australian Securities and Investments Commission v Macro Realty Developments Pty Ltd [2016] FCA 292, that an agreement may be void where directors have purported to fetter wholesale their discretions in advance in relation to the general control and management of the company, and that doing so would itself breach their duties, including the statutory duty in s 181(1).
Where the line actually falls
Between those two positions sits the practical answer, and it comes from the High Court.
There are many kinds of transactions in which the proper time for the exercise of the directors' discretion is the time of the negotiation of a contract, and not the time at which the contract is to be performed. ... If at the former time they are bona fide of opinion that it is in the interests of the company that the transaction should be entered into and carried into effect, I see no reason in law why they should not bind themselves to do whatever under the transaction is to be done by the board.
Thorby v Goldberg (1964) 112 CLR 597 at 605 to 606, Kitto J
So directors can commit the board to the steps a transaction requires, decided at the time they enter it and on their genuine view of the company's interests. What they cannot do is hand over the running of the company in advance. Two limits travel with Thorby and should travel with any clause drafted on it: every member of the company was a party to the agreement in that case, and Menzies J expressly guarded against being taken to decide that a director can in an ordinary case bind himself to exercise his powers in a particular way. A clause obliging a nominee to vote as instructed on all matters is in the second category. A clause obliging the board to do the specific things needed to carry a particular agreed transaction into effect is in the first.
Reserved matters, and the line a veto must not cross
A reserved matters list, sometimes called consent matters or veto rights, is the minority shareholder's main protection, and it is also the clause most likely to be drafted over the line. The list says that certain decisions require the consent of a named shareholder or of a specified majority, whatever the board would otherwise decide.
Reserved matters that operate at shareholder level are unobjectionable. Shareholders may agree among themselves how they will vote their own shares, and that is what most of the list is doing. The risk appears when the clause purports to stop the board implementing a decision the directors consider to be in the company's best interests. That is the form that failed in Cycliq. The clause there required unanimous shareholder approval before the company could commence proceedings, and on its face prevented implementation of a board decision wherever the decision might have a material impact on a particular shareholder's interests, including where the decision was in the company's best interests. Cobby J held it impermissibly fettered the directors and was not valid and enforceable. That was a first instance decision on an interlocutory application, so it is not the last word, but it is a considered holding rather than an aside.
Two drafting habits keep a reserved matters list on the right side of the line. Frame each item as an obligation on the shareholders to exercise their votes in a particular way, rather than as a prohibition on the board. And keep the list to matters that genuinely change the bargain the investor bought into, rather than extending it to ordinary management.
Reserved matters that usually earn their place
- Issuing shares, options or convertible instruments, or creating a new class
- Amending the constitution or the shareholders agreement
- Selling the business or all or substantially all of the assets
- Borrowing above a stated figure, or granting security over the business
- Changing the nature of the business, or starting a materially different one
- Related party transactions, and any payment to a shareholder or their associates outside agreed remuneration
- Winding up, or appointing an administrator, other than where the directors form the view that they must
A veto over entering administration cannot be absolute, because the directors have their own exposure for insolvent trading and cannot be contractually prevented from acting on it.
Issuing shares, and the dilution the replaceable rules will not stop
Section 254D is a replaceable rule, and this is one of the places where the default is better than what many companies replace it with. Before issuing shares of a particular class, the directors of a proprietary company must offer them to the existing holders of shares of that class, as far as practicable in proportion to their existing holdings. The offer has to state the number of shares and the period for which it remains open, and anything not taken up may then be issued as the directors see fit.
Two things follow. First, because it is replaceable, a constitution adopted at incorporation may have displaced it without anyone noticing, and many standard constitutions do exactly that. Second, even where it applies, s 254D protects only against issues within a class. A company that issues a new class of preference shares carrying most of the economics has not breached it.
The protection worth having in the agreement is therefore wider than the statutory rule: a pre-emptive right on any issue of any equity or equity linked instrument, with a stated period to take it up, and a mechanism for a shareholder who cannot fund their share. Where the parties are also concerned about the price rather than only the proportion, an anti-dilution provision setting a floor, or requiring an independent valuation for any issue below a benchmark, does the remaining work.
Transfers: pre-emption, drag and tag
The share transfer provisions decide who your co-owners can become, and they are the reason most shareholders agreements are read for the first time years after signing.
The starting default for a proprietary company is generous to the board. Section 1072G, another replaceable rule, provides that the directors may refuse to register a transfer of shares in the company for any reason. That is a blunt instrument and it belongs to the directors rather than to the shareholders, so it is a poor substitute for a proper pre-emption regime. Check whether the constitution has kept it.
A workable regime has three parts, and they operate in sequence.
The three transfer mechanisms, and who each one protects
- Pre-emption gives the continuing shareholders the first chance to buy a departing shareholder's stake, usually pro rata, at a price fixed by the agreement's valuation mechanism or by a matched third party offer. It protects the group against an unwanted new co-owner.
- Tag along lets a minority holder join a sale by the majority on the same terms. It protects the minority against being left behind with a new and unknown majority owner.
- Drag along lets a stated majority compel the minority to sell into a whole of company sale. It protects the majority against a holdout blocking an exit, and it is what a trade buyer will insist on.
Why a drag along has to be agreed at the beginning
Drag along deserves particular care, and the reason is a High Court decision about doing the same thing the wrong way round.
High Court of Australia
Gambotto v WCP Ltd (1995) 182 CLR 432
HeldA company amended its articles so that a holder of 90% or more could compulsorily acquire the minority's shares. The amendment was invalid, and the Court divided on the reason. Mason CJ, Brennan, Deane and Dawson JJ held that such a power can be taken only if it is exercisable for a proper purpose and its exercise will not operate oppressively in relation to the minority, and that the tax and administrative benefits relied on were not by themselves a proper purpose. McHugh J held that the tax saving was a legitimate business objective that would have justified the expropriation, but that the company had not shown the full disclosure that fair dealing required. All five judges agreed that a proper purpose is not enough on its own: the alteration must also be fair in the circumstances.
The justification the plurality had in mind was narrow. An expropriation may be justified where it is reasonably apprehended that the continued shareholding of the minority is detrimental to the company, its undertaking or the conduct of its affairs, resulting in detriment to the existing shareholders generally, and where expropriation is a reasonable means of eliminating or mitigating that detriment. A shareholder competing with the company is the standard example. Wanting a cleaner group structure is not.
Note what did not save it. The price was supported by an independent valuation and exceeded net asset value. Fairness in this setting has a procedural half as well as a substantive one, and on McHugh J's reasoning it was the procedural half, disclosure, that the company failed.
The practical lesson is about sequence. We are describing how these clauses are built and why, rather than asserting that any particular drag along would survive a challenge. Gambotto concerned a power introduced later, by majority amendment, and imposed on a minority who had not agreed to it. A drag along agreed by every shareholder at the outset, and acceded to by every incoming shareholder, rests on consent rather than on a majority's later decision to change the rules. That is why the drag goes in at incorporation or at the investment round, and why the accession discipline earlier in this article is not administrative housekeeping.
And there is a statutory route that Gambotto does not govern
A shareholder who reaches 90% of a class does not have to amend anything. Part 6A.2 of the Corporations Act gives a 90% holder a compulsory acquisition power with its own protections, including a fair value test in s 667C which values the company as a whole and then allocates pro rata within the class without any discount for a minority parcel. Where Parliament has supplied a comprehensive procedure with its own fairness test, the Gambotto principles are not added on top of it: the New South Wales Court of Appeal so held for selective capital reductions in Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd [2001] NSWCA 427, where Giles JA said superadded Gambotto principles would be "conflicting and confusing". The detail of Part 6A.2 is beyond this article, but a minority told that expropriation is nearly impossible has been told something practically wrong.
What this means for you
If your company has no drag along and you now want one, you cannot simply pass a special resolution to insert it and expect it to hold. Ask instead for it to be agreed, and expect the shareholders being asked to agree to want something in return. A fair price is not by itself an answer to a minority who did not consent.
Leavers, and what triggers a compulsory offer
Most shareholders agreements in owner operated companies are really about what happens when one of the owners stops working in the business, and that is a different question from what happens when they sell. The mechanism has two halves and both have to be specified, because a court will not supply either.
The first half is the trigger. Death, permanent incapacity, resignation, termination for cause, breach of the agreement, insolvency of a corporate shareholder and a change of control of a corporate shareholder are the usual ones. The second half is the consequence, which is normally a compulsory offer of the leaver's shares to the others.
Between the two sits the good leaver and bad leaver distinction, and it does real work: it sets the price. A good leaver is typically offered fair value; a bad leaver is offered something less, often the lower of fair value and the amount they paid. Because the difference can be large, the definitions have to be tight, and the categories that are neither obviously good nor obviously bad, such as a founder who resigns after four years to do something else, need to be allocated deliberately rather than left to argument.
How the price gets set
An agreement should say who values, on what basis, and what happens if a party will not cooperate. A named firm or a person appointed by a named professional body, acting as expert and not as arbitrator, with the costs allocated in advance, resolves in weeks what an unspecified process resolves in years. Whether minority discounts apply, and whether the valuer is to disregard the fact of the departure, are the two questions that most often get missed and most often decide the number.
Deadlock in a fifty fifty company
A fifty fifty company with two directors has no way of deciding anything its owners disagree about, and the agreement is the only thing that can supply one. Before reaching for an elaborate mechanism, check the constitution for a casting vote, because a chair's casting vote converts an apparent deadlock into ordinary majority control and changes the entire analysis.
Where there is genuinely no casting vote, deadlock provisions run in escalating tiers, and the earlier tiers are the ones that actually get used.
The tiers, in the order they should run
- Referral upward. The dispute goes to the shareholders themselves, or to nominated senior people, within a stated period.
- Mediation, before a mediator agreed or appointed by a named body, with a fixed window.
- Expert determination, where the disagreement is about a fact or a number rather than about direction.
- A separation mechanism, being a buy sell provision or an agreed sale of the company.
The best known separation mechanism is the shotgun clause, under which one side names a price and the other must either buy at that price or sell at it. It is elegant, and it favours the party with better access to funding, which in an owner operated company is often not the party with the better case. Where the parties are unequal in that way, an agreed sale process run by a nominated adviser is fairer, and it should be drafted as such rather than adopted from a precedent because it appeared there.
One drafting point applies to all of these tiers. A dispute resolution procedure that must be exhausted before proceedings are commenced should say so expressly and should state its own steps and time limits precisely, because a court asked to stay proceedings for non compliance will look for exactly that. Where the parties are in different countries, the same clause has to deal with the seat and the governing law, and a defective one causes its own litigation, which we have written about in the context of pathological arbitration clauses.
When it breaks down: oppression, and what a court can order
The statutory oppression remedy sits behind every shareholders agreement and cannot be contracted out of. Under s 232, the court may make an order where the conduct of a company's affairs, an actual or proposed act or omission, or a resolution of members, is either contrary to the interests of the members as a whole, or oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member, whether in that capacity or in any other capacity.
The breadth of s 233 is what makes the remedy useful. The court can make any order it considers appropriate, and the section lists examples including that the company be wound up, that the existing constitution be modified or repealed, that the conduct of the company's affairs be regulated in the future, and that shares be purchased by a member. In practice the buyout order is the common outcome in a private company, and it is why an oppression claim is often the real alternative to a deadlock clause that does not work.
The relationship with the agreement runs both ways. Conduct that breaches the shareholders agreement is not automatically oppression, and conduct that complies with the agreement is not automatically safe from it. What the agreement does is set the expectations against which fairness is measured, which is a reason to write down the commercial understanding rather than leave it as something everyone assumed.
The cross-border company, and where the accountant comes in
Where one of the shareholders sits outside Australia, three questions arrive that a domestic precedent does not address. We act for German and other European groups holding Australian subsidiaries, and for Australian companies taking on foreign investors, and the same three come up every time.
The first is the resident director requirement. A proprietary company must have at least one director who ordinarily resides in Australia, and a foreign group that has not solved this before completion has a structure it cannot register. The second is foreign investment approval, which turns on the identity of the investor and the nature of the business rather than on the size of the stake alone, and which has to be assessed before the share subscription is signed rather than after. The third is the mechanics of a dispute across borders, being governing law, jurisdiction or arbitration, and service.
There is a fourth question, and it is not a legal one. The tax consequences of a shareholding structure, of a share issue, of a buyback and of a leaver's exit are an accountant's work, and they frequently need to be settled before the documents are drafted rather than after. Where a restructure, a share transfer or a capital raise is in contemplation, we say so at the outset and we work alongside a tax accountant on it. We can recommend one. Getting the numbers after the drafting is the usual reason we see a completed structure having to be unwound.
Where this article stops
This is an article about proprietary companies with a small number of shareholders, which is what most Australian shareholders agreements govern. It does not deal with listed companies, the takeovers provisions in Chapter 6, or the compulsory acquisition regime in Chapter 6A, all of which change the analysis of transfers and drag along considerably.
It does not deal with employee share schemes, with unit trusts or other structures that are not companies, or with the tax treatment of anything described in it. Three further subjects belong in a shareholders agreement and are not covered here, each because it deserves its own treatment: dividend and distribution policy, which is usually the founders' central economic term; funding obligations and shareholder loans, being what happens when the company needs money and one holder will not or cannot contribute; and restraints of trade on a departing shareholder, which are the natural companion of the leaver provisions above. And it states the law of the Commonwealth as it applies to Australian companies; where a shareholder or the company sits in another jurisdiction, that jurisdiction's company law will have something to say about the same questions and will not always say the same thing.
Related reading on this site: directors' duties and the compliance calendar, which covers the obligations a nominee director takes on personally, and what happens when a shareholder fails to perform. For the broader practice, see our expertise and our track record.
