Understanding Shareholder Agreements: Why Every Business Needs One

A shareholder agreement is one of the most important legal documents a company can have—but it’s often overlooked. Whether you’re a start-up, a family-run business, or a growing company bringing in investors, a carefully drafted shareholder agreement protects your interests, defines roles, and helps avoid costly disputes.

At MCB Lawyers, we regularly assist business owners and company directors across Manly, Wollongong, and Parramatta with drafting, reviewing, and enforcing shareholder agreements tailored to their commercial needs.

What is a Shareholder Agreement?

A shareholder agreement is a private contract between the shareholders of a company that outlines their rights, responsibilities, and obligations. It complements the company’s constitution and offers a clear framework for managing the business and handling internal matters not covered by legislation.

Why is a Shareholder Agreement Important?

Without a clear agreement, disputes can arise over issues such as management decisions, share transfers, or dividend distribution. A properly drafted shareholder agreement can:

• Define ownership structures and voting rights

• Govern profit sharing and dividend payments

• Set rules for selling or transferring shares

• Establish dispute resolution procedures

• Address what happens in the event of death, divorce, or disability

• Protect minority shareholders or provide exit strategies for major stakeholders

It is a crucial risk management tool that can save your business significant time, money, and stress in the long run.

Common Clauses in Shareholder Agreements

While no two agreements are the same, there are common clauses most businesses should consider:

• Pre-emptive rights: Giving existing shareholders the first right to purchase shares before they’re offered to outsiders.

• Drag-along and tag-along rights: Ensuring minority shareholders are protected or included during a major sale.

• Dispute resolution procedures: Providing a clear method for resolving disagreements—before they escalate into litigation.

• Reserved matters: Outlining key business decisions that require unanimous or majority shareholder approval.

Do You Need a Lawyer to Draft One?

Yes. Shareholder agreements are legal documents with serious implications. DIY templates can be risky—especially if they don’t comply with the Corporations Act 2001 (Cth) or address your specific business structure. A commercial lawyer ensures the agreement is enforceable, tailored, and aligned with your long-term goals.

When Should You Put One in Place?

The best time to implement a shareholder agreement is at the beginning of the business relationship or when a new shareholder joins. It is far easier to agree on terms while everyone is aligned, rather than during a dispute.

However, even if your business is already running without one, it is never too late. A shareholder agreement is a smart investment in your company’s stability and future.