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Do I Need a Shareholders Agreement and Company Constitution?

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If you have set up a company and have more than one shareholder (or plan on bringing on more shareholders), it’s time to think about your legal documents seriously. A company will be managed by a combination of:

  • the Corporations Act 2001 (Cth) (the Act);
  • company constitution; or
  • shareholders agreement.

A shareholders agreement and company constitution governs how directors and shareholders manage the company. These documents are especially important if you intend to grow your business or bring investors on board.

What is a Shareholders Agreement?

A shareholders agreement sets out the relationship between shareholders and directors of the company. Compared with a company constitution, it more fully defines the rights and obligations of the parties. A shareholders agreement covers the following key issues:

  • the number and appointment of directors and board members,
  • board meetings,
  • directors duties,
  • shareholder meetings,
  • dispute resolution,
  • issuing new shares,
  • issuing dividends, and
  • transferring and selling shares.

Ensure that you tailor your shareholders agreement to cover the process for resolving disputes between shareholders and directors. If there is an inconsistency between the two documents, the shareholders agreement usually contains an express provision that the shareholders agreement prevails when both documents’ clauses cannot co-exist.

Company Constitution

A company constitution sets out the relationship between the company and key members such as the director, shareholder and company secretary. A constitution often covers many of the same issues as a shareholders agreement but in less detail. When you register a company with ASIC, you will choose whether to: 

  • rely on the replaceable rules set out in section 141 of the Act; or
  • adopt a standard constitution provided by a law firm; or 
  • adopt a bespoke constitution. 

You may choose to adopt a bespoke constitution when you are:

  • issuing various classes of shares with differing rights and obligations; 
  • wanting to set a minimum or a maximum number of directors; or 
  • wanting to vary the standard replaceable rules. 

After all, standard clauses may not always suit your company. 

Key Takeaways

The replaceable rules will govern your company if you don’t have a shareholders agreement or constitution. Although these may be suitable for some small businesses, most will require tailored documents. Depending on your business’ size and growth goals, you may choose to have both documents in place.

If you have any questions or need assistance drafting your company’s legal documents, get in touch with our specialist business structuring lawyers on 1300 544 755.

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