Partnership and Shareholder Agreements: Why and What to Include

When everything is going well, no one thinks about a contract

Most partnerships and companies begin in an atmosphere of optimism — friends or colleagues who share a business vision, with no one wanting to start by asking “what happens if we disagree?” But that moment — when everyone still agrees — is the best time to put an agreement in place.

When a disagreement does happen, the warm atmosphere needed to negotiate is gone. An agreement drawn up while the skies are clear is the one that applies when the storm hits.

Partnership Agreement — for a partnership structure

If you run your business as a partnership (two or more people operating the business together), a Partnership Agreement sets out:

Sharing profits and losses: The default split under state law is usually equal between the partners — but you can agree on something different if you have an agreement.

Capital and asset contributions: Who contributes how much, which assets belong to the business, and which are personal.

Business decisions: Which decisions need all partners to agree, and which a single partner can make on their own.

Exit and buyout: If a partner wants to leave, what is the process? Who buys out their share, and at what price? Without an agreement in place, this is the single biggest source of disputes.

Death or incapacity: What happens to a partner’s share if they pass away or are no longer able to take part?

Without a Partnership Agreement, most disputes are resolved under your state’s partnership law — which may not be what you want.

Shareholders Agreement — for a company structure

For a Pty Ltd company, a Shareholders Agreement (also called a Shareholders’ Deed) supplements the Constitution (the company’s rules):

Minority shareholder rights: What rights do shareholders with a small stake have? Can they be forced out of the company?

Pre-emptive rights: If a shareholder wants to sell their shares, do the remaining shareholders have the right to buy them first before they are offered to outsiders?

Drag-along and tag-along: A drag-along right lets majority shareholders force the minority to sell when a buyer wants the whole company. A tag-along right lets minority shareholders join that transaction on the same terms.

Deadlock resolution: When a company has two shareholders holding 50/50 and they cannot agree, how is it resolved? Without a deadlock resolution mechanism, the company can be paralysed.

Non-compete between shareholders: Restricting shareholders from doing something that competes with the company.

Funding obligations: Do shareholders have to put more money into the company if it is needed?

Company Constitution — the legal foundation

When you set up a company, you can use the default Replaceable Rules in the Corporations Act or write your own Constitution. For a company with several shareholders, a tailored Constitution combined with a Shareholders Agreement is usually the better choice.

The Constitution and the Shareholders Agreement must be consistent with each other — if they conflict, it creates legal complications.

Why you should not use an off-the-shelf template

A template found online does not reflect the specifics of your business, does not capture the private arrangements between the parties, and may not suit your state’s law. Have a solicitor draft it, or at least review it once — this cost is small compared with the cost of a dispute later on.

When to put one in place

Put one in place from the very start, before you begin operating. If the business is already running and does not have one, do it now — late is still better than never. It is harder once the business is profitable and each party has started to form different expectations, but it is still essential.