Shareholders agreements

Why the constitution is not enough

A company constitution deals with the company's internal management. It does not say who gets to be a director, what happens when a founder leaves, how the company is funded, or what a departing shareholder's shares are worth. A shareholders agreement does, and it binds the shareholders as a contract between them.

The clauses that matter when it goes wrong

• Pre-emptive rights. A shareholder wanting to sell must offer to the others first, at a price fixed by a stated mechanism. Without it, your co-founder can sell to anyone.
• Drag along and tag along. Drag lets a majority force a minority into a sale of the whole company, which is what a buyer will require. Tag lets a minority join a majority's sale on the same terms. A company without drag rights is materially harder to sell.
• Leaver provisions. Distinguishing a good leaver from a bad leaver, and setting a different valuation for each. This is the clause that determines what happens to a departing founder's 40 per cent.
• Valuation mechanism. Name the method and the appointing body. Name the valuer and who appoints them. "Fair value as agreed" leaves nothing to enforce.
• Reserved matters. Decisions requiring unanimous or special consent: issuing shares, borrowing over a threshold, changing the business, related party transactions.
• Deadlock. On a 50-50 company, what happens when the two of you disagree. A shootout clause, an independent chair with a casting vote, or a defined exit. Without one, the only remedy is an oppression application under s 232 of the Corporations Act 2001 (Cth) or a winding up on the just and equitable ground under s 461(1)(k), which is slow and destroys value.
• Vesting. Founder shares that vest over time. The single most useful clause where one founder may leave in year one.
• Restraint and IP assignment. Confirming that everything created for the business belongs to the company, not to the founder who wrote it.