Many family companies in Australia were set up quickly. A parent registered a Pty Ltd, adopted a standard constitution or simply relied on the replaceable rules, and issued shares to a spouse and later to the children. For years nobody looked at the paperwork, because the family made decisions around the dinner table.
That works while the founder is in charge. It stops working when the children have their own spouses and plans, when one sibling lives in Singapore or Shanghai, or when the founder steps back. Then the family discovers that its “understanding” about who decides what, and what happens if someone leaves, is not written down anywhere that binds anyone.
A shareholders’ agreement turns the parts of that understanding which must be enforceable into legal obligations. This article explains why the constitution alone is usually not enough, and which clauses to consider.
Why the constitution and replaceable rules are not enough
Every Australian company is governed by its constitution, the replaceable rules in the Corporations Act 2001 (Cth), or both. These rules are deliberately general. For example, in a proprietary company they give existing shareholders a first offer of new shares in proportion to their holdings (section 254D), allow the directors to refuse to register a share transfer for any reason (section 1072G), and let members remove a director by resolution (section 203C).
What the rules do not deal with is what families actually argue about: whether a son-in-law can end up owning shares, what happens to a sibling’s shares on divorce, how a departing sibling is paid out and at what price, and who has the final say on dividends or selling the main property. A constitution can be amended to cover some of this, but a constitution is a public-facing document that can be changed by special resolution. A shareholders’ agreement is a private contract between the shareholders (and usually the company), which generally can only be changed with the consent of the parties to it.
In our view, use both: check that the constitution does not conflict with the agreement, and state that the agreement prevails between the parties.
Decide what must be binding
A family charter usually carries moral weight rather than legal force. Not every family wish should become a contractual obligation. Choose the matters where a breach would genuinely damage the business or the family, and put only those into the agreement.
Before drafting, follow the chain of control: the family trust’s appointor, the trustee company, the shares, the board. Find where one person can act alone, and ask who checks that power.
Key clauses for a family company
Pre-emptive rights and transfer restrictions
The core protection for most families is keeping shares in the family. The agreement can require any shareholder who wants to sell to offer the shares first to the other shareholders, and can define “permitted transferees” such as lineal descendants or a family trust controlled by the shareholder. Transfers to anyone else need the consent of the others or are prohibited outright.
Death and incapacity
The agreement should say what happens to a shareholder’s shares on death or loss of capacity. Options include allowing the shares to pass under the shareholder’s Will to permitted family members only, or giving the remaining shareholders an option or obligation to buy them at a set price. The agreement should line up with each shareholder’s Will and enduring power of attorney, otherwise the documents may pull in different directions.
Divorce and relationship breakdown
A shareholders’ agreement cannot stop the Federal Circuit and Family Court of Australia from treating shares as property of a marriage or de facto relationship. What it can do is give the family a right to buy back shares if a court orders them transferred to a former spouse, and restrict a former spouse from becoming a shareholder.
Buy-sell triggers and valuation method
List the events that start a compulsory or optional sale: death, permanent incapacity, bankruptcy, ceasing employment in the business, serious breach of the agreement, or simply a decision to exit. Then set out how the price is fixed. Common approaches are an independent valuer, an agreed formula reviewed each year, or a valuation agreed between the parties with a valuer as the fallback. Say whether a minority discount applies.
Reserved matters and voting
Some decisions should not be left to a simple board majority. A list of reserved matters might include selling the main business or property, borrowing above a set limit, issuing new shares, changing the dividend policy, employing family members and their pay, or admitting a new shareholder. These can require unanimous or high-majority approval.
Board appointment rights
Each branch of the family, or each sibling, can be given the right to appoint and remove a director, and an independent director can be added once the second generation takes over.
Drag-along and tag-along
If a buyer offers for the whole company, a drag-along clause lets a large majority require the others to sell on the same terms. A tag-along clause protects minority holders by letting them join a sale on the same terms the majority receives.
Dividend policy
Siblings who work in the business often want profits reinvested. Siblings who do not work in it often want income. A written dividend policy, for example a target percentage of after-tax profit subject to the board’s solvency judgment, removes a recurring argument.
Deadlock and dispute resolution
The agreement should define deadlock and set out a staged process to resolve it: a family meeting, then a facilitator, then mediation, then expert determination or arbitration, with court as the last resort. Buy-sell mechanisms can be included for a deadlock that cannot be resolved.
Equal ownership, different roles
Parents often give children equal shares. That is fair, but equal ownership does not have to mean equal management.
The agreement can align three things deliberately: the economics (who receives dividends and capital), the governance (who sits on the board and votes on reserved matters) and the management (who is employed and on what terms). For example, all siblings could hold equal ordinary shares and appoint one director each, while the sibling who runs the business is paid a market salary under an employment contract approved by the board.
A practical checklist
- Collect the current constitution, share register, any trust deeds that hold shares, and every shareholder’s Will and power of attorney.
- Map who controls what: trusts, trustee companies, shares, board seats.
- Hold a family conversation about goals before any drafting. Discuss who wants control, who wants income and who might want to leave.
- Decide what must be binding and what can stay in a non-binding family charter.
- Stress-test the draft against scenarios: death, incapacity, divorce, a sibling wanting out, a family member moving overseas, a founder who will not step back.
- Amend the constitution so it is consistent with the agreement.
- Review the agreement every few years and at each generational change.
Frequently asked questions
Do I need a shareholders agreement if I have a company constitution?
Usually yes, for a family company with more than one shareholder. The constitution deals with the company’s machinery, while a shareholders’ agreement deals with the relationship between the owners, such as transfers, exits, valuation and deadlock. The two should be drafted to work together.
Can a shareholders agreement stop shares going to an in-law?
It can restrict voluntary transfers to non-family members and give the family a right to buy shares that would otherwise pass outside the family. It cannot override a court in a property settlement.
Can children have equal shares but not equal control?
Yes. Voting rights, board seats and management roles can be set separately from ownership through the agreement, different share classes and employment contracts.
How Chua Tan Associates can help
We prepare and review shareholders’ agreements and constitutions for family companies, starting with a conversation about what the family actually wants and tracing who holds control through trusts, trustee companies and the board. Justin Chua is a Nationally Accredited Mediator and an Accredited Family Business Advisor with an accounting background, so we can facilitate the family discussions that come before drafting and work alongside your accountant on tax. We act for families across Australia and overseas, coordinate with lawyers in other countries where shareholders live abroad, have a notary public for documents signed overseas, and advise in English, Mandarin and Cantonese.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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