Partnership & Shareholder Agreements in Australia

When two or more people own or operate a business together, it is important to document how the relationship is intended to work.

Partnership agreements and shareholders agreements can set out matters such as decision-making, ownership, funding, profit distributions, exits and what happens when circumstances change.

The right agreement depends on the structure of the business. A partnership agreement is used for a partnership, while a shareholders agreement is generally used where a business operates through a company with multiple shareholders.

This guide explains the role of each agreement and some of the key matters Australian business owners should consider.

Table of Contents

• Why Have an Agreement Between Business Owners?
• Partnership Agreement vs Shareholders Agreement
• Shareholders Agreements, Constitutions and Company Rules
• Key Clauses to Consider
• Exit Arrangements and Ownership Changes
• Independent Legal Advice

Why Have an Agreement Between Business Owners?

Many business relationships start with a shared idea and an understanding between the owners about how the business will operate.

As the business develops, questions can arise about matters such as:

• who is responsible for particular decisions;
• how profits are distributed;
• what happens if the business requires additional funding;
• how new owners can join the business;
• what happens if an owner wants to leave;
• how shares or partnership interests can be transferred;
• what happens if the owners cannot agree on an important decision; and
• how intellectual property and other business assets are dealt with.

A written agreement can document these arrangements before an issue arises and provide the owners with a clearer framework for dealing with future changes.

At Rise Legal, we prepare partnership and shareholders agreements for Australian businesses using fixed-fee proposals with the scope and costs confirmed upfront.

Partnership Agreement vs Shareholders Agreement

The type of agreement you need depends on the legal structure through which the business operates.

When Is a Partnership Agreement Used?

A partnership agreement is commonly used where two or more people carry on business together as partners.

Each Australian State and Territory has legislation governing partnerships. In a general partnership, partners can have unlimited liability for the debts and obligations of the partnership.

A partnership agreement does not remove a partner’s liability to third parties. However, it can document how responsibilities, financial contributions, profits, losses and other matters are to be dealt with between the partners.

A partnership agreement may address matters such as:

• the ownership interests of each partner;
• initial and future capital contributions;
• how profits and losses are allocated;
• roles and responsibilities;
• decision-making and voting;
• drawings or remuneration;
• ownership of intellectual property;
• admitting new partners;
• retirement or departure of a partner;
• death, incapacity or insolvency of a partner; and
• dissolution of the partnership.

If the partners do not have a written agreement, or the agreement does not address a particular issue, the relevant partnership legislation may apply.

When Is a Shareholders Agreement Used?

A shareholders agreement is generally used where a business operates through a company and there are two or more shareholders.

It is a private contractual agreement that can set out the commercial arrangements between the shareholders and, depending on the drafting, may also involve the company itself.

A shareholders agreement can deal with matters such as:

• share ownership;
• director appointment rights;
• decision-making and reserved matters;
• shareholder voting;
• funding requirements;
• dividend policies;
• share transfers;
• new shareholders;
• exit arrangements;
• deadlock procedures;
• restraint provisions; and
• intellectual property.

If you are still deciding which structure is appropriate for your business, you can also read about our business structuring services. Tax and accounting consequences should be discussed with an appropriately qualified accountant or tax adviser.

Shareholders Agreements, Constitutions and Company Rules

Australian companies are governed by the Corporations Act 2001.

Depending on the company, its internal management may be governed by the replaceable rules contained in the Corporations Act, a company constitution, or a combination of both.

A proprietary company can generally rely on the replaceable rules without adopting its own constitution. If a company wants to replace or modify particular replaceable rules, this is generally dealt with through its constitution.

A shareholders agreement is separate from the constitution and can sit alongside the company’s governance arrangements. It is commonly used to document commercial arrangements between shareholders that go beyond the basic internal-management rules.

For example, a shareholders agreement might deal with:

• which decisions require shareholder approval;
• which decisions require a higher voting threshold;
• restrictions on transferring shares;
• rights of first refusal;
• funding obligations;
• director appointment rights;
• exit arrangements; and
• procedures for dealing with deadlock.

Where a company has a constitution and a shareholders agreement, the documents should be prepared so they operate consistently with each other and with the Corporations Act.

Key Clauses to Consider

There is no single set of provisions that is appropriate for every business. The terms should reflect the ownership structure, the roles of the owners and how they intend to operate the business.

Decision-Making and Voting

The agreement can specify how decisions are made and which decisions require additional approval.

Day-to-day operational decisions may be dealt with differently from significant matters such as:

• taking on substantial debt;
• issuing new shares;
• selling a significant business asset;
• changing the nature of the business;
• entering significant contracts;
• appointing or removing directors; or
• selling the business.

Depending on the ownership structure, certain decisions might require a simple majority, a higher percentage of votes or unanimous approval.

Funding and Capital Contributions

The agreement should consider what happens if the business requires additional funds.

For example, the owners may agree that additional funds are contributed in proportion to their ownership interests, provided as shareholder or partner loans, or raised from an external source.

The document can also address what happens if one owner is unable or unwilling to contribute further funds.

Profit Distributions and Dividends

Owners may want to document how profits are to be dealt with, including the circumstances in which profits may be retained in the business or distributed to the owners.

For a company, any arrangements concerning dividends must operate consistently with the Corporations Act and the company’s financial position.

Intellectual Property

The agreement should clearly address the ownership and permitted use of relevant intellectual property and other business assets.

This can include trade marks, logos, domain names, software, written material, confidential information and other intellectual property used by the business.

Where appropriate, separate assignments or licences may also be required. You can read more about our trade mark and intellectual property services.

Restraints

An agreement may include restraint provisions intended to restrict certain competitive activities by an owner after they leave the business.

The enforceability of restraint provisions depends on the circumstances and applicable law, so these clauses should be drafted carefully rather than treated as a standard restriction that will automatically apply.

Exit Arrangements and Ownership Changes

One of the most useful functions of a partnership or shareholders agreement is setting out what happens when an owner wants or needs to leave.

Exit provisions can address circumstances such as:

• an owner voluntarily wishing to sell their interest;
• retirement;
• death or incapacity;
• insolvency;
• serious breach of the agreement;
• termination of an owner’s employment or involvement in the business; and
• sale of the entire business.

Transfers of Shares or Partnership Interests

The agreement can impose conditions on the transfer of an ownership interest.

For example, existing owners may be given the opportunity to purchase an interest before it can be offered to an external buyer.

The agreement can also specify how the price is determined, such as through an agreed formula or independent valuation process.

Deadlock

Deadlock can arise where owners with equal or similar voting power cannot agree on an important decision.

Depending on the ownership structure, an agreement may include procedures for dealing with deadlock, such as:

• further meetings between the owners;
• referral to an agreed process;
• buy-sell mechanisms;
• valuation procedures; or
• an agreed process for an owner to exit.

The appropriate mechanism depends on the size of the business, the ownership percentages and the commercial relationship between the parties.

Independent Legal Advice

Where an agreement is being prepared for several business owners, their interests may not always be identical.

Depending on the circumstances, it may be appropriate for individual partners or shareholders to obtain independent legal advice about their rights and obligations before signing.

How Rise Legal Can Help

Rise Legal assists Australian business owners with preparing and reviewing partnership agreements and shareholders agreements.

Our work can include documenting:

• ownership arrangements;
• roles and responsibilities;
• decision-making processes;
• funding arrangements;
• share or interest transfers;
• exit provisions;
• deadlock processes;
• restraints; and
• intellectual property arrangements.

We provide fixed-fee proposals for defined legal work so the scope and legal fees are confirmed before work begins.

Contact Rise Legal to request a fixed-fee proposal for a partnership or shareholders agreement.

Frequently Asked Questions

Can we have a shareholders agreement if we already have a company constitution?

Yes. A company may have a constitution, rely on the replaceable rules in the Corporations Act 2001, or use a combination of both.

A shareholders agreement is a separate private contract between the relevant parties and can deal with commercial matters such as decision-making, share transfers, funding, exits and deadlock.

Where a company has both a constitution and a shareholders agreement, the documents should be prepared so they operate consistently.

Does a proprietary company have to have a constitution?

No. A proprietary company can generally rely on the replaceable rules in the Corporations Act 2001 instead of adopting its own constitution.

A company may also adopt a constitution or use a combination of a constitution and the replaceable rules.

Is a proprietary company’s constitution publicly registered with ASIC?

Generally, a proprietary company is not required to lodge its constitution with ASIC simply because it has one. It should retain the constitution with its company records.

Different requirements can apply to public companies and in particular circumstances.

What happens if we don’t have a written partnership agreement?

If there is no written partnership agreement, the relevant partnership legislation in the applicable State or Territory will govern matters that are not otherwise agreed between the partners.

Those laws contain default rules dealing with issues such as the relationship between partners, financial arrangements and dissolution.

A written agreement allows the partners to document arrangements that reflect how they intend to operate the business, subject to applicable law.

How is a shareholders agreement different from a partnership agreement?

A shareholders agreement relates to ownership arrangements in a company, while a partnership agreement relates to people carrying on business together as partners.

The legal structures are different, so the rights, obligations and risks associated with each structure are also different.

Does a shareholders agreement need to be registered with ASIC?

A shareholders agreement is generally a private contract and is not registered with ASIC simply because the shareholders enter into it.

Its legal effect depends on the terms of the agreement, the parties to it and the applicable law.

How often should a shareholders agreement be reviewed?

It is sensible to review the agreement when there is a significant change in the business or ownership structure.

This might include a new shareholder joining, an owner leaving, a significant change in funding arrangements or a change to the way the business operates.

A periodic review can also help confirm that the agreement still reflects the current arrangements between the owners.

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This article provides general information only and does not constitute legal advice. It does not take into account your specific circumstances. Laws and regulatory requirements may change, so you should obtain legal advice relevant to your situation before acting on the information contained in this article. Liability limited by a scheme approved under professional standards legislation.

 

 

 

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