Shareholders Agreement and Companies Constitution

29 September 2025 in Business Law | 5 min read | skip to FAQs

This article explores company’s shareholders’ agreement, company’s constitution and replaceable rules.

When establishing a company, it is essential to understand the frameworks that govern its internal management. The primary mechanisms include the company’s constitution, replaceable rules set out in the Corporations Act 2001 (Cth) (“Corporations Act”), and shareholder agreements.

Background

1. The previously used terms of company memorandum or articles of association are now referred to in Australia as company constitution.
2. A company’s internal management may be governed by a constitution, replaceable rules or a combination of both, pursuant to section 134 of the Corporations Act 2001 (Cth).

Replaceable Rules 

Replaceable rules are provisions of the Corporations Act that govern a company’s internal management unless the company adopts its own constitution to modify or replace these rules pursuant to section 135(2) of the Corporations Act. They apply to companies registered after the commencement of the Company Law Review Act 1998, which came into effect on 1 July 1998, or to companies that choose to repeal their constitution.

Companies registered before 1 July 1998 are deemed to retain their existing constitutions unless they opt for the replaceable rules.

Key areas governed by replaceable rules include:

1. Officers and employees (e.g., voting and completion of transactions by directors of proprietary companies under section 194 of the Corporations Act.
2. Inspection of books (e.g., company or directors allowing a member to inspect books under section 247D of the Corporations Act)
3. Director’s meetings (e.g., calling directors’ meetings under section 248C of the Corporations Act.
4. Meetings of members (e.g., calling of meetings of members by a director under section 249C of the Corporations Act)
5. Shares (e.g., dividend rights for shares in proprietary companies under section 254(W)2 of the Corporations Act.
6. Transfer of shares (e.g., registration of transfers under section 1072F of the Corporations Act)

Company’s Constitution

A company’s constitution is a set of rules for governing the company that overrides statutory replaceable rules under the Corporations Act. It is a contract between the company, each member, each director and the company secretary. While it is not compulsory for a company to adopt a constitution, it offers a structured approach to managing the company’s affairs. If a company decides to adopt a constitution, it can do so either before or after its registration under section 136 of the Corporations Act:

1. Adopting a Constitution Pre-Registration: According to section 136(1)(a) of the Corporations Act, the persons who have consented to be members of the proposed company must agree in writing to the terms of the constitution before lodging the application for registration.
2. Adopting a Constitution Post-Registration: A company may adopt a constitution after registration by passing a special resolution (section 136(1)(b) of the Corporations Act).

The Role of ASIC

For public companies, it is mandatory to lodge a copy of the constitution with the Australian Securities and Investments Commission (ASIC) under section 136(5) of the Corporations Act. If the public company is to have a constitution upon registration, a copy must be lodged with the application (section 117(3) of the Corporations Act).

Other (non public) companies are not required to lodge their constitution unless specifically requested by ASIC (section 138 of the Corporations Act). Further, a company must provide a copy of the constitution to a member within seven days of a written request under section 139 of the Corporations Act.

Shareholder Agreements

A shareholder agreement is a legally binding contract between a company and the company’s shareholders, that governs their respective rights and responsibilities in relation to the corporation (see Blount v Taft 295 NC 472; 246 SE 2d 763 (1978)). As such, unlike the statutory contract created by the Corporations Act, shareholder agreements are governed by ordinary contract law principles.

Compared to a company’s constitution, shareholder agreements are much more detailed in outlining the specific processes and mechanisms of a company in relation to, among others, the following matters:

1. Structure of Company and basic duties of the parties

2. Composition of the Board

3. Board meetings

4. Dividend policy

5. Dispute resolution

6. Deadlock procedures

7. Protection of the business

8. Confidential Information

9. Non-competition

10. Assignments and transfers of shares

11. Shareholder exit

12. Providing for shareholders as employees

Advantages of Adopting a Shareholder Agreement.

Protection of Minority Rights

A well-drafted shareholder agreement can enhance the protections afforded to minority shareholders, supplementing the basic infrastructure provided by the company’s constitution. Such agreements can include special provisions to significantly enlarge the legal protections given to minority shareholders by law.

Dispute Resolution

Shareholder agreements are invaluable tools for preventing, managing, and resolving disputes. They often include effective dispute resolution mechanisms and provisions for handling deadlocks, providing legal certainty and expanding the remedies available to parties who may be unfairly disadvantaged.

Protecting the Interests of Business Founders

As a business founder, a shareholder agreement can help protect your initial capital and investment while ensuring that you retain a decisive role in its future.

Providing a Mechanism for Shareholders to exit and receive Payment for their Shares

There is no market for the sale of shares in a proprietary limited company and the shareholders agreement provides the only sale mechanism.  Shareholder agreements are supplementary to the company’s replacement rules and constitution. They may be made between all shareholders and often include the company itself as a party to the agreement.

Key Takeaways

Understanding the interplay between a company’s constitution, replaceable rules, and shareholder agreements is crucial for effective corporate governance. While the replaceable rules provide a default framework, adopting a constitution and shareholder agreements can offer more tailored and robust governance structures, enhancing the company’s overall management and protecting shareholder interests.

It is important that any proprietary limited company has a shareholders agreement to, among other things, provide an exit strategy for shareholders.

 

How can BSM Sydney Lawyers assist you?

The highly experienced business lawyers at BSM Sydney Lawyer specialise in drafting shareholder agreements tailored to your unique circumstances. We go beyond what standardised templates provide and offer a highly responsive and personalised service. We can assist with all aspects of shareholders agreements. The senior business lawyers at Brander Smith McKnight Sydney law firm offer a free 20 minute consultation.

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