Understanding the Difference Between an Australian Company Constitution and a Shareholders Agreement
One of the most important things to consider when forming a company in Australia is the legal documentation that you use to govern the business. Many founders and investors make the mistake of relying solely on the Australian company constitution, failing to recognize that it may not provide the depth of protection that they need. If you want to ensure that your company is protected, then it is essential to understand the difference between an Australian company constitution and a shareholders agreement.
An Australian company constitution provides the basic rules for how your business will operate. It is a legal document that outlines the responsibilities and duties of the company's directors, how decisions will be made, director's powers, share structure, and how meetings will be conducted. However, it does not usually offer enough protection for the company and its shareholders.
A Shareholders Agreement is a more detailed legal document that outlines, in depth, the role and responsibility of the shareholders within the company and how they relate to one another. It is a private, binding agreement between shareholders that is typically entered into after the formation of the company. It provides much more detail than the company constitution, making it more protective for shareholders.
The Shareholders Agreement offers a more specific framework for shareholders to operate within. It clearly defines the rights and responsibilities of each shareholder, including how to resolve disputes, and outlines how shareholders can buy and sell their shares in the company. It also provides protection against the dilution of shareholders' rights, ensuring that each shareholder has an equal say in the company's decision-making process.
Unlike the Australian company constitution, a Shareholders Agreement is a living document, and it can be updated as needed. This means that if there are changes to the business structure or key personnel, the Shareholders Agreement can be amended to reflect these changes. This makes it a more customized and flexible document that can provide better protection for everyone involved.
Another benefit of a Shareholders Agreement is that it can include specific provisions to protect minority shareholders. If they have less than 50% of the voting shares and are worried about being out-voted in major decisions, a Shareholders Agreement can include provisions to protect their rights and provide them with additional voting power.
In conclusion, while an Australian company constitution is a necessary document, it is best to have a shareholders agreement in place as it provides a more comprehensive framework for governing a company. It offers much more specific protection for shareholders, and it is updated as needed to reflect changes in the business structure. A Shareholders Agreement can make a significant difference in protecting your interest, and if you're a founder or an investor, it’s important to ensure that you have a well-drafted shareholders agreement in place.
How can we help you?
Merton Lawyers are experts in corporate governance and preparing bespoke shareholders agreements. To discuss how we can assist you, please contact our corporate team to arrange for an initial consultation.
