Buying out a shareholder: what to check in your shareholders agreement
Before buying out a shareholder, check the agreed valuation method, transfer approvals, payment terms and the departing owner's continuing obligations. Read the shareholders agreement alongside the constitution and any applicable replaceable rules. They may restrict an exit, but they do not guarantee a buyer or an agreed price.
This guide is for owners of Australian private companies considering a buyout. If you are leaving, the same contract review helps you understand your position. Review these business contracts before anyone commits to a price or completion date.
Three documents decide the exit
ASIC says a shareholder's rights may be set out in the replaceable rules, the constitution or a shareholders agreement. Read the agreement and constitution, then identify which statutory rules apply before anyone names a price.
The replaceable rules are default rules in the Corporations Act. A proprietary company can run on them without a constitution. They don't apply where one person is both the sole director and the sole shareholder.
The constitution is the company's own rulebook. ASIC calls it a contract between the company and its members, directors and secretary. It is also a contract between the shareholders. Where it is silent on a topic a replaceable rule covers, that rule applies.
The shareholders agreement is a separate contract between the owners. Most exit terms live here: price, first rights to buy, leaver terms, restraints and deadlock.
Changing the constitution takes a special resolution. That needs at least 75% of the votes cast by members.
| The question | Where to look first |
|---|---|
| Who can the leaving owner sell to? | The agreement's transfer and pre-emptive rights clauses, then the constitution |
| Can the board refuse to register the sale? | The constitution, or the replaceable rule in s 1072G |
| What is the price, and who sets it? | The agreement's valuation clause |
| When is the money paid? | The agreement, then the share sale deed |
| What does the leaver still owe? | The agreement's restraint and confidentiality clauses, and any employment contract |
| Who has guaranteed the company's debts? | Loan, lease and supplier guarantees, outside both documents |
Check that every current owner has signed the agreement. An owner who bought in later should have signed a deed joining it.
Transfer of shares when the agreement says nothing
Silence in the shareholders agreement does not by itself make every replaceable rule apply. Check the constitution and the company’s circumstances first. Where the relevant rules apply, they govern matters such as registration and meetings; they do not supply a complete exit process. ASIC lists each replaceable rule with the section of the Act behind it.
| What the leaving owner wants | What the default rule does | Section |
|---|---|---|
| To sell to an outside buyer | The directors of a proprietary company may refuse to register a transfer for any reason | s 1072G |
| To stop being a shareholder on signing | The seller stays the shareholder until the transfer is registered | s 1072F |
| A first right for the other owners to buy | None for existing shares. Existing owners get first offer on new shares only | s 254D |
| A meeting to settle it | The quorum is 2 members. With no quorum within 30 minutes, the meeting is adjourned | s 249T |
| A way through a tied board vote | The chair has a casting vote | s 248G(2) |
| A set price | No replaceable rule sets a price or a valuation method | — |
These rules do not create a valuation or require someone to buy. Although s 1072G gives directors broad registration discretion where it applies, it is not a licence to disregard directors’ duties, the constitution or enforceable commitments. Get advice if refusal is being used to block an agreed exit.
Buying out a shareholder: the price clause
Price is the clause to read first. The suggestions in this guide are illustrative contract negotiation requests, not statutory entitlements or terms that suit every company. A valuation clause usually takes one of 3 forms:
A formula, such as a multiple of earnings less net debt.
An independent valuer, agreed by the owners or appointed by a named body.
An agreed value, a figure the owners update each year.
Then check the details that move the number. They are the valuation date, any minority discount, who pays the valuer and how the price is paid.
Worked example 1: one company, three prices
These are illustrative figures. Three owners hold 40%, 40% and 20% of a company. Sam, with 20%, wants out.
The agreement prices the shares at 4 times average EBITDA for the last 2 financial years, less net debt. EBITDA means earnings before interest, tax, depreciation and amortisation.
EBITDA was $300,000 in the first year and $340,000 in the second. The average is $320,000. Four times that is $1,280,000. Less net debt of $180,000, the company is worth $1,100,000.
| How the clause is worded | Company value | Sam's 20% |
|---|---|---|
| 2-year average, no discount | $1,100,000 | $220,000 |
| 2-year average, 25% minority discount | $1,100,000 | $165,000 ($220,000 × 75%) |
| Last 12 months only, after a slow year ($260,000 EBITDA) | $860,000 ($260,000 × 4 − $180,000) | $172,000 |
Same company, same 20%. The wording alone moves Sam's price by up to $55,000.
Payment terms matter as much. Say the agreement allows 4 equal yearly instalments with no interest. Sam then gets $55,000 a year, and carries the risk that the buyer cannot pay the later instalments. Identify whether the buyer is another shareholder or the company itself.
| What the agreement says | What to ask for instead |
|---|---|
| Silent on a minority discount | Say in words whether a discount applies |
| Value "as determined by the directors" | An independent valuer, appointed by a named body if the owners can't agree |
| No valuation date | Value at the date the transfer notice is given |
| Paid "on terms agreed" | Paid in full at completion, or by instalments with interest and security |
Pre-emption rights in a shareholders agreement
A pre-emptive right gives the other owners the first chance to buy shares before an outsider can. The replaceable rules give one only for new shares, under s 254D. For an owner's existing shares, the right exists only if the agreement or the constitution creates it.
A pre-emption clause needs a working timetable. Without one, the leaver can be stuck between owners who won't buy and a board that won't register an outsider.
| What the agreement says | What to ask for instead |
|---|---|
| A right of first refusal with no time limit | 30 days for each owner to accept, then the leaver may sell to an outsider |
| An offer at a price the leaver names | An offer at the valuation clause price |
| Owners must buy all the shares or none | Shares not taken up are offered again, in proportion to holdings |
| Nothing about the board's power to refuse | The directors must register a transfer made under this clause |
The last row matters. Align the shareholders agreement with the constitution and bind the necessary parties; a promise between shareholders alone may not resolve how the company registers the transfer.
Drag-along and tag-along clauses
These clauses can matter when an owner sells to an outside buyer. Their triggers depend on the wording: a tag-along may apply to a controlling stake, while a drag-along may require the remaining owners to join a sale.
Drag-along: if owners holding a set share accept an offer for the whole company, the others must sell on the same terms.
Tag-along: if a majority owner sells, the minority can join the sale on the same terms.
There is no drag-along or tag-along among the replaceable rules. When buying out a minority shareholder, check whether the agreement has a drag-along, and on what terms.
| What the agreement says | What to ask for instead |
|---|---|
| A drag-along at 51% | A higher threshold, such as 75% |
| On terms the majority accepts | The same price and terms per share for every owner, paid at completion |
| No tag-along | A tag-along on any sale that passes control |
| The minority gives warranties on the whole business | The minority warrants only that it owns its own shares |
Leaver clauses: good leaver, bad leaver
A leaver clause says what happens to an owner's shares when they stop working in the business. It usually splits leavers in two. The agreement may give a good leaver market value and a bad leaver a discounted price. Those labels have no single price formula: read the definitions, triggers and valuation provisions together.
Worked example 2: a definition worth $550,000
These are illustrative figures. Two founders each own 50% of a company valued at $1,200,000. Alex paid $50,000 for that 50% three years ago. Alex resigns to start something new.
The agreement says a good leaver gets market value. A bad leaver gets the lower of market value and the amount paid. Market value of Alex's 50% is $600,000.
| How "bad leaver" is defined | Alex is a | Alex's price |
|---|---|---|
| Anyone who resigns within 5 years | Bad leaver | $50,000 |
| Only someone dismissed for serious misconduct or in breach of the agreement | Good leaver | $600,000 |
| A step-down: 20% of the shares move to market value each year | 3 of 5 years in | $380,000 (60% × $600,000 + 40% × $50,000) |
One definition is worth $550,000 to Alex, and the same amount to the owners who stay.
If the leaver is also an employee, include an employment contract review. Check whether resignation or dismissal triggers the share clause, and keep the employment exit and share transfer consistent.
| What the agreement says | What to ask for instead |
|---|---|
| Any resignation makes you a bad leaver | Bad leaver limited to serious misconduct or a breach of the agreement |
| Bad leaver price is the amount paid | A step-down that recognises years served |
| The directors decide who is a bad leaver | A list of objective events in the clause itself |
Restraints on the owner who leaves
The owners who stay usually want the leaver kept from competing, or from taking clients and staff.
Treasury consulted on draft non-compete reforms from 7 September to 2 October 2026. The consultation proposes restrictions on employment restraints; a consultation draft is not an operative ban.
Its explanatory materials, paragraphs 2.34–2.35, distinguish employment restraints from restraints used in a business sale or some employee-shareholder arrangements. That is not a blanket exemption for anything labelled a shareholders agreement.
Have a lawyer assess the restraint’s purpose, scope, governing law and enforceability. Check the employment contract and share-sale documents together. Our Insight covers whether you can stop an employee working for a competitor.
| What the agreement says | What to ask for instead |
|---|---|
| No competing anywhere in Australia for 5 years | A step-down version: the area the company trades in, for a period tied to the sale |
| No dealing with any customer | Customers the leaver dealt with in the last 12 months |
| No restraint at all | A restraint in the share sale deed, linked to the price paid |
Shareholder deadlock
A deadlock can turn into an exit. In a 50/50 company, the default rules can stall the board.
Where the relevant replaceable rules apply, both board and member meetings generally need a quorum of two. The board may determine a different board quorum; member-meeting rules and the constitution must be checked separately. Casting votes can matter, but eligibility and conflicts also matter. In a two-owner company, absence can prevent a quorum, so do not assume a majority shareholding alone lets a meeting proceed.
A deadlock clause sets out what happens next. One common version is a buy-sell or "shotgun" clause. One owner names a price, and the other must either buy at it or sell at it. This can disadvantage an owner who cannot raise finance quickly, even if the price looks fair.
| What the agreement says | What to ask for instead |
|---|---|
| No deadlock clause | Steps in order: a meeting of owners, then mediation, then a buy-sell process |
| The chair has a casting vote | No casting vote while the shares are split 50/50, written into the constitution |
| A shotgun offer with 10 days to respond | 60 days to respond, so the other owner can arrange finance |
ASIC says a company must have a constitution to change a replaceable rule. Removing the casting vote means changing the constitution.
Funding calls before the exit
A funding call clause says when owners must put in more money. Check existing funding commitments, the constitution and share issue terms before treating a request as optional. Holders of partly-paid shares can owe calls on the unpaid amount under s 254M of the Corporations Act. This example assumes fully-paid ordinary shares with equal voting rights.
The default rules do give existing owners first offer on new shares, in proportion to their holdings. A resolution at a general meeting can authorise an issue without that offer.
Here is why that matters before an exit. Two owners, Jo and Pat, hold 100 shares each. The company needs $200,000, and only Jo pays in.
| Price of each new share | New shares Jo takes | Jo's share of the company | Pat's share |
|---|---|---|---|
| $2,000 | 100 | 66.7% (200 of 300) | 33.3% |
| $1,000 | 200 | 75% (300 of 400) | 25% |
On these assumptions, Jo has 75% of votes on a poll. That can meet the special-resolution voting threshold even if Pat votes against, but notice, quorum, constitutional requirements and other legal protections still matter. It does not let Jo hold an otherwise inquorate meeting alone or justify an improper share issue.
| What the agreement says | What to ask for instead |
|---|---|
| Owners fund "as the board requires" | A cap for each owner, a notice period and a list of purposes |
| New shares at a price the board sets | New shares at the valuation clause price |
| An owner who doesn't fund becomes a bad leaver | Dilution only, at that price |
Owners buy, or the company buys back
These are two different deals. In the first, the owners who stay buy the shares and end up with bigger stakes. In the second, the company buys back its own shares.
ASIC’s share buy-back guidance distinguishes a selective buy-back from a purchase by the remaining owners. For a selective buy-back, approval can be by a resolution agreed to by all ordinary shareholders at a general meeting, or by special resolution with no votes cast in favour by the selling shareholders or their associates. The voting restriction belongs to that special-resolution route.
Under s 257A of the Corporations Act, the buy-back must not materially prejudice the company’s ability to pay creditors, and the required procedures must be followed. Solvency alone is not the whole test. Have the adviser schedule the applicable ASIC lodgements, disclosure and notice periods before signing or paying.
Either way, the paperwork follows. Record the change in the members register. For a transfer between owners, the company must tell ASIC within 28 days.
Then check every guarantee the leaver signed for the company, including one attached to a supplier agreement. Lenders, landlords and suppliers often hold one. Ask each for a written release as part of completion. Our Guide to business loan agreements covers the director guarantee. If an outsider is buying the whole company instead, see buying a business.
Contract negotiation: three clause rewrites worth discussing
These are illustrative drafting extracts, not complete contract templates. Generic business contract templates may omit the exit terms your company needs. The proposed deadlines, discounts and payment terms are commercial choices. A lawyer should tailor the contract drafting, confirm who must sign and align the documents before use.
The valuation clause
What the template says:
The Shares will be transferred at a price determined by the Directors.
What to ask for:
The Shares will be transferred at Fair Value, determined by an independent valuer agreed by the Shareholders. If they don't agree within 14 days, the valuer is appointed by [a named body]. Fair Value is assessed at the date of the Transfer Notice, with no minority discount. The buyer pays in full at completion.
The transfer clause
What the template says:
A Shareholder may not transfer Shares without the consent of the other Shareholders.
What to ask for:
A selling Shareholder must first offer the Sale Shares to the other Shareholders at Fair Value in proportion to their holdings. Each has 30 days to accept. Any unaccepted shares must be re-offered for 14 days to accepting Shareholders in proportion to their holdings. Remaining shares may be sold within 90 days at no lower price and on terms no more favourable to the third-party buyer. Otherwise, a fresh offer is required. The buyer must sign a deed joining this Agreement. Completion and registration are subject to applicable law and a Constitution aligned with this process.
Set out partial-sale mechanics and make the company a party where necessary. Do not rely on this extract alone to remove a constitutional registration restriction.
The leaver clause
What the template says:
A Shareholder who ceases to be employed by the Company for any reason is a Bad Leaver.
What to ask for:
A Shareholder is a Bad Leaver only following dismissal for serious misconduct or a material breach of this Agreement established under its dispute-resolution process. Any other leaver is a Good Leaver. A Good Leaver receives Fair Value. For a Bad Leaver, the proportion priced at Fair Value is 20% for each completed year of service, capped at 100%; the remainder is priced at original subscription cost. The price is calculated at the agreed valuation date.
This changes the exit-price calculation; it does not describe the ownership vesting of shares already held. The complete agreement must identify the buyer, payment timetable, disputed-exit process and enforceable transfer obligations.
Shareholder exit checklist
Work through these with the other owners before anyone agrees a price.
Documents. Do you have the signed shareholders agreement, the current constitution and any deeds of accession?
Signatures. Has every current owner signed the agreement?
Defaults. Which replaceable rules still apply because the constitution is silent?
Transfer. Can the board refuse to register a sale? Does the agreement require registration?
Pre-emption. Who gets first offer, in what proportion and within how many days?
Price. Formula, valuer or agreed value? Which valuation date? Any minority discount?
Payment. In full at completion, or by instalments? With interest and security?
Leaver terms. Is the leaver good or bad under the definition as written?
Restraints. What area, what period, and is the leaver also an employee?
Drag and tag. Could a sale of the whole company change the deal?
Funding. Is any funding call due before completion, and at what share price?
Structure. Are the owners buying, or is the company buying back?
Guarantees. Which loans, leases and supplier accounts does the leaver guarantee?
Admin. Who updates the members register and makes the applicable ASIC filings? For a share transfer, diarise the 28-day notification deadline.
After completion, good contract management means keeping the executed sale deed, updated ownership records, releases and any instalment or restraint deadlines together.
When to call a lawyer
Before anyone signs the share sale deed. The deed, the agreement and the constitution have to say the same thing.
When the owners can't agree. ASIC says it does not get involved in disputes about the running of proprietary companies. It says to get legal advice before starting court action.
When the company is buying back the shares. A selective buy-back has its own approvals and ASIC notices.
When the restraint matters. That's especially true where the leaver is also an employee, because employment restraints and sale-related restraints can raise different legal questions.
What this doesn't cover
Shareholder disputes that are already in court, and removing an owner against their will. Tax, capital gains and stamp duty, which need an accountant. Public and listed companies. Partnerships, unit trusts and sole traders, which run on different rules. Employee share schemes. Templates for drafting a new agreement.
Reviewed 25 October 2026 against the official sources listed below. The position can change.
Understand the agreement before agreeing to the buyout. Use Contractam’s AI contract review to identify clauses and questions to take into the negotiation. Get legal advice on the transaction structure and final exit documents.
Sources checked
Official sources checked on 25 October 2026:
Corporations Act 2001, compilation dated 19 September 2026, Volume 1: replaceable rules; meetings and voting; partly-paid shares; buy-backs, including ss 254M and 257A–257F.
ASIC: company rules and constitutions and replaceable rules: governing documents, transfer rules, pre-emption on new shares, quorum and casting votes.
ASIC: share buy-backs: selective buy-back approval routes, creditor protection and procedural requirements.
ASIC: transfer of shares: notification within 28 days.
Treasury: draft non-compete reforms and the explanatory materials linked in the restraint section: consultation status and the distinction between employment and sale-related arrangements.
Contractam provides contract review and information, not legal advice. For advice specific to your situation, consult a qualified Australian lawyer. Contractam reviews contracts under Australian law only. See our disclaimer.