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Shareholders agreements remain a hugely important document for any company in 2025. This contract between the shareholders dictates the conduct, rights and duties that every shareholder is bound by, ensuring clarity and fairness from the start.
As a result, shareholders agreements frequently incorporate clauses designed to protect the interests of those involved. Such provisions help ensure that all parties are adequately safeguarded during significant business developments.
However, not all clauses serve every shareholder equally. For example, drag along and tag along clauses—now more prevalent than ever—offer distinct benefits: one supports the interests of majority shareholders, while the other ensures that minority shareholders are not left behind.
Let’s explore these clauses in more detail below.
What Is A Shareholders Agreement?
Firstly, it’s important to understand what a Shareholders Agreement is. This document is a legally binding contract between the owners of the company—commonly known as the shareholders—that sets out the rules for the company’s operation and governance.
The agreement covers a range of crucial matters, including:
- How decisions are made
- Who the shareholders are
- What portion of shares each shareholder possesses
- Voting rights and meeting procedures
- The relationship between shareholders and directors
- Dispute resolution mechanisms
- Transferring shares
- Shareholder rights and responsibilities
What happens between shareholders ultimately impacts the entire company. Therefore, the documents governing their conduct must be precise, detailed and aligned with the company’s core values.
Engaging a legal professional to help draft your Shareholders Agreement is essential to ensure the contract works in your company’s best interests. A lawyer can custom-tailor clauses to suit your specific industry and business needs. For further insights into the early stages of business planning, you might also want to check out our Business Set-Up Ideas and Plans guide.
When Would I Need A Shareholders Agreement?
If your company has more than one shareholder, it’s advisable to establish a shareholders agreement as early as possible. While these agreements can be updated later, setting the terms from the beginning helps prevent misunderstandings. For smaller businesses considering their structural options, our article on Operating as a Sole Trader provides valuable perspective on whether and when to transition to a more formal corporate structure.
A shareholders agreement is particularly beneficial if your company anticipates growth and expansion. As business activities become more complex in 2025, so too do the legal considerations and regulations. Keeping your documentation current can prevent legal pitfalls as your company evolves. For additional guidance on updating your framework, visit our Business Structure Guide.
What Is A Drag Along Clause?
A drag along clause is a provision within a shareholders agreement that allows majority shareholders to streamline the sale or transfer of the company. Essentially, it empowers them to force minority shareholders to sell their shares under the same terms, thereby preventing a holdout that could derail a favourable deal.
During a business sale, this clause ensures that if the majority has negotiated a good deal, all shareholders must sell their shares on the same terms. This helps secure a smooth and unified transaction.
What Is A Tag Along Clause?
Tag along clauses are designed to prevent minority shareholders from being left in an unfavourable position when a majority shareholder sells their stake. When a majority shareholder chooses to sell to a third party, the tag along clause allows minority shareholders the option to participate under the same terms.
This means that if the majority is exiting, minority shareholders can effectively “tag along” to ensure they also benefit from the sale. In today’s rapidly evolving market, this provision is crucial for maintaining fair treatment for all investors.
When Would I Use Drag Along And Tag Along Clauses?
Let’s look at how these clauses might operate in real-world scenarios:
| Example Dave, a majority shareholder, is in a strong position when his company is approached for acquisition by a larger enterprise. Satisfied with the deal, Dave opts to exit the company. However, some minority shareholders are reluctant to sell. By invoking the drag along clause, Dave compels these minority shareholders to sell their shares on the same terms, ensuring the deal proceeds without any hold-up. This clause thus facilitates a seamless transaction by eliminating potential obstacles from dissenting shareholders. |
| Example Beverly, a minority shareholder in a promising startup, finds herself in a difficult position when a majority shareholder decides to sell their stake to a third-party buyer. Concerned about remaining in the company under new management, Beverly triggers the tag along clause in her shareholders agreement. This allows her to sell her shares on the same terms and price as the majority shareholder, providing her with an equitable exit strategy. The tag along clause thus offers minority shareholders an important safety net in times of change. |
How To Transfer Shares To Another Person
Your shareholders agreement will typically include provisions outlining the process for transferring shares, especially when a shareholder wishes to exit the company. Often, existing shareholders enjoy pre-emptive rights, meaning the departing shareholder must first offer their shares to the current shareholders before seeking a third-party buyer.
If no current shareholders wish to acquire the shares, the sale may proceed with a new buyer. The incoming shareholder will then be required to sign the relevant internal documents, including the shareholders agreement, to confirm their position within the company.
Once the transfer is complete, the company is obligated to notify the Australian Securities and Investments Commission (ASIC) within 28 days to update its records. Increasingly in 2025, many companies are also adopting digital platforms to streamline this process, ensuring accuracy and compliance with modern regulatory standards. For practical tips on managing digital transitions in your business, explore our Online Business Privacy Guide.
It is also wise to periodically review your shareholders agreement to ensure it remains current with evolving market conditions and legislative reforms. Regular updates can help address new challenges such as digital asset transfers, remote work practices, and other emerging trends. For guidance on keeping your company’s legal framework up-to-date, visit our Business Structure Guide.
Key Takeaways
Drag along and tag along clauses are essential tools in protecting the interests of both majority and minority shareholders. Ensuring your shareholders agreement—and its underlying clauses—remain robust and current is key to managing disputes and facilitating smooth corporate transitions.
To summarise what we’ve discussed:
- A shareholders agreement is a binding contract that governs the conduct and rights of shareholders.
- It is advisable to have this agreement in place as soon as there is more than one shareholder.
- A drag along clause enables majority shareholders to compel minority shareholders to sell their shares during a business sale.
- A tag along clause ensures that minority shareholders can participate in a sale on the same terms as the majority.
- The process for transferring shares is outlined in the agreement, with mandatory ASIC notification upon completion.
- Regular review and updates of your shareholders agreement are recommended to keep pace with the evolving legal landscape in 2025.
If you would like a consultation on drag and tag along clauses, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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