Bringing In a New Co-Owner: What to Agree Before They Buy In

Bringing in a co-owner can be a good way to keep a key person, fund growth or start a succession plan. It's also hard to undo. When co-owners fall out, the cause is usually something they never agreed at the start.

New shares or existing shares

There are two ways in, and the money goes to different places.

1. New shares. The company issues shares and the price is paid to the company. In a proprietary company, unless the constitution says otherwise, new shares must first be offered to the existing holders of that class in proportion to their holdings (Corporations Act 2001 (Cth), s 254D). The members can waive that by resolution at a general meeting. The company must notify ASIC within 28 days of the issue (s 254X).
2. Existing shares. You sell some of your shares and the price is paid to you. The company can register the transfer only on a proper transfer form (s 1071B), and you stay the legal owner until it's registered (s 1072F). Under the default rules, the directors of a proprietary company may refuse to register a transfer for any reason (s 1072G).

Many constitutions change these default rules, so I read the constitution first.

The price, and how it's paid

Your accountant or a valuer can help you settle the value, and your accountant advises on the tax. The legal question is how the price is paid.

A key employee often can't pay in full on day one. A loan from the seller, or payments from future dividends or bonuses, can bridge the gap. If the company itself helps fund the purchase, for example by lending, giving a guarantee or paying a dividend or bonus that funds the price, that can be financial assistance. It's allowed only if it doesn't materially prejudice the company, its shareholders or its ability to pay its creditors, or if the shareholders approve it, or if an exemption applies (s 260A). Shareholder approval has its own process, including lodging a notice with ASIC at least 14 days before the assistance is given (s 260B).

Who you can offer shares to

A proprietary company can have no more than 50 shareholders who are not employees, and it can't make an offer that would need a prospectus, except to existing shareholders or employees (s 113). Most private deals fit an exemption, such as personal offers to no more than 20 investors raising no more than $2 million in 12 months (s 708(1)), or an offer to a senior manager who is not a director, or to their spouse, parent, child, brother or sister (s 708(12)). For a wider group of staff, the employee share scheme rules may suit (Pt 7.12, Div 1A).

What the shareholders agreement should cover

The constitution sets the company's rules. The shareholders agreement sets the deal between the owners, and it should cover:

1. Decisions that need everyone's agreement, such as issuing more shares, borrowing above a set limit, selling the business or changing the constitution.
2. The board: who is a director, and how directors are appointed and removed.
3. Dividends: how profits are paid out or kept in the business.
4. Deadlock: what happens when the owners can't agree.
5. Leaving: what triggers a compulsory sale (resignation, death, incapacity, serious breach) and whether a "bad leaver" sells at a lower price.
6. Valuation: how the price is set when someone leaves.
7. Restraints: how long, and where, a departing owner can't compete or approach customers and staff.
8. Drag and tag: whether a majority can make the others sell on the same terms, and whether a minority can join a sale.

Without an agreement, there is no automatic way out. An owner who wants to leave may have to rely on the court's power to order a buyout where the company's affairs are conducted oppressively or unfairly (ss 232 and 233). That is slow and expensive. It's the fallback, not a plan.

The new owner as director and employee

A key employee who buys in often wears three hats: shareholder, director and employee. Each needs its own document.

Before appointment, a new director must give the company a signed consent to act (s 201D) and must have a director ID, or have applied for one (s 1272C). The company must notify ASIC within 28 days (s 205B), and from 1 July 2027 it will also have to give ASIC the director's ID.

The Commonwealth has released draft laws that would ban non-compete clauses for most employees. As at 20 September 2026 they are a draft only. The draft explanatory material treats employee shareholder agreements as outside the ban, but the draft wording leaves room for argument. Until the final law is known, I tie an employee shareholder's restraint to ceasing to be a shareholder and to protecting the goodwill they've bought into, not to their employment ending.

Registers and ASIC

The company must update its register of members (s 169) and, as a proprietary company, notify ASIC of the change within 28 days (ss 178A and 178D). If the new owner holds the shares as trustee of a family trust, the register must show that the shares are not held beneficially (s 169(5A)).

If the company or a subsidiary has Queensland land-holdings worth $2 million or more, a buyer who ends up with 50% or more, alone or with related persons, may pay landholder duty (Duties Act 2001 (Qld), ss 158, 159, 165 and 167). Check with your accountant.

Partnerships and unit trusts

In a partnership, unless the partners have agreed otherwise, no one can become a partner without the consent of all the existing partners (Partnership Act 1891 (Qld), s 27(1)(g)). A new partner doesn't become liable for the firm's past debts just by joining (s 20(1)). A change in the partners can also revoke a continuing guarantee for future transactions (s 21(1)), so check the bank facilities first.

In a unit trust, the new owner usually needs units in the trust and shares in the trustee company, with a unit holders agreement doing the work of a shareholders agreement.

Sign the agreement before any money is paid. It's far easier to agree how someone leaves while everyone is still getting on.

If you're thinking about bringing someone into your business, you can book a consultation with me to talk it through.

The law in this article is stated as at 20 September 2026.

Joe Kafrouni, Director and Accredited Specialist (Business Law), Kafrouni Law

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