Your shareholders’ agreement was signed on day one by the founders, the company and maybe a seed investor. Two years later the register looks nothing like that signing page: an angel came in through a SAFE conversion, three employees exercised options, a co-founder transferred shares to a family trust, and a departing early hire sold a parcel to an external buyer. Here is the uncomfortable question a due diligence lawyer will eventually ask: is every person on the register actually bound by the shareholders’ agreement? If the answer involves the word “implicitly”, you have a problem — and the tool that prevents it is a two-page document that gets less attention than almost anything else in the startup document stack: the deed of accession.
Why the Constitution Binds Automatically but the Shareholders’ Agreement Doesn’t
The confusion starts because a company’s two core governance documents work in legally different ways. The constitution is a statutory contract: under section 140(1) of the Corporations Act 2001 (Cth), it takes effect as a contract between the company and each member, and between the members themselves. Nobody signs it. Whoever appears on the register is bound, automatically, from the moment they are registered as a member.
A shareholders’ agreement enjoys no such magic. It is an ordinary contract, and the ordinary rules of privity apply: it binds the parties who executed it and nobody else. A person who acquires shares after signing day — by subscription, transfer or option exercise — takes the shares subject to the constitution, but is a complete stranger to the shareholders’ agreement until they become a party to it. Your carefully negotiated pre-emptive rights, drag-along, leaver provisions and board composition rules simply do not reach them.
That gap matters most precisely when you least want it to. Drag-along rights are the classic example: an acquirer wants 100% of the company, the drag lets the majority compel minority holders to sell — but only minority holders bound by the drag. One shareholder who never acceded, discovered mid-transaction, can hold up or re-price an exit. The same logic applies to transfer restrictions, restraints, confidentiality and dispute-resolution clauses: against a non-acceding holder, you are left with the constitution and the general law, which is a much thinner rulebook.
What a Deed of Accession Actually Is
A deed of accession (UK-influenced documents say “deed of adherence”) is a short instrument by which the incoming holder covenants to be bound by the existing shareholders’ agreement as if they were an original party — usually with effect from the date they acquire their shares, and usually in a form scheduled to the shareholders’ agreement itself so there is nothing to negotiate later.
It is a deed, not a contract, for a practical reason: consideration. When an investor subscribes for shares, the company gets the money — it is not obvious what consideration flows from the existing shareholders to the new one in exchange for their promises. Rather than litigate that question, the document is executed as a deed, which is binding without consideration. That choice has a consequence: deed execution formalities apply, and for individuals they still vary by state — witnessing requirements and all — which we covered in detail in our post on electronic execution and section 110A. A deed of accession that fails its execution formalities risks doing exactly nothing, which defeats the purpose.
The Mechanics: How One Signature Binds a New Party to Everyone
The clever part of a well-drafted accession mechanism is that it does not require every existing shareholder to countersign each time someone joins the register. Chasing forty signatures for every option exercise would be unworkable. Standard drafting solves this in one of two ways:
- Agency or attorney clause. The shareholders’ agreement appoints the company as agent (or attorney) for all existing parties, authorised to execute deeds of accession on their behalf. The new holder signs, the company signs — once for itself and once for everyone else — and the accession is complete. If your shareholders’ agreement uses this mechanism, check the appointment clause actually exists and covers accessions; the schedule form is useless without the authority behind it.
- Deed poll. The incoming holder executes the accession as a deed poll — a one-way deed made in favour of the company and all present and future parties to the shareholders’ agreement, who can enforce it without having executed it. Only the new holder needs to sign at all.
Either works. What does not work is the pattern we see in DIY document stacks: a scheduled “form of accession” with signature blocks for “the Existing Shareholders” and no agency clause — a form nobody could practicably complete, so nobody ever did.
The Trigger Points: Where Accessions Get Missed
Accessions don’t get missed because anyone decides to skip them. They get missed because share issues and transfers happen through four different doorways, and the accession requirement has to be wired into each one:
- New share issues. The subscription agreement should make execution of a deed of accession a condition of the issue — signed as part of the same document pack, before the shares are allotted. Priced rounds run by lawyers rarely miss this one.
- Share transfers. The shareholders’ agreement should provide that no transfer is permitted, and the company must not register a transfer, unless the transferee has first executed a deed of accession. This is the backstop that matters, because the register is the pinch point: for a proprietary company, the constitution (or the replaceable rule in section 1072G of the Corporations Act) typically gives directors a discretion to refuse to register a transfer, and the shareholders’ agreement converts that discretion into an obligation. A transferee who never gets registered never becomes a member — so the accession requirement has real teeth, provided the board actually applies it.
- Option exercises and ESS issues. Employee option holders are usually not parties to the shareholders’ agreement while they hold options — they are not shareholders yet. The binding moment is exercise: the plan rules or the exercise notice should require a deed of accession (or provide that the employee is deemed bound) before shares are issued. Some plans instead have employees execute a deed poll at grant, covenanting to accede on exercise. Either way, the failure mode is the same — an ESOP administered through a cap table platform where shares get issued on exercise with nobody checking the accession box. If your employees hold shares rather than options, audit this today.
- Convertible instruments. SAFEs and convertible notes convert into shares at the next round, often for multiple small investors at once. The SAFE or note itself should oblige the investor to execute a deed of accession on conversion — well-drafted Australian instruments generally do — and the conversion mechanics at the round should actually collect them.
When Someone Slips Through
Suppose you discover — usually in due diligence, occasionally mid-dispute — that a holder on the register never acceded. What then? If they were registered despite a clause prohibiting registration without accession, the transferor has likely breached the shareholders’ agreement, and the company’s officers have a governance problem, but the holder is still not a party to the agreement. Arguments that they are bound anyway — through conduct, estoppel or an implied contract because they knew of the agreement and enjoyed its benefits — are genuinely arguable in the right facts, but they are litigation positions, not cap table hygiene. The practical fix is almost always the same: get a deed of accession signed now, with effect from the acquisition date. Most holders will sign without fuss when asked; the ones who won’t are precisely the reason the mechanism exists, and their refusal is information you want before an exit is on the table, not during one.
This is also a standard due diligence line item. An investor’s legal team will reconcile the register against the accession deeds and expect a complete set — every holder either an original party or covered by a dated, validly executed accession. A clean folder of accessions is one of the cheapest signals of a well-run company you can produce; reconstructing them under time pressure at a Series A is one of the more expensive kinds of clean-up.
The Bottom Line
A shareholders’ agreement is only as good as its coverage of the register, and the register never stands still. Make sure your agreement has a scheduled accession form and the agency or deed poll mechanics to execute it practicably; wire the accession requirement into all four doorways — subscriptions, transfers, option exercises and convertible conversions; have the board refuse to register any transfer without one; and reconcile accessions against the register periodically, not just when a term sheet lands. Two pages, signed at the right moment, is all it takes to keep the agreement you negotiated meaning what you think it means.
This article is general information only, not legal advice — whether a particular holder is bound, and what to do about one who isn’t, depends on your documents and the circumstances of the acquisition. Viridian Lawyers advises Australian founders and investors on shareholders’ agreements, ESOPs and investment documentation. If you’re not certain every name on your register has acceded, get in touch and we’ll help you close the gaps.
