Last Updated on 25/09/2025 by Damin Murdock
For founders of Australian startups, maintaining control over company ownership is critical, especially in the early stages. One of the key ways to protect your vision and guard against unwanted external influence is by restricting the transfer of shares. This article explores the legal mechanisms available under Australian law to manage share transfers effectively while remaining compliant with the Corporations Act 2001 (Cth) (the Act).
Use of Company Constitution to Restrict Transfers
The primary tool for restricting share transfers is your company’s constitution. For proprietary limited companies, the constitution can include provisions that give directors the authority to approve or refuse any share transfer, for instance, approval required where a shareholder proposes to sell to a direct competitor.
Case law has established that directors may refuse transfers so long as the decision is made in good faith, not arbitrarily, and aligns with the best interests of the company. This means while directors have discretion, it must be exercised properly, transfers cannot be blocked randomly and unpredictably or to punish a shareholder unfairly.
To ensure this authority is enforceable:
- Clearly state in the constitution that all share transfers require director approval.
- Specify that approval must be exercised in accordance with the company’s interests and not contrary to any applicable shareholder rights.
Implement Pre-Emptive Rights
Another powerful restriction mechanism is the inclusion of pre-emptive rights. These provisions require that any shares intended for sale must first be offered to existing shareholders. Only if they decline can the shares be offered to outsiders.
This ensures that control remains within the existing ownership group and prevents dilution or external interference. To make pre-emptive rights effective:
- Include detailed procedures in the constitution or shareholders agreement.
- Define what constitutes a fair and reasonable offer price.
- Set timeframes for offer acceptance and transfer completion.
Administrative and Procedural Safeguards
Beyond constitutional clauses, you can apply administrative controls that delay or review share transfers:
- Share transfers are not effective until the company formally registers them. You may require transfer documentation, original share certificates, payment of transfer fees, and even further evidence of the transferee’s eligibility.
- Directors can also suspend the registration of share transfers for up to 28 days in a calendar year. This provides breathing room to evaluate the legitimacy or strategic impact of any proposed transfer.
Legal Limits and Compliance
While you can impose restrictions, Australian law does not allow companies to completely prohibit share transfers. Provisions that seek to void transfers upon shareholder bankruptcy or impose blanket bans are invalid. The restriction must allow for a fair process and be justifiable in the company’s interests, and the company’s constitution must comply with statutory rights and due process.
Best Practices for Founders
To implement and enforce transfer restrictions effectively:
- Draft a tailored company constitution with clear and enforceable provisions.
- Use standard transfer forms and maintain a robust approval process.
- Keep detailed records of board decisions regarding share transfers.
- Consult legal advisors to ensure alignment with the Act and avoid unintended invalidation.
Final Thoughts
Restricting share transfers is essential for founders who want to preserve control over their startups. By using a well-drafted constitution, pre-emptive rights, and procedural safeguards, you can minimise the risk of ownership disputes and external disruptions.
Feel free to contact Damin Murdock at Leo Lawyers via our website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to our newsletter via our Website, and subscribe to our YouTube , LinkedIn, Facebook and Instagram. If you liked this article or video, please also give us a favourable Google Review.
DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article and if you require specific legal advice, please contact us.
Damin Murdock (J.D | LL.M | BACS - Finance) is a seasoned commercial lawyer with over 17 years of experience, recognised as a trusted legal advisor and courtroom advocate who has built a formidable reputation for delivering strategic legal solutions across corporate, commercial, construction, and technology law. He has held senior leadership positions, including director of a national Australian law firm, principal lawyer of MurdockCheng Legal Practice, and Chief Legal Officer of Lawpath, Australia's largest legal technology platform. Throughout his career, Damin has personally advised more than 2,000 startups and SMEs, earning over 300 five-star reviews from satisfied clients who value his clear communication, commercial pragmatism, and in-depth legal knowledge. As an established legal thought leader, he has hosted over 100 webinars and legal videos that have attracted tens of thousands of views, reinforcing his trusted authority in both legal and business communities."
