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Why have a shareholders' agreement?

31 July 2017

Disputes between company shareholders can be acrimonious, time consuming and expensive to resolve. They can result in a substantial loss of value in the company. The unfortunate consequences of shareholder disputes can be avoided if the shareholders consider the issues that might arise between them at the outset while relations between them are harmonious. The unfortunate consequences can also be avoided if the shareholders have signed a shareholders’ agreement setting out how those issues will be dealt with if they arise.

Companies Act 1993

The regulation and administration of companies in New Zealand is primarily governed by the Companies Act 1993. Some of the Companies Act requirements are compulsory (for example, directors’ duties to act in good faith in the interests of the company and not to trade recklessly). Some of the Companies Act provisions can be changed to suit the circumstances. Changes and additions to the Companies Act provisions are done by the adoption of a constitution by the shareholders. The constitution is registered with the Companies Office and is a public document. One provision often included in a constitution is the requirement that a shareholder wishing to sell shares must first offer them to the existing shareholders. Without this a shareholder is free to transfer his or her shares to whomever he or she chooses.

Why have a shareholders’ agreement?

In addition to a constitution, the shareholders could sign a shareholders’ agreement. The shareholders’ agreement is a private document and is not available for the public to view, unlike the constitution. The shareholders’ agreement can therefore cover matters that the shareholders do not wish to make public or are more appropriately covered in this way. It can deal with matters before the company is incorporated, whereas the constitution will only regulate the company once it has been incorporated. Without a shareholders agreement, so long as the directors and the company comply with the Companies Act and the constitution, the shareholders will not necessarily have any say over director’s decisions and how the company is run. Commonly covered matters in a shareholders’ agreement are:

  • Business activities. The shareholders can agree on the nature and scope of the company’s business activities and place restrictions on the amount the directors can spend without obtaining the shareholders’ consent.
  • Term of the business. The shareholders might agree that the company’s activities cannot change or shareholders cannot transfer their shares until a fixed period has elapsed.
  • Funding. The shareholders can agree on how much shareholders must invest by way of share capital or shareholders’ loans, how much bank funding will be obtained and who must give personal guarantees of the company’s borrowing.
  • Appointment of directors. Instead of relying on the default provisions of the Companies Act which provide for directors to be appointed by a shareholder majority resolution, the shareholders can agree on who can appoint directors to represent different owners of shares.
  • Management of the company. The shareholders can agree on who will manage the company and which shareholders will be employed by the company.
  • Transfer or sale of shares. Commonly a shareholders’ agreement will provide that shareholders must offer shares to existing shareholders, how that process is to be undertaken and how the shares are to be valued. The shareholders may wish to restrict the transfer of shares to preserve tax benefits such as imputation credits and tax losses which may be lost if the company’s shareholdings change.
  • No competition with the company. The shareholders can agree that a shareholder cannot compete with the company and they cannot use the company’s intellectual property (such as customer lists) for their own benefit.

 

The majority of private companies in New Zealand do not have a shareholders’ agreement, but in many cases the cost and time taken to put in place a shareholders’ agreement when measured against the angst of a shareholders’ dispute could be turn out to be extremely worthwhile.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott