New Zealand: Shareholders' Agreements: a "must have"

Last Updated: 21 July 2012

By Sarah Kerr

While there is no legal requirement for shareholders in a company to enter into a shareholders' agreement, failing to do so can be the commercial equivalent of driving without a seatbelt. Without a shareholders' agreement, shareholders can find themselves embroiled in costly, time-consuming litigation that can seriously undermine the value of their investment.

What is a shareholders' agreement ?

A shareholders' agreement is a written contract between shareholders regulating the operation of the company in which they have invested. It provides shareholders with certainty about their rights and obligations towards each other. Importantly, if properly drafted, shareholders' agreements set out clear rules for how to deal with major change events, such as the introduction of new investors, the exit or death of a shareholder, the sale of all or a substantial part of a company's assets or the listing/initial public offering of a company's shares.

There is no set format for a shareholders' agreement – it can be as long or as short (and as straightforward or as detailed) as shareholders wish.

Why have a shareholders' agreement ?

Detect incompatibility before investing: Negotiating a shareholders' agreement can be an invaluable "mutual due diligence" exercise for potential co-investors. Thrashing out the detail of a shareholders' agreement can force shareholders to turn their minds to possible future events they may not otherwise have paused to consider. As with all commercial (and personal) relationships, it is better to know about the "deal-breakers" at an early stage. Sometimes, issues will emerge during the negotiation process that make it untenable for one or more prospective investors to follow through with their investment in a company. More often than not, though, the negotiation of a shareholders' agreement can be a positive learning experience for all investors and can crystallise and align shareholders' long-term goals for the company concerned.

Address issues at the outset to avoid costly disputes later on: Without a shareholders' agreement, the relationship between shareholders in a company is regulated by various provisions of the Companies Act 1993 and the company's constitution (if it has one). While the Act and a company's constitution go some way to detailing the rights and obligations of shareholders, there are many key matters they overlook. By failing to adequately address the "hard issues" (and even the more mundane operational issues) at the outset of their relationship, shareholders can experience severe financial loss further down the track. This loss can manifest itself in legal fees (if a dispute escalates to litigation) and in a serious diminution in company profits (due to board members and management being distracted from running the company's business). In extreme cases, shareholder disputes can lead to the financial collapse of a company or to a court-ordered liquidation.

Confidentiality: Remember that company constitutions are publicly available documents, accessible to all via the Companies Office website. To keep key commercial terms between shareholders confidential, it pays to record them separately in a shareholders' agreement, instead of including them in a constitution.

Attract funds more easily: If properly drafted, a shareholders' agreement can be a sign of "good housekeeping" that makes a company appear more attractive as a borrower to a bank or other lending institution.

Succession: A shareholders' agreement can give a company a headstart in any sale process, demonstrating to potential purchasers that shareholders "have their house in order" and have definitively agreed amongst themselves procedures for the sale of the company's shares or assets.

Foundation for claim in damages: Breach of a shareholders' agreement by a shareholder can enable non-defaulting shareholders to pursue the defaulting shareholder for damages for breach of contract.

What matters are addressed in a shareholders' agreement?

The content of shareholders' agreements is generally split between operational matters of an administrative nature and provisions specifically designed to address "change events".

Operational matters can include:

  • who has the right to appoint directors and how many (including whether a shareholder continues to have the right to appoint a director when that shareholder's shareholding falls below a certain percentage threshold);
  • whether the chairperson of the board has a casting vote;
  • the quorum for shareholders' meetings and board meetings;
  • the company's dividend policy – when will dividends be paid/not paid? how will dividends be calculated (for example, as a percentage of net profits)?;
  • director and shareholder approval thresholds for key decisions - for example, it may be appropriate to require a 90% board resolution and/or shareholders' resolution (or even a unanimous board and/or shareholders' resolution) for significant actions such as:
    • the entry by the company into contracts committing the company to expenditure in excess of a certain monetary amount;
    • the appointment or removal of members of the senior management team;
    • the establishment of a share option or similar incentive scheme for company employees or executives;
    • a trade sale or listing of the company;
  • future funding of the company, including:
    • whether funds will be borrowed from banks or other third parties and, if so, whether shareholders will be required to personally guarantee borrowing from third parties;
    • whether shareholders will be required to inject further capital or to make shareholder loans to the company;
  • whether budgets and business plans are to be prepared and, if so, how frequently, who is to prepare and approve them and to whom are they to be disclosed;
  • a robust dispute resolution mechanism designed to avoid situations of deadlock (that can be fatal to a company's continued existence, particularly in a closely-held company where shareholding is split equally and where both shareholders may have equal board representation). Dispute resolution may be by means of referral to a respected independent third party (such as the head of an industry body or professional association), via mediation or, failing success at mediation, via arbitration.

Provisions in shareholders' agreements dealing with "change events" can include:

  • pre-emptive rights applying to the transfer of shares, including:
    • whether a selling shareholder's shares must first be offered to all existing shareholders proportionate to their shareholding before being offered to third parties;
    • whether a selling shareholder may sell some but not all of its shares;
    • how the sale price of shares is determined – who determines the price (the selling shareholder, the board, a third party?) and using what valuation methodology?;
    • whether the pre-emptive rights relating to the sale of shares are automatically triggered if a shareholder acts in breach of the shareholders' agreement (so that any defaulting shareholder can be forced to sell its shares);
    • stipulating certain "permitted transfers" (for example to family trusts and related corporate entities) that can occur outside the pre-emptive rights regime;
  • pre-emptive rights applying to the issue of new shares, including:
    • whether new shares in the company must first be offered to all or only a select pool of existing shareholders proportionate to their current shareholding (as protection from dilution) or whether the board may offer new shares to any party it thinks fit without first offering them to existing shareholders (to encourage the injection of fresh capital);
    • whether particular shareholders have veto rights enabling them to block the issue of shares to any prospective new shareholder;
  • tag-along rights enabling a minority shareholder to force an exiting majority shareholder to secure the same "exit deal" for the minority shareholder;
  • drag-along rights enabling an exiting majority shareholder to force a minority shareholder to sell its shares to a third party buyer who is only willing to purchase 100% of the company's shares and who does not wish to have the minority shareholder as a co-shareholder;
  • provisions addressing what happens when a shareholder dies or becomes mentally incapacitated, including:
    • whether the pre-emptive rights relating to the sale of shares are triggered automatically on the death or mental incapacity of a shareholder (so that any mentally incapacitated shareholder or the estate of a deceased shareholder can be forced to sell that shareholder's shares);
    • whether shareholders are required to take out trauma and life insurance policies for each other's benefit so that remaining shareholders can afford to purchase shares held by mentally incapacitated or deceased shareholders;
  • non-compete provisions preventing an exiting shareholder from being involved in a competing business in a particular geographical region for a prescribed period of time after selling its shares in the company.

We can help

Hesketh Henry's Corporate and Commercial team has extensive experience in drafting and negotiating shareholders' agreements for companies of all types (whether venture capital or private equity investee companies, closely-held/family companies, or companies in which management are to invest). Please call us to discuss your circumstances – we would be delighted to assist.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions