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

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

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”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.