29 December 2023

How many shareholders can my NZ company have?



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There are some considerations to take into account when evaluating your cap table and shareholder numbers.
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Companies may have a large number of shareholders either involved in their business or passively holding shares. There is no cap on how many shareholders you have in either a private or public company. However, there are some considerations you need to take into account when evaluating your cap table and shareholder numbers. This article explores those considerations.

Shareholder Numbers for Private Companies

While public companies often draw attention and news headlines, most companies in New Zealand are private companies. Shares in a private company can be privately offered, owned, and traded. However, since a private company cannot freely offer their shares to the general public, they sometimes find they cannot raise capital as quickly as public companies.

Conversely, a public company is one that has undertaken an initial private offering and has been publicly listed on a stock exchange such as the NZX. Listing is typically suitable for larger, more established companies that wish to raise money from members of the public rather than being owned (and sometimes operated) by founders, management, or private investors.

While there is no limit on the number of shareholders for a private company, companies should be wary of exceeding 50 shareholders and 50 share parcels.

A company will be a "Code company" subject to the Takeovers Code if the following elements exist:

  • 50 or more shareholders and 50 or more share parcels; and
  • the company is at least "medium-sized," meaning that it has assets with either:
    • a total value of at least $30 million; or
    • a total revenue of at least $15 million for the most recent financial year.

The Takeovers Code places several additional administrative and regulatory burdens on Code companies. Therefore, Small, private companies tend to stay clear of these restrictions. The additional requirement of being "medium-sized" is a relatively new concept in New Zealand. It aims to help ease the compliance burden for many startups and SMEs, which are small but widely held.

Shareholder Numbers for Public Companies

Like private companies, public companies can have an unlimited number of shareholders. However, public companies are subject to additional (and significant) rules. These include disclosure requirements, financial reporting obligations and other regulations, like the relevant stock exchange rules. As public companies can raise funds from the general public (including via listed stock exchanges where they are a listed company), they can access (and typically will have) a large number of shareholders.

Relevant Considerations for Private Companies

Employee Share Option Plans

Companies can use an Employee Share Option Plan (ESOP) to incentivise employees by offering a small ownership stake in the company. Under an ESOP, an employee receives options to buy shares in a company which typically 'vest' over time (usually three to four years). Once the options have fully vested, employees may purchase shares in the company by paying the exercise price to convert their options into shares.

With an ESOP, an employee receives options at a point in time, and the value of these options will increase over time in combination with the employee's work for the company. Of course, if your company grants options to many employees (given the small ownership stakes each employee can receive), the number of shareholders in the company has the potential to increase dramatically.

One of the ways to manage this (while still being able to offer such an incentive) is by providing that employees can only exercise their options on an exit event. An exit event could be the company being bought out or undertaking an initial private offering. If an employee can only exercise their options on vesting, they will only ever be an optionholder rather than a shareholder. An optionholder will still benefit from the uplift in value from their options over time. However, you will not need to record them on your company's register as a shareholder.

ESOP Nominee

Suppose your company wants to allow employees to exercise their options into shares once vested while also managing shareholder numbers. In that case, it can use a nominee structure. Here, you would set up a nominee to hold shares on behalf of multiple employees. This nominee would only count as one additional shareholder and share parcel for Code company purposes.

As the name suggests, the nominee is merely a nominee who holds the legal name to the shares. However, the beneficial owners will ultimately own all benefits, such as voting and dividend rights. The nominee must act in accordance with the instructions of the beneficial owners, and the beneficial owners can dissolve the arrangement at any time.

Therefore, having an ESOP in place allows companies to incentivise employees who can share in the company's growth while managing the company's number of shareholders.

Key Takeaways

While neither public nor private companies have a limit on the number of shareholders, private companies should be aware of the implications of being classified as a Code company and, therefore, subject to the Takeovers Code.

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