New Zealand: Key clauses to include in an NZ shareholders agreement

When running a company, all parties must clearly understand the company's processes and their roles and responsibilities. This becomes even more important when a company has several shareholders. Therefore, while having a shareholders agreement is not legally necessary, it can be an essential tool to prevent issues between the company and its shareholders. Likewise, this document can improve individuals' trust in your company. This article will outline:

• what a shareholders agreement is;
• why they are essential to ensure the smooth running of the company; and
• what you should include in a shareholders agreement.

Shareholders Agreement

A shareholders agreement is a formal document setting out the relationship between shareholders and your company. It is effectively a contract between these parties. While it is called a shareholders agreement, you can think of these documents as a shareholders rule book.

A good shareholders agreement will outline the rules to follow in certain situations. For example, it would outline the process if a shareholder wishes to sell their shares or if a shareholder passes away.

Therefore, while these documents are not essential for your company, they are very handy, particularly if your company has more than one shareholder or is growing. When you have multiple individual shareholders, there is an increase in the opportunities for misunderstandings and challenges to occur.

Key Terms to Include

There are some key terms that you should include in your shareholder agreement.

Names and Roles of the Parties

Your shareholders' agreement should set out the names of all individuals involved in the company. These will typically fall into two groups: directors and shareholders.

Additionally, you should include as much information as possible relating to what these individuals should do in their roles. For example, you should include:

• the nature of the company;
• how many directors the company will have and how to appoint and remove them;
• the roles and responsibilities of the shareholders and directors;
• how you will arrange funding;
• what insurance you need to protect shareholders;
• non-competition provisions to prevent individuals from engaging in competitive behaviour against the company;
• how distributions should be paid from the company; and
• what behaviours would be so significant that it could call for the removal of a director or shareholder.

Process of Buying and Selling Shares

Your shareholder agreement should include written guidance on when shareholders want to buy or sell shares. A straightforward and clear process will allow for consistent decision-making and provide certainty to your shareholders.

Often companies include pre-emptives. This means that if a shareholder wishes to sell their shares, other existing shareholders have the first right to buy these shares. Such a clause ensures that existing shareholders have a right to buy those shares and therefore block an unrelated third party from becoming involved in the company.

Process for Dispute Resolution

Unfortunately, disputes between shareholders or between your company and its shareholders may arise. To help manage future disputes, your shareholder agreement should detail clear guidelines for resolving issues. Indeed, disputes that go to court are often costly and time-consuming for all involved. Therefore, preempting and resolving a conflict with a transparent process can significantly benefit your company.

Process for Making Important Decisions

You could also outline how the company can make critical decisions. These decisions can include:

• the appointment or removal of a director;
• amending the company constitution; or
• closing the company.

Certain decisions are significant and will affect the directors and shareholders of the company. Therefore, it is a good idea to have a clear process to gauge shareholder approval. This will also avoid any disputes further down the line.

For example, your shareholders' agreement could outline which decisions the shareholders should be invited to vote in, whether a majority or supermajority vote is necessary, and the voting process for these decisions.

Additionally, you could outline how your company will allocate voting rights to shareholders. For example, many companies allocate one vote per share owned. However, if individuals hold different types of shares, including preference shares, these shareholders may have different and superior voting powers.

Pre-Emptive Rights and Right of First Refusal

Another important clause to include in your shareholders' agreement relates to pre-emptive rights and the right of first refusal. Pre-emptive rights protect existing shareholders. They mean that if a company issues new shares, existing shareholders have the first right to buy them. The right of first refusal means that if shares are ever sold, existing shareholders have the first right of refusal to these shares. Both of these rights are usually applied on a pro-rata basis. However, a 'super pre-emption' may be agreed upon, giving existing shareholders the right to buy more than their pro-rata allocation.

These rights are important for existing shareholders as without these, existing shareholders may have their equity in the business diluted. This is because the value of their stake will decrease over time if new shares are issued in the business. Accordingly, this will negatively impact the founders as they will be the first shareholders in a business.