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One essential feature of a company is that it consists of share capital. Each share represents an ownership stake in a company for the shareholder who owns it. The ability to issue, buy and sell shares makes companies a flexible business structure. Companies can go into business with other people, raise capital from investors and incentivise staff by giving them equity. As a small business owner, if you intend to do any of these things, you will need to understand how to issue shares in your company. 

Issuing vs Selling or Transferring Shares

To ‘issue’ shares means ‘creating’ new shares in the company. You issue these shares to a particular shareholder in exchange for a certain price per share. Note that issuing shares differs from transferring or selling shares. The latter involves selling existing shares in the company from one shareholder to another. The key difference is that if you are purchasing newly-issued shares, you pay the company itself. Alternatively, you pay a particular shareholder if you are purchasing existing shares.

Example: Daniel runs a construction company called ABC Constructions Pty Ltd. He is the sole shareholder, with 1,000 shares in total. Daniel wants to raise capital to expand the business and finds an investor, Charlie. Charlie is willing to invest $500,000 in exchange for a 20% stake in the company. Accordingly, Daniel issues 250 shares in the company to Charlie for $2,000 p/share.

Five years later, Daniel is ready to retire, and Charlie is interested in taking over the business. The business is valued at $5 million. As Daniel retains an 80% shareholding in the company, his 1,000 shares are worth $4 million. Accordingly, Charlie purchases Daniel’s shares at $4,000 p/share ($4 million in total), leaving Charlie as the company’s sole shareholder with all 1,250 shares.

The Process of Issuing Shares

Negotiation and Transactional Documents

If you plan to issue shares to an investor in exchange for money, you will first need to agree to the share issuance’s key commercial terms. Specifically, how many shares will you issue to the investor and at what price? 

Tip: You want to balance the benefit of increased capital that investors provide against the loss of control that comes with issuing shares to other shareholders.

After negotiating key terms, you and the investor may choose to enter into a term sheet. This is a guiding document for further negotiations before both parties sign a final document. Regardless of whether you use a term sheet, the final document that confirms the share issuance is a share subscription agreement. A share subscription agreement may be a short, simple document setting out the share issuance’s basic details. Alternatively, it could be an extensive legal document, including company warranties and guarantees for the investor’s protection.  

You may be issuing shares to a new shareholder, where your company has a shareholders agreement. In that case, the investor will need to sign the company’s shareholders agreement as a condition for being issued the shares. The investor may be taking a significant shareholding in your company. In that case, they may need a new shareholders agreement to be put in place. This new agreement protects their position as an investor.

Disclosure Obligations

There are extensive disclosure obligations that apply to share issues with members of the public. However, you may rely upon certain exclusions when making small or personal share offers. The purpose of these exclusions is to promote small businesses’ growth without onerous disclosure obligations that may otherwise apply. We suggest you seek legal advice to ensure that your share issue:

  • fits within these exclusions; and
  • complies with any limited disclosure requirements that may nevertheless apply to your offer.

Approvals and Share Register

To issue shares, you will need the company directors’ approval and, often, the shareholders’. 

As with almost all significant company decisions, passing a board resolution requires a majority of the board of directors to vote in favour of the resolution. You will need to prepare a directors certificate setting out the price and terms of the share issue. You will also need to certify that, in the directors’ opinion, the price and terms are fair and reasonable to the company and its shareholders. 

Your company may not have a constitution. In that case, its existing shareholders have standard pre-emptive rights to any newly-issued shares. These rights allow existing shareholders to participate in the share issue proportionate to their current shareholding. If pre-emptive rights apply, and assuming none of the existing shareholders wants to buy shares, you can pass a resolution of the shareholders waiving their pre-emptive rights. 

Additionally, your company can negate such pre-emptive rights by drafting a constitution that explicitly rules them out. This, however, is unusual. It is worth noting that the reverse is true for share transfer. Pre-emptive rights do not apply on a share transfer unless the constitution or shareholders’ agreement expressly provides for these. This highlights the importance of adopting a constitution for your company.   

Once you obtain the necessary approvals and finalise the share issuance, you must update the company’s share register. A share register is a detailed list of the company’s shareholders, including historical transactions (both share issues and transfers). Notably, only when you include these details in the company’s share register is the share issuance final.

Reporting Obligations

You will need to notify the Companies Office within ten business days of a share issue. You must inform the Companies Office of the number and class of shares you will issue and the shareholder’s details.

To update the Companies Office register, you will need a RealMe login, and an online services account with the Companies Register. Log in to your online services account, enter your company’s name and company number or New Zealand Business Number (NZBN). Next, follow the steps set out on the Companies Office website.

Also, keep in mind that you will need to include an updated list of the company’s shareholders and their details when filing your annual return.

Key Takeaways

As a company director, you want to ensure that you obtain the necessary approvals, correctly update your company’s share register and notify the relevant authorities. If you would like to speak with an experienced corporate lawyer to get assistance with issuing shares, contact LegalVision’s New Zealand business lawyers on 0800 005 570 or fill out the form on this page.

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