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One benefit of structuring your business as a company is that you can issue new shares. There are all kinds of benefits to issuing new shares, from bringing on new investors to giving staff a share of the business and aligning their incentives accordingly. However, issuing shares is not always a straightforward process, and there are several legal and business aspects to understand. This article sets out three questions to ask yourself, including the need to issue shares, whether pre-emptive rights are relevant, and whether you will need a special resolution.

What Is the Need to Issue New Shares?

While issuing new shares can be advantageous, it also dilutes the ownership stake of existing shareholders (including yourself). Hence, a general rule is to be cautious and carefully plan why you think issuing new shares is the best way to advance your business interests. Of course, attracting new investment is a great thing. But even then, you should have a clear business case for why the investment in question warrants the specific number of shares. 

Having a clear idea of the actual need to issue new shares will help ground your negotiations with the parties interested in becoming shareholders. Likewise, it will also help you communicate clearly to existing shareholders and other stakeholders in your business about why the dilution of ownership is worthwhile.

Have I Given Existing Shareholders the Option to Buy Newly Issued Shares?

Your company constitution may detail specific requirements and obligations you must follow. One of the most basic requirements in New Zealand for a company issuing shares is first to offer those shares to existing shareholders to purchase. This is called a ‘pre-emptive right’. This right aims to protect existing shareholders from having their control and stake of the business diluted unilaterally. You should always bear this possibility in mind when seeking to issue new shares to bring new investors on board. 

Note as well the typical legal requirements around this offering of shares to existing shareholders. You must give those existing shareholders the same (or more favourable) terms and conditions of purchase compared to what you will offer to outside parties. Again, this aims to protect existing shareholders. Additionally, there are sometimes provisions in a company constitution giving even non-shareholders a pre-emptive right when new shares are issued. This is another handy thing to check.

Will You Need a Special Resolution to Issue Shares?

There can sometimes be obstacles or other difficulties with issuing the number of shares you would like under the company’s rules. This is dependant on your company constitution and the specific requirements around issuing shares. In some scenarios, you may need to pass a special resolution to ensure the business can legally issue shares.

A special resolution is when a supermajority of shareholders (typically 75%) support a proposal. For instance, a proposal to alter the constitution or allow a waiver to pass a special share issuance. It is crucial to know in advance if you will need a special resolution to issue shares. Factoring in this need to organise a supermajority of shareholders in support can sometimes present new obstacles. Knowing the requirements in advance can save trouble and stress later on.

Key Takeaways

Issuing new shares in your company is a fantastic way to advance your business’s growth, particularly attracting new stakeholders and parties. However, there are legal and commercial questions every time you seek to issue new shares. Important considerations when issuing new shares include:

  • the purpose of issuing shares; 
  • the status of existing shareholders and their pre-emptive rights; and 
  • whether you will need a special resolution for the issuing process.

If you would like more information about issuing shares or managing this process with existing shareholders, contact LegalVision’s corporate lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

Can any company issue new shares?

Companies can almost always issue shares in some form. However, the company constitution will often detail the correct process for doing so. There are also additional rules and regulations for public companies that make doing so more difficult.

What are pre-emptive rights?

Pre-emptive rights give existing shareholders the option to buy newly issued shares in the company. Your company cannot offer those shares to outside investors at more favourable terms and conditions than those available to existing shareholders. These rights aim to protect existing shareholders and prevent their stake in the business from being diluted without their control.

What is a special resolution?

A special resolution is when a supermajority of investors can vote to alter some part of the constitution or permit an action that would otherwise be in breach of the constitution. A supermajority is typically 75%, although a company constitution can change that requirement. A special resolution can allow companies to issue shares when their constitution would otherwise forbid them from doing so.

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