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A shareholders’ agreement is a contract between company shareholders that regulates how they deal with each other and the company. While it is not strictly compulsory to have a shareholders’ agreement, they can be invaluable. Having one is particularly helpful if any situations arise where there is disruption or conflict. Ensuring your business has a shareholders’ agreement can ensure that issues that might arise in the future are considered well before they become problems. This article sets out five kinds of mistakes you should avoid when drafting a shareholders’ agreement in New Zealand. 

Not Putting Your Shareholders’ Agreement in Writing

It is crucial to put any shareholders’ agreement in writing. Although it is possible to have a legally binding oral or other informal types of agreement, they open you up to a significantly increased risk of disputes and disagreements later down the line. A written shareholders’ agreement will help ensure a much faster and easier resolution of disputes and disagreements. In some instances, it may even prevent disputes altogether. By clearly outlining the terms and conditions for shareholders before disputes arise, you already have a procedure in place if they do occur. 

Not Including Any Provisions That Deal With the Death of a Shareholder

You should include provisions dealing with the situation if one shareholder dies. The nature of this particular risk will turn on the type and size of the business. Particularly for a small business, it is essential to include a provision concerning the death of a shareholder. 

In most cases, a shareholder’s shares form part of their estate when they die. This might find the remaining shareholders running the business with a former shareholder’s beneficiaries. It could be their parents, siblings, partner, or friends. The beneficiaries who now hold shares in the company may have no knowledge or interest in the business. Also, they might have a vested interest that is at odds with the rest of the shareholders. 

A typical clause in this situation is a mandatory, rather than optional, buy-out. This also helps address the uncertainty that occurs on the death of a shareholder. However, this is something shareholders need to discuss. It is not a given that a mandatory buy-out clause will be appropriate for your business. It remains an option to allow family members or other beneficiaries to enquire shares after the death of a shareholder. That may be appropriate if the business in question is a small, family-run business.

Not Including Privacy and Confidentiality Provisions

Shareholders receive vast amounts of information about a business. In the case of conflicts between shareholders, a shareholder may have the power to misuse information.

Including a privacy or confidentiality provision in your contract can compel shareholders to keep information private. For instance, it may cover:

  • any documents, including electronic information, relating to the operation or governance of the business;
  • the shareholders’ agreement itself;
  • any decisions or proceedings of the shareholders;
  • any decisions or proceedings of the Board of Directors;

A shareholders’ agreement may bind shareholders beyond their term as a shareholder and beyond the life of the agreement itself. 

These confidentiality provisions are significant for shareholders’ agreements as these agreements will often contain much more sensitive information than publicly available documents that are registered with the Companies’ Office. For instance, a shareholders’ agreement may outline policies concerning the allocation of dividends, remuneration and dispute resolution that you may not want to share with the general public.  

Not Including a Clear Process For Deadlocks

Deadlocks between shareholders can cause a company to fail. Deadlocks are a particular problem if shares are held evenly, such as in the case of 50/50 owned and controlled companies. 

It is essential that where there is a deadlock between shareholders, the shareholders’ agreement outlines a clear process for moving forward. These provisions should ensure shareholders can resolve disagreements quickly and efficiently.  For example, a deadlock clause may provide that a particular decision is elevated to a particular person after a certain period. A shareholder may force the other(s) to buy them out or force the company’s liquidation. 

Not Including Clear Enough Dispute Resolution Provisions

This is related to the question of deadlocks but will cover a broader range of situations. They will typically arise where different groups of shareholders disagree, but they have not necessarily reached a situation where they simply cannot continue in business together.

Key questions to consider are: 

  • What process should shareholders follow if there is a dispute? 
  • Do you want to mandate a staged approach, requiring parties to negotiate between themselves before remitting a matter to formal mediation or arbitration? If this is the case, how is the mediator or arbitrator going to be chosen? 
  • At what point is a dispute escalated? 
  • At what point can, or should, a disagreement cause the agreement to be terminated?

Key Takeaways

Although there is no requirement that businesses have a shareholders’ agreement, it is best practice to have one. They are analogous to relationship property agreements, more often referred to as “pre-nups”. The aim is to outline the rules for shareholders clearly. These will help guide your business into the future and prevent future disputes. When writing your shareholders’ agreement, it is essential to consider these common mistakes and factor them into any agreement you produce.

If you would like more information about shareholders’ agreements, contact LegalVision’s corporate lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

Can you have an oral shareholders’ agreement?

Yes, but it is not best practice. A written agreement will help prevent disputes over what exactly shareholders agree upon.

Can I amend my shareholders’ agreement?

Yes, it is always possible to amend clauses in your shareholders’ agreement. Often a shareholders’ agreement will outline a process for doing this. It is best to get legal advice on this question, as it might differ between companies.

Do I need to register my shareholders’ agreement?

No. Unlike a company constitution, you do not need to register your agreement with the Companies Office. As a result, this gives it a greater degree of confidentiality. This means you can include more sensitive information about issues such as the roles and remuneration of the shareholder employees, the dividend policy, funding, rules around dispute resolution and rules around compulsory selling of shares.

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