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The ownership structure of every business is different and will be recorded, in detail, in its shareholder agreement. This agreement is a legally binding document and will explain the powers and decision-making duties of shareholders. Indeed, a shareholder can enforce the agreement against another shareholder if they are not upholding their obligations under the agreement. One of the most common issues that arise out of shareholder agreements concern directors’ voting rights. This article will explain how the shareholder agreement operates and how it guides directors’ voting rights.

What Is a Shareholders Agreement?

The shareholders agreement underpins, consolidates and explains the ownership structure of a company. It is an important document as it sets out the ownership percentage of each shareholder and what rights they have. It is similar to a partnership agreement. Likewise, the shareholders agreement can be between individuals or investors such as companies. 

There is no legal requirement to have a shareholders agreement but it is recommended so that all owners know what their rights and obligations are.  The shareholder agreement not only outlines the arrangement between shareholders but also between shareholders and the company itself.

What Is a Director?

A director is an appointed individual who has the right to make business decisions on behalf of a company. However, for more important decisions, a director may need to agree with some, or all, of the other directors to affect a decision. 

A director sits on the board of a business and also could be a shareholder of the business. However, not all shareholders are directors and a director does not need to be a shareholder. Indeed, businesses will often appoint independent directors to their board, and the shareholders agreement will usually outline this process. Directors usually get one vote each.

Voting Procedure

The board will vote on matters of governance for a business. For resolutions or decisions to pass, usually the board will need to vote at least 51% in favour of the matter. Also, for a motion to commence in a board meeting, the members must meet quorum. This means that a certain number of directors must be present either at the meeting or through telecommunication means such as Zoom. 

The number of directors needed for a quorum will depend on the specific shareholder agreement or company constitution

It is important to remember that a director votes for a resolution as long as they do not dissent from it. This means that if a director is silent during a vote, the board will take this as voting for the resolution. 

Important Motions

Additionally, certain matters might need more than 51% of the board to be in favour of the matter for it to pass. These might be matters of greater importance that require, for example, the board to vote at least 75% in favour of the motion to pass. Alternatively, some matters such as matters relating to the shareholder’s agreement might need unanimous support for it to pass. This is because all parties to a contract must consent to any alterations to the contract.

Casting Vote

In some companies, the chairperson will have a casting vote, which is a vote that splits a deadlock. The chairperson is appointed by the board and is seen as the leader of the board. They run meetings and organise the agenda. However, New Zealand law states that the chairperson will not have a casting vote for boards of directors of companies. This means that a chairperson has the same vote as any other director and if a motion is split, it will not pass. 

Key Takeaways

Shareholders agreements are the building blocks for any company structure as they outline the ownership percentages for all the relevant parties. They also govern the relationship between shareholders and directors of the company. Directors on the board can be shareholders but some are appointed externally. 

In New Zealand, the board can make decisions on the governance of a company and each director has one vote. Most decisions must achieve a 51% majority but some important decisions may require a higher majority. Further, in organisations that are not companies, the chairperson has a casting vote that allows them to break deadlocks. However, New Zealand law does not allow chairpersons to have a casting vote and if a vote is tied the motion will not pass.

For legal assistance with managing voting rights for your shareholder agreements, or any other corporate governance matter, contact LegalVision’s corporate lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can a director abstain from voting?

Yes, any director can abstain from voting as long as they make this decision clear.

What organisations allows a chairperson to have a casting vote?

Organisations, where a chairperson can have a casting vote, include charities, sports clubs and not for profits. 

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