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If you are setting up a new company, it may be worthwhile to draft up a shareholders agreement. This document governs the relationship between shareholders and your company, as well as between the shareholders themselves. Its purpose is to set up binding rules for shareholders to provide guidance should certain situations arise in the future. Potential examples are a shareholder’s death, or when a shareholder wants to sell their shares. You do not have to have a formal agreement with your shareholders as part of your company’s creation documents, but there are advantages to having one if something goes wrong. This article will go through the benefits of a shareholders agreement, its contents, and how it is different from the constitution of your company.

Advantages of a Shareholders Agreement

A shareholders agreement is helpful when there is more than one shareholder in your company. Where there are multiple parties, there are increased chances for misunderstandings. Having rules and information set out in a document can eliminate such misunderstandings. This applies both in day to day workings of your company, and also if a dispute occurs between shareholders. 

A written document can provide a level of certainty for the shareholders of your company, and it may be useful to consider possible resolutions now, should any issues come up in the future.

Shareholders Agreement vs Company Constitution

A similar document you can create in your company’s creation is the company constitution. The law provides some default regulation for how you should run your company, but having a constitution means that you can tailor it to your business. You must register your company’s constitution with the New Zealand Companies Office. 

There is some overlap between a company’s constitution and a shareholder’s agreement, but there are a few differences. Notably, a shareholders agreement is confidential, and you do not need to register it with the Companies Office. This means the agreement can cover more sensitive company information, such as dispute resolution or dividends policy. It also regulates the relationship between shareholders themselves and generally covers more specific topics relating to how the company is run. It can also cover matters before a company’s incorporation, whereas a company constitution only applies after your company is incorporated.

Contents of a Shareholders Agreement

You can tailor your agreement to the specific needs of your company. Some possible topics you can cover include:

Dispute Resolution

A key reason for having a formal agreement with your shareholders is to provide clarity by outlining how to manage significant disagreements. Disputes are costly and time-consuming, but if you can rely on what your shareholders previously agreed on what to do in these situations, the resolution process should be easier.

Management and Running of the Company

A shareholders agreement can provide a clear-cut outline of how business should function. This can include how your company is run on a day-to-day basis, as well as financial matters. It can also cover who is in charge of these matters, as well as other administrative issues.

Decision Making

You can also include clauses covering how the company makes decisions. You can define whether your company director or shareholders are in charge of specific decisions. Finer points can include:

  • the voting process on decisions that concern the company; 
  • the rights attached to the shares that shareholders own, such as pre-emptive rights;
  • any non-competition provisions; and
  • which decisions directors can make on their own, and which decisions need shareholder approval.

Some critical decisions may only be made by shareholders who own a higher percentage of shares in your company. A shareholders agreement would outline what that percentage threshold is. The agreement would also cover what happens when shareholders need to make these critical decisions. Such crucial decisions are:

  • appointing or removing a director;
  • winding up a company;
  • changing the company constitution; and
  • changing the scope or direction of the business.

For example, shareholders owning 25% or more shares would be able to make these decisions. You can cover these issues in your company constitution, but you may prefer such administrative matters with the confidentiality the shareholders agreement provides.

Shares

Another important issue to plan for in your agreement is what happens when a shareholder wants to sell or purchase more shares. Spelling out the process ensures it is uniform with clearly-defined steps.

For example, if you want to make sure that shares are offered first to other shareholders, you can write this up in the agreement. This way, there is more control over how shares are sold within the company.

Key Takeaways

A shareholders agreement can be useful for defining the relationship between your company and its shareholders, as well as the shareholders themselves. You can cover a number of circumstances in your agreement, including your company’s decision making processes and share sales. It can also be useful as a contingency plan, should unforeseen situations come to pass. If you would like more information or any help drawing up a shareholders agreement, contact LegalVision’s corporate lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What is a Shareholders Agreement?

A shareholders agreement is a confidential contract between the shareholders of your company. It regulates how your shareholders operate in the company, and the relationship between the shareholders themselves.

Do I need a Shareholders Agreement?

No, but it can be useful to have one if something goes wrong in your company, and the shareholders have already agreed on the way to handle it. It may also be useful as a rubric for how you run certain administrative issues in your company.

What is a Shareholder?

A shareholder is someone who owns a share (or shares) in your company. This means that they have certain rights attached with those shares, and can be part of decisions about how you run your company.

Do I need to register a Shareholders Agreement?

No, this type of agreement is confidential. This means that you do not need to register it with the Companies Office.

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