Does your business need a shareholder agreement?

July 13, 2016 by
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What is a shareholder agreement?

A shareholder agreement is a contract between shareholders of a company. Under New Zealand law, there is no legal requirement to have a shareholder agreement. However, most companies that have more than one shareholder are well advised to put in place a shareholder agreement.

Why?

Like in a romantic relationship, business partners are focussing on how successful their future will be rather than on what might happen if they encounter rocky times.

Does your business need a shareholder agreement?

A shareholder agreement can be entered into at any time during the lifetime of a company.

Shareholders are the owners of the company. Even though they own the company, shareholders are are not liable for actions or debts of the company. Remember the company is a separate legal entity.

Directors are acting on behalf of the company. Unlike, shareholders, they can be held personally liable for actions and debts of the company. Directors of a company owe a duty of care to the company. Directors must act in the best interest of the company.

Does your business need a shareholder agreement?

Unlike a company constitution, a shareholder agreement is confidential. The constitution of a company is publicly available on the Companies Register.

A shareholders agreement is an important tool to manage potential risks and impasses that may arise in the future.

Shareholder agreements deal with matters that require confidentiality such as non-compete clauses, business plans, how the company is funded, voting rights, dividend distribution, issuing of new shares, buying and selling of shares, and the management of the business, including an exist strategy.

A shareholder agreement should be tailored to the particular needs of a business. Questions to consider when drafting a shareholder agreement include:

  • How will the business be funded?
  • Who is on the board of directors and how are directors appointed and removed?
  • What type of decisions require board or shareholder approval?
  • What are the respective contributions to the business of each individual shareholder? (i.e. cash funding, knowledge, resource, intellectual property, etc)?
  • How are the profits shared between the shareholders?
  • How are business plans and budgets being approved?
  • What is the exit strategy of the business?
  • Protection of minority shareholders by including a clause in relation to tag along rights
  • What are the tax implications and how is continuity being preserved?

Many disputes which arise between shareholders can be avoided if a shareholder agreement is put in place that is tailored to the specific business needs. A key benefit of a shareholder agreement is that it can provide an effective mechanism for resolving any impasses that arise among the shareholders. A well-drafted shareholder agreement should therefore always contain dispute resolution mechanisms.

It is a good idea to talk to tax experts about personal tax planning before setting up or changing an existing shareholder agreement. For instance, a company can only carry forward itsunallocated imputation credits if the company retains 66% commonality of shareholding.

What does a shareholder agreement cost?

The legal cost of preparing a customised shareholder agreement depends on the complexity and the number of shareholders involved. Basic shareholder agreements start at $1,800 and more complex shareholder agreements can cost up to $15,000.

Keep in mind that the costs of drafting a solid shareholder agreement is small (even a comprehensive one) compared to the cost of resolving (let alone litigating) a dispute between shareholders which may in the end jeopardise the future of the business.