Why do I need a Shareholders' Agreement?
The best time to discuss your rights and responsibilities as shareholders of a company is before any issues arise. It’s risky to assume you’re all on the same page if you haven’t discussed the key points. For example, when your company starts making a profit, how much should be paid out to shareholders (versus invested back into the company)? How will decisions be made? What happens if one shareholder wants out, do the others have to buy their shares? At what price? How are disagreements resolved? What if the company needs more funding?
Understanding how these issues could impact each shareholder and the company and then agreeing upfront how they will be dealt with creates a much smoother business journey. And if things do take an unexpected turn, you have a rule book to follow rather than ending up in a messy dispute.
What’s in a Shareholders' Agreement?
Our Shareholders’ Agreement contains all the key terms typically included in a shareholders’ agreement for a small-mid size Kiwi company. It includes director appointment rights, restrictions on the transfer of shares, restrictions on the issue of new shares, funding, how decisions are made, the contributions expected from each shareholder, roles and remuneration of any shareholders that are employees or contractors in the business, dividend policy, circumstances in which a shareholder will be forced to sell its shares, and optional non-competition and non-solicitation restraints.
Our Shareholders’ Agreement is not designed for complex or unusual shareholding arrangements. It assumes all founder shares are fully vested (ie, there are no conditions on the shareholders’ ownership of their shares), all shares are 'ordinary' shares (not preference or redeemable shares), and does not include rights to buy back unvested shares (or a vesting schedule). Further customisation of the agreement will be needed to address more complicated shareholding arrangements - see below under ‘What if I need help?’ for how we can connect you with a lawyer for this.
Our Shareholders’ Agreement assumes your company has a constitution which is consistent with the terms of the Shareholders’ Agreement. If you don’t have one or need to replace your current one, see our On Your Terms Constitution. A company constitution is a set of rules for how a company operates, while a shareholders' agreement focuses on how the shareholders interact and make decisions. They work together, and having both is a good idea. By law, a company can only do certain things if its constitution (but not shareholders’ agreement) permits it.
How long will it take me to create my Shareholders' Agreement?
15 - 30 minutes – have a shareholders’ lunch date and nut it out together! You will need to complete the Q&A within one month (following that your access will expire). During this access period, you can come back to the Q&A and re-answer any question to reflect a change in position, which will generate an amended Shareholders’ Agreement for you.
What information do I need to complete the Q&A?
- The names and contact details of the shareholders
- Shareholding details
- How many directors each shareholder can appoint or the shareholding percentage required to be held to appoint a director (and the names of those directors that have been appointed)
- The amounts and terms of any shareholder loans (if this is not covered in separate shareholder loan agreements)
- The initial capital contributions made by each shareholder to the company
- Whether the shareholders will work in the business as employees or contractors, and if so, high-level details of their roles and remuneration
- Restrictions on the sale of shares
- Restrictions on the issue of new shares
- Whether a discount will be applied to the price payable to a shareholder in the event they leave the company under unfavourable circumstances
- How often and how much of the company’s profits will be distributed as dividends
- Details of any restrictions on competing with the business or soliciting customers/ employees/suppliers of the business – such as the time period and restricted area.
We strongly encourage all shareholders to participate in the Q&A process to create their Shareholders’ Agreement together. This will ensure all the key issues are discussed, negotiated and agreed as part of the document creation process, which should drastically shorten the time for all shareholders to sign it, saving time and potentially legal fees.
What if I need help?
Shareholders’ Agreements contain some important matters, and if anything is unclear or you have any questions, feel free to contact us at hello@onyourterms.co.nz.
If you need further customisation of your Shareholders’ Agreement or a legal review (such as if you wish to include founder vesting provisions, have issued preference or redeemable shares, or other non-standard provisions), On Your Terms has teamed up with Luminate Legal to offer its customers the option of obtaining legal advice from a lawyer to provide extra assurance and peace of mind.
If you would like to ask a lawyer some quick questions about your document (or your responses to the Q&A), or have your document reviewed/edited by a lawyer, click here to view and select Luminate Legal's packages and fixed-fee pricing exclusively for On Your Terms customers. Alternatively, you can ask your own lawyer for legal advice on your Shareholders’ Agreement. As you’ve done a large chunk of the work yourself this should be at a much lower cost than if your lawyer prepared the Shareholders’ Agreement.
What do I do once my Shareholders' Agreement is created?
Schedule 2 to the agreement contains a list of decisions relating to the company that can’t be made without 75% majority of the directors, or 75% majority of the shareholders or unanimous approval of the shareholders. The shareholders need to carefully review this Schedule and decide whether any of the types of decisions listed need to move into a different approval category or have a different triggering threshold.
Otherwise, the agreement is ready to be signed by the company and all its shareholders as soon as you have downloaded it. Your document will be in Word so you can amend it if necessary.
Other helpful information:
- Check out our blogs: Why Business Prenups (aka Shareholders’ Agreements) are Essential! Your Top 10 Questions on Shareholders’ Agreements Answered
- You may also find these bundles or documents useful for your business: Term Sheet for Shareholders’ Agreement, Shareholders Agreement and Constitution Bundle; Constitution, Term Sheet for Sale and Purchase of Shares (one minority shareholding), Agreement for Sale and Purchase of Shares (one minority shareholding), Share Transfers and Company Approvals Bundle
- Check out our FAQs here
If you’re unsure whether this Shareholders' Agreement is what you need, reach out to us at hello@onyourterms.co.nz – we’re happy to help!
If you’re not satisfied with your purchase of this product for any reason, let us know why within 10 days of your purchase and we’ll work with you to make sure you’re happy, including giving you a full refund if necessary.
Disclaimer: On Your Terms was created to provide fast, easy and affordable access to legal information and documentation. We are not a law firm and do not provide legal advice. The information and documents we provide are of a general nature, designed for common situations, and may not be suitable for your needs or circumstances. If you need legal advice, we have a network of specialist law firm partners able to help you here.