Why do I need a Shareholders' Agreement and Constitution?
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 will disagreements be 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.
While a shareholders’ agreement focuses on how the shareholders interact and make decisions, a constitution is a set of rules for how a company operates. They work together, and it’s a good idea to have both. In New Zealand, companies don’t legally have to have a constitution (or a shareholders' agreement). But by law, a company can only do certain things if its constitution (but not shareholders’ agreement) permits it, such as to buy-back shares from its shareholders, indemnify its directors or employees, get directors and officers insurance for its directors or employees, or issue redeemable shares. These actions can be beneficial for a company.
This Bundle contains both our Shareholders’ Agreement and Constitution. Creating both at the same time saves time and money and ensures consistency across these two essential company documents.
What’s in this Shareholders' Agreement and Constitution Bundle?
This Shareholders’ Agreement and Constitution Bundle contains:
- A Shareholders’ Agreement
- A Constitution
- Shareholders’ Resolution Adopting Constitution
Our Shareholders’ Agreement contains all the key terms typically included 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.
This Bundle 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 held by the shareholders are ‘ordinary’ shares (not preference or redeemable shares, although the constitution does permit the company to issue these other types of 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 simple, easy-to-understand Constitution permits a company to take certain actions or avoid certain procedures that it would not otherwise be legally able to do. It doesn’t repeat large chunks of the Companies Act as many constitutions unnecessarily do.
How long will it take to create my Shareholders' Agreement and Constitution?
20 - 35 minutes – have a shareholders’ lunch date and nut it out together! During the Q&A you can save your progress to come back later, or repeat the Q&A to change an answer or produce a new version of a document.
What information do I need to complete the Q&A?
- The full legal name of the company and its business number (if it has one)
- The names and contact details of the shareholders
- Shareholding details
- Minimum number of directors and 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)
- Quorum requirements – how many directors must be present at a board meeting?
- 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 and company constitution together. This will ensure all the key issues are discussed, negotiated, and agreed upon 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 do contain some important matters, and if you have any questions during the Q&A process, feel free to reach out to us at hello@onyourterms.co.nz.
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 documents (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 to review the Shareholders’ Agreement and Constitution you have created. 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 documents themselves.
What do I do once my Shareholders' Agreement and Constitution are created?
Schedule 2 to the Shareholders’ 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 Shareholders’ 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 MS Word so you can amend it if necessary.
The Constitution is ready to go as soon as you have downloaded it. It doesn’t need to be signed. All shareholders must approve and adopt the Constitution for the company by signing the Special Resolution of Shareholder Adopting Constitution (provided with the Constitution). If:
- the company is not yet incorporated (also known as registered), the Constitution must be uploaded to the New Zealand Companies Office at the time the company is incorporated.
- the company already exists, the Constitution must be uploaded to the New Zealand Companies Office within 10 working days after the shareholders adopt it.
Other helpful information:
- Check out our blogs: How to transfer shares in a New Zealand company, Why Business Prenups (aka Shareholders’ Agreements) are Essential!, Your Top 10 Questions on Shareholders’ Agreements Answered
- See our Guide to Director Obligations in New Zealand and Guide to Incorporating a Company in New Zealand
- You may also find these bundles or documents useful for your business: Term Sheet for Shareholders’ Agreement, Company Constitution, Term Sheet for Sale and Purchase of Shares (one minority shareholding), Agreement for Sale and Purchase of Shares (one minority shareholding), Transfer of Company Shares and Approvals Bundle, Deed of Accession to Shareholders Agreement, Company Registers, Director Indemnity Bundle
- Check out our FAQs
If you’re unsure whether this Bundle 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 simplified, fast, 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 law firm partners able to help you here.