How does a shareholder’s agreement promote success in business?
When it comes to business in New Zealand, laying down a solid foundation is paramount for longevity and success. The excitement and rush of getting into business often diverts your attention from important documentation necessary to regulate relationships, collective management of the business and most especially an exit from the relationship.
What is a Company?
A company is made up of its directors and shareholders. Directors are responsible for the strategic management and governance of a company, while shareholders are the owners of the company who hold shares representing the extent of their ownership. Shareholders have important rights such as voting on major transactions and receive the company’s profits (known as a dividend). In larger companies a board can be appointed to help manage the company.
Companies Act 1993 (“Act”)
The Act is legislation that governs the establishment, operation, and regulation of companies. It covers aspects such as the shareholders’ rights, directors’ duties, financial reporting requirements, dealings with shares and liquidation of companies. The Act is the default regulation to rely on when parties haven’t registered a constitution or entered into a shareholder’s agreement.
Company Constitution
When incorporating a company you can elect to file a constitution. A constitution is a legal document that outlines the rules and procedures governing the internal management and operation of a company. Whilst it contains many important provisions, it is not typically tailored to suit your business or the relationship you have with the other directors and shareholders.
Shareholders Agreement
A shareholders’ agreement is an essential road map for your journey through business. This agreement should record bespoke terms upon which the parties determine their ownership, roles and responsibilities, and exit from the company. Disputes among shareholders are not uncommon, and they can escalate quickly, potentially jeopardizing the stability and reputation of a business. A well-drafted shareholders’ agreement anticipates such conflicts and includes mechanisms for their resolution. A well set out process for resolving conflicts can save time, money, and valuable relationships.
In some cases, parties have no choice but to resort to a liquidation of their company if an exiting shareholder cannot sell their shares internally or on the open market. In such cases, the goodwill value is often lost as the liquidator will simply sell the assets (such as cars, machinery and tools), and the process is time consuming and costly.
Planning for the future is essential for the longevity of any business. A shareholders’ agreement can address succession planning by outlining procedures for the transfer of shares in the event of a shareholder’s death, disability, or retirement. By establishing clear guidelines for the sale or transfer of shares, the agreement ensures a smooth transition of ownership while minimizing disruption to the company’s operations.
Pen to Paper
A shareholder’s agreement is an integral part to ensuring that the parties agree on some fundamental operations of the company and most importantly, how a shareholder can exit. Regardless of the size or industry of your business, you should prioritize the drafting and implementation of a tailored shareholders’ agreement. Whether you’re looking at new business opportunity or have been in business for 20 years, there is no better time than the present to put pen to paper. If you don’t yet have a shareholder’s agreement or you have one in need of review, please touch base with our experienced Commercial Team.
