Have you recently become a shareholder in a company? Do you know what that means to you – what your obligations and responsibilities are?
In general, a closely held company is one with only a limited number of shareholders. These are private companies, meaning the shares do not trade publicly.
Holding shares in a company can be exciting and also rewarding, both financially and in terms of your involvement with the business. All companies are ultimately owned by their shareholders. Another words, as a shareholder you are an investor in that company. When you have shares in a company, you own a piece of that business. Under New Zealand law, being a shareholder gives you a number of rights and some degree of control over the company.
You may be a shareholder because a company has issued shares to you. Companies in New Zealand are governed by the Companies Act (currently the Companies Act 1993) and are registered with the Companies Office. Full details of the company are listed on the Companies Office website (https://companies-register.companiesoffice.govt.nz. All companies must record details of their shareholders on their own share register, which will also appear on the Companies Office Companies Register. As a shareholder, your details are listed on the share register. These details must be kept up to date.
You can also buy shares of a publicly traded company. Public companies have to comply with more stringent requirements as they can sell shares to the general public. We will not deal with publicly listed company shareholdings in this article.
The Companies Act also prescribes the rules for companies and in particular the rights of shareholders. The rights of shareholders may be modified or altered by virtue of the ‘Shareholders’ Agreement’ for the company and/or its constitution. We will discuss these later.
The basic rights of shareholders are the right to:
As a shareholder you own part of the company but shareholders are rarely responsible for the everyday management of the company. It is important that you understand the difference between shareholders and directors. While shareholders in a company are the owners of a company, the shareholder role is a passive role - shareholders do not have a role in the management and strategic planning of a company.
Management and strategic direction are controlled by the directors. It is the directors that prepare the strategic plan, the business plan, financial budgets and forecasts, manage relationships with employees and make sure that the company completes its statutory obligations in terms of tax returns, GST returns, health and safety, etc.
While you, as a shareholder, may be able to vote for the directors of the company (if you have voting shares), you do not automatically have a seat at the board of directors of the company. Generally, for each share you hold, you will get a vote on issues raised at company meetings. These issues can include a range of different things but the most common issues where shareholders may have a say are:
As a shareholder you are also entitled to a percentage of any distribution or dividends paid by the company. The amount of any dividend paid to you depends on how many shares you own. Dividends are paid to shareholders based on the percentage of the shares owned.
If the company goes into liquidation and sells its assets then, once any creditors and outstanding debts are paid, you, as a shareholder, are entitled to a proportional share of any money that may remain following the sale. Again, this will be paid in accordance with the percentage of shares you hold.
One liability that can occur is if you have not paid for your shares in full when the company goes into liquidation. In this case, you will be forced to pay whatever amount is outstanding for the value of your shares.
Earlier, we mentioned shareholders’ agreements and constitutions and how these may each function in relation to your rights as a shareholder. A shareholders’ agreement is a prescriptive document that is unique to each company. It is a private document containing the specific and detailed agreement between the shareholders of a company.
A shareholders’ agreement, for example, sets out the financial structure of a company, the responsibilities of working directors and how shareholders can exit the company. Shareholders’ agreements can have more specific details of the shares and the shareholders of the company, particularly in regards to the finances and funding of the company. For example, it can record exactly how much start-up capital was put into the company by the shareholders.
The agreement should set out the dividend policy for the company. It often also sets out the rules for how a shareholder can exit the company and what the confidentiality and restraint of trade rules are. It should also list the things that cannot be done without the consent of all shareholders, or at least a substantial majority of shareholders. These include but are not limited to:
On the other hand, the constitution is a generic document. It sets out the rights, powers and duties of the company, board, each director and each shareholder. You can incorporate a New Zealand company with or without a company constitution. The constitution usually covers:
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