Two people start a company as equal shareholders because they trust each other. Several years later they want different things — one wants to reinvest and the other wants income, or one wants out, or one has stopped contributing. Nothing in the company’s constitution addresses any of it.
A shareholders’ agreement is the document that does, and it is cheapest and easiest to negotiate at the point when everybody still gets on.
What the default position actually gives you
Without an agreement, you have the Companies Act 1993 and the constitution. Together they deal with the mechanics of running a company — directors, meetings, share issues, distributions — and almost nothing about the relationship between shareholders.
Specifically, they do not tell you:
- How deadlock is resolved when two 50 percent shareholders disagree.
- Whether a shareholder can sell to an outsider, and on what terms.
- What happens if a shareholder dies, is disabled, divorces or becomes bankrupt.
- Whether a shareholder must work in the business, and what happens if they stop.
- How shares are valued when someone leaves.
- Whether shareholders can compete with the company.
- How much profit is distributed versus retained.
Every one of those becomes urgent at exactly the moment relations have deteriorated.
The clauses that matter most
Transfer restrictions and pre-emptive rights. A departing shareholder must generally offer their shares to existing shareholders first, on defined terms, before selling externally. Without this you can end up in business with a stranger, or a competitor.
Valuation mechanism. How shares are valued on a transfer, and who determines it. An agreed method — an independent valuer, a formula, a multiple — prevents the most common and most bitter dispute. Consider whether a departing shareholder’s reason for leaving affects the price, since a “good leaver / bad leaver” distinction is common and needs care to be enforceable.
Deadlock resolution. Essential in a 50/50 company. Options range from a casting vote to mediation, to a shotgun clause where one party names a price and the other chooses to buy or sell at it. Shotgun clauses favour the party with more cash, which is worth knowing before agreeing to one.
Drag-along and tag-along. Drag-along lets a majority selling the whole company compel minorities to sell on the same terms. Tag-along lets a minority join a sale on the same terms rather than being left with a new majority owner. Both protect a legitimate interest and both should be present.
What happens on death, disability or bankruptcy. Usually a compulsory transfer to remaining shareholders, frequently funded by life and total permanent disability insurance held for the purpose. Without funding, a compulsory buyout clause obliges people to find money they do not have at the worst moment.
Working obligations. Whether shareholders are required to work in the business, how they are remunerated for it, and what happens to their shares if they stop.
Dividend policy. How much is distributed versus retained. This is the most common source of ongoing friction between shareholders with different personal circumstances.
Reserved matters. Decisions requiring unanimous or supermajority approval — taking on debt above a threshold, issuing shares, changing the business, related-party transactions. This is how a minority shareholder retains meaningful protection.
Restraint of trade during and after shareholding, which must be reasonable in duration, geography and scope to be enforceable.
The uncomfortable conversations are the valuable ones
Negotiating this document surfaces assumptions people did not know they disagreed about — whether the business exists to generate income or to be sold, how hard everyone intends to work, what happens if someone’s circumstances change.
Discovering those differences during a negotiation, with lawyers present and goodwill intact, is enormously cheaper than discovering them during a dispute. Some ventures should not proceed, and it is better to find that out at the start.
Practical points
- Do it at the start, or at the next natural trigger — a new shareholder, an investment round, a significant change.
- Get independent advice each. One lawyer acting for everyone cannot advise on the conflicts that the document exists to manage.
- Check it against the constitution so the two do not conflict. Where they do, which prevails should be stated.
- Fund the buyout obligations with insurance where the agreement creates them.
- Review it periodically, particularly after changes in circumstances.
The Companies Office publishes material on company obligations and constitutions, and the Companies Act 1993 is available free at legislation.govt.nz with no copyright in the official text.
General information only, not legal advice. Shareholders’ agreements should be prepared with independent legal advice for each party.
