Company Constitution & Shareholders’ Agreement

WHAT ARE THEY & WHAT DO THEY COVER …
It is not compulsory to have either a constitution or a shareholders’ agreement but these are important documents that can help to regulate how the company (and business) you’ve created will operate in all kinds of different situations, including day to day operations and decisions, dealing with the departure of one or more shareholders, as well as in more difficult times such as the death of one of the shareholders or disputes.

Constitution
A constitution is a document that sets out the rights, powers and duties of the company, the board, each director and each shareholder. In New Zealand you can incorporate a company either with or without a constitution. If a company has a constitution it needs to be adopted and registered through the Companies Register, thereby making it a public document.

Companies that do not have a constitution are governed by the Companies Act 1993 so having a constitution can allow a company to operate in ways that wouldn’t otherwise be possible under the Act, i.e. binding the company through 1 directors signature witnessed.

Shareholders Agreement
A shareholders agreement is a private contract between the shareholders of a company regarding their dealings with one another and the company. It does not get registered through the Companies Register. This privacy element is one of the main advantages of a shareholders agreement.
A shareholders agreement can include outlining responsibilities for the day to day running of the company and also the rules, processes and framework for dealing with contentious matters that may arise. A shareholders agreement can include as few or as many matters as the shareholders determine and they frequently range in size, covering only as many details as the shareholders agree that it should.

What do they Cover
Any number or combination of issues can be addressed, depending on what matters to you and your fellow shareholders:

• Directors – who? How many? How are they appointed & removed? Do they have differing responsibilities? What are their obligations?
  
• Who can bind the company and how?
  
• Operations of Company – how will the company be run on a day to day basis? Are there financial reporting requirements you want to include? How can make decisions – operational & strategic decisions.
  
• Remuneration – will shareholders/directors be paid? Are there other benefits included, e.g. car, phone, computer, use of credit cards?
  
• Meetings – how often? Quorum?
  
• Exiting the company – Can a shareholder be forced to be bought out? Can a shareholder require the others to buy them out? What is the process if all shareholders want out?
  
• Pre-emptive rights of shareholders – do shares have to be offered to the other shareholders first before they can be offered to others? Exemption for associated person transfers?
  
• Information about shares and shareholders – who can be a shareholder? How many shares? Do the shares need different rights attaching to them?
  
• Shareholder decisions – are there some that require unanimous approval? Do all shareholder have the same rights?
  
• New shareholders – how are new shareholders introduced?
  
• Valuation of shares – how will shares be valued? Will this be the same method in all circumstances?
  
• Drag Along / Tag Along - applicable if you have a majority or minority shareholders – can force sale of minority shares.
  
• Deadlocks – what is the process to resolve disputes? Fundamental dispute – what does this mean & what happens if there is one? Mediation?
  
• Restraint of trade – are departing shareholders subject to a restraint of trade? If so, on what terms?
  
• Non-competition – are shareholders prevented from carrying on business in competition with the company?
  
• Distributions – how and when will they be paid? Will profit stay in the company?
  
• Funding – how will capital be raised? How else will the company be funded?
  
• Shareholders funds – will the shareholders be required to introduce capital to the company? Will there be interest paid back to the shareholders for any such loans? Do all shareholders have to be able to put in the same amount?
  
• Insurance – what needs will the company have, consider death or serious injury of another shareholder?