What Does the Lack of a Constitution Mean for Shareholders? 05 Feb 2018

When setting up a company, there are lots of new roles to get your head around. Whether you are a shareholder yourself, or a director in a company, it is important to understand what is expected from the role.

Generally, the constitution of a company determines the rules for how the company is to run. The Companies Act 1993 (“the Act”) often sets out that a company can only do certain things if its constitution allows it. In New Zealand however, a company is not required to have a constitution. Although it is very useful to have, it is not a legal requirement. In the absence of one, the Act sets out the rights, duties and obligations of shareholders, amongst other matters.

Shareholders’ Powers

 

Although shareholders are not responsible for, and don’t participate in, the day-to-day management of the company, the Act holds that there are certain powers that only shareholders of a company can exercise. These include:

While the appointing and removing of directors is usually done by an ordinary shareholders’ resolution (simple majority vote), the other powers require a shareholders’ resolution to be passed by a majority of 75% (or higher if required by the company’s constitution) of those shareholders entitled to vote, and voting on the decision.

Under section 109 of the Act, shareholders may also question and pass a resolution relating to the management of the company. However unless the constitution says otherwise, the resolution is not binding on the board.

Limitations

There are certain provisions which are only allowed if expressly permitted by the constitution. These will not be available if a company does not have a constitution. They are:

-       A company may purchase its own shares (section 59)

-       A company may hold its own shares (section 67A)

-       The share register may be divided and kept in different places (section 88)

-       A director of a company may (with the prior agreement of the shareholders) act in a manner which he or she believes to be in the best interests of the company, even though it may not be in the best interests of the company (section 131).

Shareholders can bring an action against a director for a breach of duty owed to them, but not all directors’ duties are owed to shareholders. Section 169(2) makes it clear that a shareholder cannot bring an action against a director for any loss in the value of their shares by reason only of the loss being suffered by the company.

Reporting Requirements

 

Under section 178, a shareholder may, at any time, make a written request to a company for information held by the company. The company then has 10 working days from receiving the request to:

The company may refuse if:

Shareholders’ Exit Strategy

 

Unlike a director, a shareholder cannot just be removed from a company by the other shareholders If problems between shareholders arise, the Companies Act allows a shareholder to apply to the Court to seek orders against the company or other shareholders – for example for the liquidation of the Company. However, this is where it can often be helpful to have a Shareholders’ Agreement which adds to the ordinary rights and responsibilities of the shareholders under the Companies Act. The agreement can set out who can buy their shares, how the shares will be valued, and any restrictions a shareholder may face once leaving, like a restraint of trade. Again, this Agreement isn’t legally required, but it brings clearer rules that are agreed upon by the shareholders.

Conclusion

 

Without a constitution, there are laws in place to govern what a shareholder can and can’t do. However if you have a company with more than one shareholder, you may want to look into getting a constitution and/or shareholders agreement. They can provide greater guidance on matters already in the Act, but can also allow shareholders greater involvement in how the business itself is run.

 

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Kris Morrison krismorrison@parryfield.com or Steven Moe stevenmoe@parryfield.com at Parry Field Lawyers (348-8480)