Many start-ups pay great attention to their business plan, marketing strategy and product development yet they forget one most important thing and that is legal issues in respect of managing their crown jewel, their company.
Problems arise when there is more than one shareholder and when certain transactions are entered into by the company without complying with the Companies Act 1993 requirements. Minutes, resolutions and meetings are essential and records are to be kept for at least 7 years.
I recently dealt with a client company whose shareholders were also directors of the company. The company was previously represented by another law firm which acted for both the shareholders and the company (hence issues of conflict on interest). To make things worse, the shareholders were in dispute with each other and started making allegations of fraud against each other. Without going into the the details, it is both the previous lawyers and the accountant’s negligence that gave rise to their problems. I had to clear
our client, a shareholder and director of the company from the alleged wrong doings.
Always remember compliance and check and balance. First, hold regular shareholder meetings. Secondly, have a proper, well-written Company Constitution. Thirdly, keep minutes and resolutions for all actions of the company. Last, but not least, if there is more than one shareholder, enter into a Shareholders Agreement.
Shareholder meetings are an important part of share ownership, yet few understand the rules and regulations that apply to them. This is unfortunate because shareholders have considerable rights associated with these meetings and they are held on their behalf. There are two types of shareholder meetings, annual meetings and special meetings.
Special meetings are all meetings other than the annual meeting. Directors or a shareholder can call a special meeting.
The Board of the Company must call an annual meeting of shareholders to be held within a time specified by the Companies Act. However, it is not necessary for the Company to hold a meeting of shareholders if everything required to be done at that meeting is done by a written resolution passed under section 122 of the Companies Act.
Shareholder/s holding not less than 5 percent of the voting rights of a company can require the directors to call a special meeting to discuss predetermined issues or propose a resolution. This is a powerful tool to hold the directors to account and seek consensus of other shareholders. There are notice requirements that need to be followed.
The above gives rise to another important aspect in running a company and that is to have a Shareholders Agreement. If you are the founding shareholder/s and are looking at bringing in more shareholders to fund the business, you want to consider what type of shares they would acquire or have issued to them and the rights that would be attached to the shares, i.e voting rights, pre-emption rights etc. This is a whole new topic.
One of the problems with shareholder motions is that they may be special resolutions requiring a 75% majority, or directors may decide that they are not binding. This is when a Company Constitution can come in handy.
A Company Constitution sets out the procedures and rules for how a company will be controlled, what a company and its directors are permitted to do, how shares may change hands and much more. While a constitution is not a mandatory legal requirement in New Zealand, if a company has not adopted a constitution then the default rules relating to the governance of companies as set out in the Companies Act 1993 (the Act) will apply. The Company Constitution also gets registered on the Companies Office Register, so serves as a notice to anyone who cares to search the company to see if the person the are dealing with has any power to contract on behalf of the company.
A company’s constitution and the First Schedule of the Companies Act 1993 govern shareholder meetings. The success of a company meeting depends on its shareholders If the shareholder/s ask well-prepared intelligent questions, then a meeting can be very informative. If shareholders sit meekly in their seats the exercise can be a total waste of time.