Tailoring Constitutions for Small Business Companies – Shareholders Agreements – Company Lawyer – Business Lawyer - Dukesons Business Law

June 2018

This Blog isn't legal advice – if you need legal advice on any company law issue, please contact me. I'm business lawyer (commercial lawyer) in Auckland who provides advice on a wide range of business law including company law issues.

I've just recently given a seminar (to lawyers) for the Auckland District Law Society on Tailoring Constitutions for Small Businesses. The focus was on clauses or issues that might be relevant to companies’ constitutions if there’s no shareholders agreement but I also discussed some aspects of shareholders agreements.

The seminar is a timely reminder for the shareholders in small closely held business companies to consider whether it would be prudent to have a shareholders agreement. For companies of that kind that are about to be incorporated or that have standard “out of the box” constitutions, there may are clauses or issues that the company should consider in relation to the constitution.

Where a company is being incorporated, or has already been incorporated, and is considering having only a standard constitution (with no shareholders agreement), the following matters merit consideration:

  • Does the constitution have pre-emptive rights in relation to share transfers?
  • If so, should there be any exceptions to the pre-emptive rights? Are any exceptions that have been provided for appropriate? For example, it may nor may not be appropriate to provide for share transfers between family members but even if it is, consider the impact of an unwanted share transfer that is ordered by a court pursuant to matrimonial relationship legislation. A transfer to a spouse or a partner ordered by the court may be an unwanted occurrence within the company.
  • Even if transfers to trusts are permitted, this doesn’t mean that transfers to beneficiaries should be permitted? If transfers aren’t permitted between family members (which should often be the case in many small companies), the same should apply in relation to trust beneficiaries.
  • Has any thought been given as to whether directors (and shareholders, for that matter) should be entitled to be involved with any competitors? The law isn’t entirely straightforward and if directors shouldn’t be involved with any competitors, an appropriate provision could be inserted into the constitution.
  • Are there appropriate provisions to cover the various ways in which a shareholder might exit e.g. death or disablement, just wants to go, has defaulted in their obligations in some way in relation to the company or under the constitution?
  • Are there provisions in the constitution that require the company to purchase its shares or that give it an option to buy its shares? If so, have the tax consequences been considered?
  • Has any thought been given to setting out matters that require the unanimous approval of all shareholders, or, say, approval by way of a special resolution? If not, consider whether there are any such matters but at the same time, care needs to be taken to make sure the minority shareholders don’t have untoward veto rights.
  • Are there processes to resolve disputes and deadlocks and, if so, are they practical and appropriate?

Some of those issues also arise when preparing a shareholders agreement. For more on shareholders agreements, see my blog at http://www.dukesons.co.nz/blog/why-have-a-sharehol...

Some companies may have been incorporated without constitutions. Generally, most companies should have a constitution if only to take advantage of certain powers that companies can only have if they have constitutions and, where there's more than one shareholder, to deal with matters like pre-emptive rights on share transfers.

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