Chances are that if you operate a business you are either a director of the company, or a shareholder, or both. There are thousands of small and medium sized business in New Zealand that operate through companies.
When it is just you who is the director and shareholder, its relatively straightforward because you're going to make the decisions yourself. Good and bad. You answer to yourself, but really you probably answer to the bank and the landlord too. You probably had to give personal guarantees to them before they'd sign anything up with your company.
Overall though, its quite simple, and you know where you stand. You know where the buck stops. The bank and the landlord do too.
Where it becomes more complicated is where there are more shareholders. And where there are more directors. In other words, the business is a bit bigger than a one man job. There might be a number of shareholders and they might not all know each other. Maybe you've got some directors who have been with the company since they started it years ago. Its their baby. But now its grown, and maybe there was a decision one day to bring in an independent director or two. An outside perspective. Its even possible that these directors don't even have shares in the company.
Before we talk about what rights you have as a shareholder, lets just reflect on the fact that most of the time its a very good idea to bolster the Board with directors who add something, and whose sole objective is to improve the performance of the company. Often an independent director will do that because they have been recruited for their expertise in a certain area, and they bring a fresh set of eyes.
But if the Board are now dealing with the strategic stuff - where the company is heading - and there are staff dealing with the day to day stuff, what say do you have if you're just a common shareholder? I mean, you own a chunk of the business, surely you should have a say, right!
And the answer is that, yes, you can have some influence. But you can't knit pick. Basically your rights as a shareholder are set out in the Companies Act and the constitution, if the company has one.
So what can you do as a shareholder? Well, its not all bad:
- you can require the company to provide you with information about the company. For example, if you want details of the financial performance of the company, you are entitled to it.
- you can have a say on who the directors of the company should be. In other words, the shareholders can hold the directors to account.
- you can sell your shares. In a closely held company though, this can be easier said than done. Firstly its almost certain that the other shareholders will have "pre-emptive rights", meaning you'll have to offer your shares to them first. If they don't want them you could be stuck with them because, realistically, who wants to be in business with your family members? Particularly if you've only got a minority shareholding to sell. Most potential buyers will work out pretty quickly that they won't have much say if they're in the minority.
- you can, though, require the company to buy your shares if you get outvoted. Minority buy-out rights, these are called. At least this is some protection for shareholders who are feeling "ganged up on".
There are even some things that can't happen without your say so as a shareholder. These are more heavy duty. For example:
- any decision about a "major transaction". Anytime the company wants to do something where the dollar value is fifty percent or more of the value of the company, thats a major transaction under the Companies Act. The directors must get shareholder approval.
- any proposal to alter the company constitution.
- any proposal to alter shareholders' rights. Sometimes a company will have different classes of shares. Some might carry voting rights and others won't. The directors can't just make changes without the shareholders agreeing to them.
Some of these shareholders' decisions can be reached by a simple majority whereas others, such as approving a major transaction or amending the constitution, will require a greater majority, often 75% but it depends what the constitution says , before they can be passed. This is what's called a "special resolution".
Most other things you are going to have to leave to the directors. and if you don't, and you decide to meddle in the company's affairs as if you were a director, then you do so at your own risk. Because you can be deemed to be a director even if you are not a named director. If you are a deemed director you open yourself up to the risk of personal liability that the directors face. Your choice.
What if you really don't like whats going on? What if you think you are being treated unfairly? This can happen. There have been plenty of disputes involving shareholders, especially in recent years when money has been tight. After all, that's when the feisty side of people comes out.
There are things you can do. You can apply to Court for an order stopping the company from doing something that goes against the constitution or the Companies Act. Or you can bring a "prejudiced shareholder" action against the company if what the company is doing is unfair to you.
Remember too that the directors have a duty to operate the company in the best interests of the shareholders. If they breach this duty or if they are negligent, you can sue them personally. Again, just keeping them honest.
If it really has turned to custard who is most at risk? The directors or the shareholders? Well, again, it depends. As I said above, directors have to face the risk of personal liability if the breach their duties. Yes they can take out insurance to protect them but thats not the answer really, is it. Better not to fall foul in the first place. On the other hand if the company goes "belly up", remember it is you, the shareholders, who own the company. So it will be you who loses your money.
And one last thing: don't go thinking you're safe just because the directors have paid out everything to the shareholders before catastrophe set in. If the company was already broke and could not meet the "solvency test" you've got a problem. The solvency test is simple. The company must have assets greater than its liabilities, and it must be able to pay its debts as they fall due. I can point to dozens of instances during the ordinary course of a company's business, where the directors cannot put their hand on their hearts and say the company will pass the solvency test. Dozens.
What if that happens in your company? Those dividends you received. What will happen to them? I mean, you've already spent the money, right. Well, I'm afraid you are going to have to pay that money back, sorry.
What I would strongly urge you to do if you are running a company. or if you are a shareholder or director and you have any nagging issues. Call me on 03 4500000 or email me on rem@prlaw.co.nz
Don't try to wing it by yourself.
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