If you’re building a company with more than one owner (or you plan to bring in investors later), the “paperwork” you put in place early can make or break the relationship when things get stressful.
A shareholders agreement and a company constitution are two of the most important documents for company ownership in New Zealand. They’re not just formalities - they set the rules for decision-making, money, exits, disputes, and what happens when someone wants to sell (or can’t keep going).
This guide is current and reflects the practical realities we’re seeing for NZ companies right now - including modern cap tables, investor expectations, and the fact that more businesses are being built quickly (often with founders in different cities, countries, or time zones).
What Are These Documents And Why Do They Matter?
At a high level:
- A company constitution is a set of rules for the company itself. It’s adopted by the company and generally sits alongside the Companies Act 1993.
- A shareholders agreement is a contract between shareholders (and usually the company too) that sets out how shareholders will work together and what happens in key situations.
In New Zealand, a company can operate without a constitution. If you don’t adopt one, the default rules in the Companies Act 1993 apply.
So why do people bother with these documents at all?
Because the Companies Act is designed to be a broad framework that works for many companies - not a custom playbook for your specific business, ownership split, risk profile, or growth plan.
When you have more than one shareholder, the big risks usually aren’t “someone hacked our system” or “a customer complained”. They’re things like:
- One shareholder wants to sell, but the others don’t want a stranger coming in.
- A founder stops contributing (or leaves) but still owns the same percentage.
- The company needs investment, but nobody can agree on dilution.
- You’re making money - but nobody agrees on whether to reinvest or pay dividends.
- A director decision affects everyone, and the minority shareholders feel ignored.
These documents are how you reduce those risks from day one, while everyone is still aligned and optimistic.
Do I Need A Shareholders Agreement, A Constitution, Or Both?
Most NZ companies benefit from having both, but not every company needs both immediately. The right setup depends on your ownership structure, future plans, and how much you want to customise the default rules.
Here’s a practical way to think about it.
If You’re A Solo Founder
If you’re the only shareholder and director (at least for now), a shareholders agreement might be less urgent - but you may still want a constitution if you’re planning for growth, multiple share classes, or bringing investors in later.
Sometimes, a better early step is making sure your foundational setup is clean, including share allocation, governance, and IP ownership. If you have multiple founders, it’s common to start with a Founders Agreement while you finalise the longer-term shareholder arrangements.
If You Have 2+ Shareholders (Even Friends Or Family)
This is where a shareholders agreement becomes important quickly.
When you’re building with someone else, you’re not only building a business - you’re also building a long-term financial relationship. A handshake understanding is rarely enough once:
- money starts flowing,
- someone’s circumstances change, or
- the business hits a rough patch.
In most cases, you’ll want a tailored Shareholders Agreement that reflects how you actually want to run the company.
If You’re Taking Investment Or Planning To
Investors (including sophisticated angel investors) usually expect clear governance and transfer rules. Even if you’re early-stage, a well-structured constitution and shareholders agreement can:
- make due diligence smoother,
- reduce investor nerves about “founder fallout”, and
- help you negotiate faster because the mechanics are already agreed.
If you’re still working out your cap table, it’s worth getting the structure right early - including what shares exist, who gets what, and what happens next. The mechanics of ownership are often set at the beginning in decisions like allocating shares.
So What’s The Difference In Practice?
- Constitution: company-level rules; can modify how the Companies Act applies; often used for formal governance settings.
- Shareholders agreement: relationship-level rules between owners; usually much more detailed on exits, disputes, and “what if” scenarios.
They overlap, but they’re not interchangeable - and the best approach is usually to make sure they work together rather than contradict each other.
What Should A Shareholders Agreement Cover?
A shareholders agreement is where you put the “real-life” rules - the stuff that doesn’t always appear in a template, but absolutely matters when things get complicated.
A solid agreement usually covers three broad areas:
- Control: who decides what, and how decisions are made.
- Value: how money moves (funding, dividends, salaries, reinvestment).
- Change: what happens when someone leaves, sells, dies, divorces, becomes bankrupt, or stops performing.
1) Roles, Contributions, And Expectations
Not every shareholders agreement needs job descriptions, but it should deal with the reality that some shareholders are “working owners” and others are passive.
Common approaches include:
- linking ownership to ongoing involvement (or consequences for not being involved),
- setting expectations for time commitment or responsibilities, and
- confirming what happens if someone wants to step back.
This is also where you might include vesting concepts or mechanisms to protect the company if a founder leaves early (especially where equity was granted upfront).
2) Decision-Making And Reserved Matters
In day-to-day operations, directors run the company. But shareholders can still protect themselves by agreeing that certain big decisions require shareholder approval (often a special majority or unanimous vote).
These “reserved matters” might include:
- issuing new shares (dilution),
- taking on significant debt,
- selling major assets,
- entering related-party transactions,
- appointing or removing directors, or
- changing the nature of the business.
This is especially helpful when there’s a majority/minority dynamic, and you want guardrails around major decisions.
3) Funding, Dividends, And Financial Management
Money is where disputes often start - even when everyone gets along.
Your shareholders agreement can set a clear process for:
- when (if ever) dividends will be paid,
- how profits will be reinvested,
- when shareholders may need to contribute more capital, and
- what happens if someone can’t or won’t contribute.
Without agreed rules, you can end up with a “stuck” company: one shareholder refuses to invest more, but also refuses to be diluted, and growth stalls.
4) Share Transfers, Exit Rights, And Entry Controls
This is usually the heart of the document. The goal is to balance:
- protecting existing owners from unwanted third parties, and
- allowing a fair and workable exit path.
Common clauses include:
- Right of first refusal (ROFR): existing shareholders get first opportunity to buy shares before an external sale.
- Drag-along: majority can force minority to sell on the same terms in a full sale (useful to secure a clean exit for a buyer).
- Tag-along: minority can “join” a sale by majority so they aren’t left behind with a new controlling shareholder.
- Valuation mechanisms: how shares are priced if there isn’t an arm’s-length offer.
Where a transfer does happen, you still need to carry out the transfer properly (and update company records). Practically, that often involves documents and steps like transferring shares.
5) Deadlocks And Dispute Resolution
If you have a 50/50 ownership split, you need to plan for deadlocks. Otherwise, a single disagreement can freeze the entire company.
Deadlock provisions might include:
- structured negotiation periods,
- mediation,
- expert determination for valuation issues, and/or
- buy-sell mechanisms (like a “shotgun” clause) - used carefully, because they can be harsh if one party has more financial power.
The best deadlock clause is the one you’ll actually be willing to follow when emotions are running high - which is why tailored drafting matters.
6) Confidentiality And Restraints (Where Appropriate)
If a shareholder leaves but still owns shares, you may need rules that protect:
- company information,
- customer relationships, and
- your competitive position.
Restraint clauses need to be reasonable to be enforceable, so it’s important to get proper legal advice rather than relying on generic wording.
What Should A Company Constitution Cover?
A constitution is a formal governance document for the company. In NZ, it can modify or replace certain default rules in the Companies Act 1993.
Not every company needs a heavily customised constitution - but when you do need one, you usually really need it.
A tailored Company Constitution commonly deals with the rules below.
1) Share Issues, Share Classes, And Rights
If you want different share classes (for example, non-voting shares, preference shares, or different dividend rights), a constitution is often part of the picture.
This can be relevant where:
- investors want certain protections,
- you’re creating an employee share arrangement, or
- you’re separating economic rights from control.
2) Director Appointment And Removal Mechanics
The Companies Act has default rules, but your constitution can clarify or modify how directors are appointed, removed, and how decisions are made.
This is particularly important if:
- a shareholder has a right to appoint a director,
- you want special voting thresholds, or
- you want clearer boundaries on powers.
3) Meeting Processes And Voting Thresholds
A constitution can include practical rules around:
- notice requirements for meetings,
- quorum,
- chairing meetings,
- proxy voting, and
- special majorities for certain decisions.
These details can sound minor - until there’s a dispute and someone challenges whether a decision was valid.
4) Transfer Restrictions (Sometimes Duplicated With The Shareholders Agreement)
Some companies include transfer restrictions in both documents so the company has a strong basis to refuse to register a transfer that doesn’t comply with the agreed rules.
The key is consistency. If your constitution says one thing and your shareholders agreement says another, you can end up in a messy situation where the company’s records and the shareholders’ expectations don’t match.
5) How The Constitution Interacts With The Companies Act
It’s worth remembering that:
- the Companies Act 1993 still matters (a constitution doesn’t replace it entirely), and
- not every “custom rule” is effective if it conflicts with mandatory parts of the Act or broader legal principles.
This is why it’s risky to DIY your constitution. The goal isn’t just to write rules - it’s to write rules that are valid, clear, and workable.
How Do These Documents Work In Real Life (Common Scenarios)?
It’s easy to read about “governance” and think it’s all theoretical. But these documents earn their keep when something changes.
Here are a few common scenarios where having the right documents (drafted properly) can save you time, money, and a lot of stress.
A Shareholder Wants To Leave (But The Business Keeps Going)
Imagine one shareholder wants out. Without clear transfer rules, you might have no agreed path for:
- who can buy the shares (other shareholders? the company? an outside buyer?),
- how the price is set, and
- what happens if nobody has cash available.
This is also where people often discover the difference between “we’re friends” and “we’re business partners”. A strong shareholders agreement reduces the chance that an exit turns into a fight.
You’re Bringing In A New Investor
If you’re raising capital, you may need to:
- issue new shares,
- update the constitution (depending on what rights are being created),
- update the shareholders agreement (or replace it), and
- document the deal clearly.
These steps often connect with broader ownership change processes like changing company ownership.
You’re Selling The Business (Or A Big Part Of It)
If a buyer wants to acquire the company, they’ll usually want a clean transfer of ownership with no surprises. Drag-along rights, warranties, and clear authority to sign are often critical in getting a deal over the line.
Depending on the deal structure, documents like a Share Sale Agreement may also come into play to set out the terms of the sale and protect both sides.
There’s A Dispute About What Was “Agreed”
Many shareholder disputes start with a sentence like:
“But we agreed you’d handle sales and I’d handle product…”
If it’s not written down, it’s hard to enforce - and memories can change over time (especially when money is involved).
This is why it’s worth investing in clear drafting early. You’re not doing it because you expect conflict. You’re doing it so that if conflict happens, you have a fair process to resolve it without blowing up the business.
Your Documents Don’t Match Each Other
One of the biggest practical problems we see is inconsistency. For example:
- the shareholders agreement says shares can’t be transferred without unanimous consent, but
- the constitution is silent (or says something different), and then
- someone tries to force a transfer using the “gap” in the documents.
When you set these documents up properly, you’re aiming for one clear set of rules that works together - not two documents that accidentally create loopholes.
If you already have documents in place, it’s often worth reviewing them when something changes (new shareholders, new investors, new share classes, or a change in the working relationship). Small updates early can prevent expensive disputes later.
Key Takeaways
- A shareholders agreement is a contract between the owners (and usually the company) setting out practical rules about control, money, exits, and disputes.
- A company constitution is a formal governance document that can modify how the default rules in the Companies Act 1993 apply to your company.
- Most companies with two or more shareholders should consider having both documents so the “company rules” and the “relationship rules” work together.
- Key shareholders agreement clauses often include decision-making thresholds, funding rules, dividend settings, share transfer restrictions, valuation methods, and deadlock/dispute processes.
- A constitution is especially useful where you have (or want) share classes, investor rights, director appointment rights, or customised meeting and voting procedures.
- These documents matter most when something changes - a shareholder exits, investment comes in, a dispute arises, or the business is sold - so getting them right early is a smart move.
- Templates can miss critical details or create inconsistencies, so it’s worth getting your documents drafted or reviewed with advice tailored to your business.
If you’d like help putting a shareholders agreement or company constitution in place (or reviewing what you already have), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
