This is the second in our series of guides on using ESOPs in NZ.  The series supplements our templates for the different types of ESOPs on our website. 

If you haven’t already, check out the first guide in the series: ESOPs in NZ: cap tables and company records.  It covers how a company’s ESOP affects its share register, cap table, and Companies Office website records.

shareholder and board resolutions required for ESOPs

We’ve seen some confusion recently around the company compliance steps required when putting an ESOP together.  In particular, there’s been a misunderstanding that securing shareholder waivers and consents was the only compliance step required for the ESOP. 

Some companies haven’t realised it’s a two-step process.

Securing the shareholder waivers and consents is only step one.  The second step requires the board to tick some compliance boxeswhen actually granting options to team members under the ESOP.

step one – shareholder waivers and consents (laying the groundwork for your ESOP)

You’ve decided to establish an ESOP, and your board and shareholders are supportive.  The next step is taking care of any shareholder consents and waivers that might stand in the way of the board being able to grant options from the ESOP to team members (and later being able to issue shares to those team members who exercise their options).  The idea here is to clear the path for the board to make ESOP grants as and when it’s ready.

What shareholder consents and waivers you need will depend on what your governance documents (your constitution and shareholders’ agreement) look like.

common waiver: pre-emptive rights

Most often, shareholders will need to waive pre-emptive rights on the issue of new shares or securities.  Pre-emptive rights require a company to offer any new shares or securities to existing shareholders first, on a pro rata basis.  If pre-emptive rights apply, your shareholders will need to waive those rights so the board can grant ESOP options, and issue any shares when those options are exercised, without first having to offer them to existing shareholders.

How do you know if pre-emptive rights apply?  Your constitution and/or shareholders’ agreement may specifically include pre-emptive rights.  Statutory pre-emptive rights may also apply by default under section 45 of the New Zealand Companies Act 1993.  If you don’t have a constitution, or if you have one but it doesn’t negate/replace section 45, then those default statutory rights will apply.

common waiver or consent: shareholder rights to approve/veto new share issues

Much like pre-emptive rights, this may be a specific right baked into your governance documents (particularly if you’ve gone through an external funding round).  It may also apply by default under section 117 of the New Zealand Companies Act 1993.  

Under section 117, the issue of new shares that rank equal, or in priority, to existing shares requires approval by a special resolution of shareholders (i.e. a 75% majority), unless the constitution of the company provides otherwise. Check your constitution for a provision of that kind.  If your constitution is based on our template it will include one.  If one is not provided (or if you don’t have a constitution), you’ll need to obtain the approval of shareholders holding at least 75% of the voting shares before any new shares can be issued on exercise of any ESOP options.  If you’ve issued more than one class of shares (e.g. ordinary and preference shares), separate special resolutions of each group of shareholders who will be affected by the share issue will be required. 

If approval/veto rights over new share issues do apply, ideally shareholders should waive them, or approve the issue of any shares, in connection with the ESOP upfront so the board doesn’t need to scramble to secure that approval if/when an option is exercised.

common waiver: anti-dilution rights

Anti-dilution rights may be triggered if the exercise price for any ESOP options is lower than the threshold price set for those rights (requiring you to issue new top up shares to any shareholders who hold those rights).  Anti-dilution rights would generally only form part of your governance documents if you’ve been through an external funding round.

how to secure shareholder waivers and consents

If you’re putting an ESOP in place during the course of a funding round, you’ll likely be putting new governance documents in place, into which you can bake these shareholder consents and waivers upfront.  If not, you’ll need to seek them separately.  Most companies we work with do this by circulating written consent and waiver documents for shareholders to sign.

step two – ticking the Companies Act compliance boxes when issuing ESOP grants

So you’ve cleared the way for your ESOP by securing the shareholder consents and waivers required.  Step two involves authorising the ESOP option grants themselves.

As and when the board grants ESOP options to team members, those grants must first be authorised under section 49 of the New Zealand Companies Act 1993 by way of board resolutions and a certificate.  You’ll find template resolutions and certificates that tick the boxes for the purposes of the New Zealand Companies Act 1993 in each of our ESOP template packets – employee share option plan (global) and employee share option plan (deed).

Where you’re granting ESOP options to multiple team members at/around the same time, you can combine those authorisations, to save time and admin.

At this stage, there is one update you need to make to your NZ Companies Office website records.  Upload a signed and dated copy of the section 49 directors’ certificate that the board is required to complete (which you’ll find in the templates linked above) within 10 working days after it’s been signed and dated.

the bits we’ve missed

The comments above, and in our first guide in this series, only deal with the nitty gritty of company admin involved in establishing and maintaining your ESOP.  They don’t cover securities law requirements (i.e. navigating the Financial Markets Conduct Act 2013, if your team members are based in NZ).

Importantly, the comments above and in our first guide also assume you’ve already come to a landing on the ESOP fundamentals – including deciding how big your ESOP pool is going to be, drafting the rules governing your ESOP, and deciding on the commercials for each grant (how much should team members have to pay to exercise their options?  What vesting and exercise timeframe should apply?  What happens on an exit event?, etc.).  We’ll cover some of these items in the next instalment of this guide.