governance lawyers

Many technology companies operate in a state of barely controlled chaos. Founders and management are thinly stretched, trying to change the world with limited resources. Cash is tight, there are problems and risks at every turn, and it is often years before stability can be achieved.

As a consequence, the governance of tech companies can be pretty challenging at times. Directors often need to play a more active role than traditional governance courses might recommend, and they need to continually work around the conflicts involved in having founder and investor representatives at the board table. To make things worse, the normal rules about decision making don’t apply in many cases because investors have special approval rights over various board decisions. Joining the board of a high growth tech company is definitely not for the faint hearted.

how we help

We help boards to navigate these difficulties in compliance with their governance documents and company law duties. This includes advising on governance processes for capital raising and m&a transactions, and advising on directors’ duties arising in difficult situations such as where there are disputes with founders or investors or where there are serious solvency concerns.

Of course, we also help companies to get their basic governance documents sorted. You can see our approach to documents such as constitutions and shareholders’ agreements on our templates page.

“Volpara certainly could not have listed without Kindrik Partners’ advice and expertise.”

ralph highnam, ceo, volpara health technologies

governance resources

having a say on directors protecting their residential addresses

in a nutshell

Submissions are now open for a bill that would allow directors of New Zealand companies to keep their residential addresses private if they have concerns about their own safety or the safety of someone they live with.

We have worked with people who have legitimate safety concerns about their residential address being publicly available. We support people being able to keep that information out of the public eye and we plan to make a submission in support of the bill.

the detail

Currently, directors’ residential addresses are publicly available on the Companies Register (at the Companies Office website). Those addresses are publicly available because the Companies Act 1993 requires them to be.

The amendment bill would allow directors to apply to the Registrar of Companies to substitute their residential address on the public record with an address for service. To do so, a director would need to:

provide a statutory declaration verifying that public availability of the director’s residential address is likely to result in physical or mental harm to the director or a person the director lives with
provide a substitute address for service (which can’t be the same as the company’s registered office or address for service), and
pay a fee (the amount of that fee is currently unknown).

The bill has passed its first reading and is now at the select committee stage.

The bill isn’t perfect – we’ll note in our submission some material issues that we hope the select committee process will address. However, we welcome it as the first development in this area that we’ve seen since 2018.

next steps

You can make a submission on the amendment bill on the Parliament website. The closing date for submissions is 11.59pm on Thursday, 02 May 2024.

You’re also welcome to get in touch with us if you would like to discuss our submission.

Deadlock in 50-50 owned companies

Shareholders’ agreements often seek to address the imbalance between shareholders holding a majority of shares, and those with a minority. But what about where two shareholders each hold 50% of the shares?

Whilst day-to-day decision making of a company is handled by its board of directors, certain matters need to be considered by shareholders. If there are only two shareholders, and each of them hold 50% of the shares, the key question that shareholders should consider when drafting a shareholders’ agreement is what happens if there is deadlock between them.

There are various ways to deal with a deadlock which will see the company continuing or will provide a way for an exit or termination. Below are some typical mechanisms used to address this issue (and sometimes we see combinations of these mechanisms in the one agreement).

Controlling vote: One shareholder has a controlling vote in a deadlock. Often this is done by allowing that shareholder to have a casting vote or being allowed to appoint two directors. But this is not ideal for the other shareholder, and possibly defeats the whole purpose of a 50-50 arrangement. Therefore, this mechanism is less likely to be seen.

Independent third party: Any deadlock could be referred to an independent third expert to review – acting as mediator (trying to facilitate an agreed resolution) or arbitrator (who determines the outcome). Whilst this can ensure the dispute is resolved, the expert may not have specific knowledge of the business so the final decision may not be in the interests of either party.

A shoot-out: Under this process, one shareholder notifies the other that it wishes to sell its shares to the other at a certain price. The other shareholder must then elect to accept that offer or to sell its own shares to the shareholder who sent the notice at the same given price. This mechanism provides an opportunity for the business to continue by forcing an exit of one shareholder. It also has the advantage that the buy-out price is determined by the ultimate buyer, rather than by way of an independent valuation.

Sealed bids: Each shareholder submits to an independent person a price which it is prepared to pay to buy the other’s shares. The independent person then reviews the sealed bids and decides which of them represents the best offer. One of the shareholders is required to accept the best offer. Again, the upside to this method is that the price is within the control of the bidders as opposed to being independently valued. But this can also favour one party over the other, e.g. if one of them has greater financial resources. Further, given the element of chance involved, it may be not attractive to shareholders.

Buy-out: One shareholder is obliged to buy-out the other in the event of a deadlock. This requires agreement up front as to the price, or the formula to calculate that price, based on the company’s valuation. This requires one shareholder to agree up front to buy-out the other . Most shareholders will be reluctant to commit to this based on a future unknown valuation. The upside is there is a guaranteed buy-out by a shareholder, even if the price is unknown at the point of signing up. That gives assurance that the business can proceed without being wound up.

Winding up: Sometimes shareholders’ agreements include a mechanism that ultimately provides for the company to be wound up if a shareholder dispute cannot be resolved and it affects the company’s ability to continue operating as a going concern. This is the nuclear option which can act as a commercial incentive to bring disputing parties to the table.

Go silent: Finally, it is an option to simply remain silent on the matter of deadlock. None of the above options represents a silver bullet and can lead to outcomes that neither is happy with. The alternative is always to negotiate at the time or wind up the company even where no specific wind-up provision applies.

Round up

Having a deadlock-resolution mechanism in the shareholders’ agreement ensures shareholders are more likely to avoid a scenario where one shareholder effectively holds the other to ransom using the threat of winding up – and that mechanism can always be overridden if the parties agree.

Shareholders also need to decide when the mechanism is triggered. It is usual that shareholders and directors don’t always reach unanimity on key decisions, but disagreements may not be so significant that it impacts the future relationship and/or the viability of the business. The agreement should be clear when a deadlock is so material that the mechanism should be used.

Finally, you may need to consider how the company’s governance could change in the future, e.g. if further shares are issued or a new director appointed. This may mean the potential deadlock disappears overnight – even a small shareholder or a single new director may be able to swing the balance of power in a way which may not be intended. So, before you agree to a new shareholder or director, think about whether you need to revisit the shareholders’ agreement.

Give us a bell if you are setting up a 50-50 owned company. Our corporate team can chat through your options to work out what is the best fit for you.

Your End of FY To-Do List: Opting out of default financial reporting requirements

This is the second in a Kindrik Partners series on company admin to be thinking about when 1 April comes around each year. The first one dealt with AGMs. In this blog, we’ll introduce the default financial reporting requirements that apply to many companies under the NZ Companies Act 1993, and help you navigate opting out of them if you wish to.

Did you know?

If your company has 10 or more shareholders, the Companies Act requires you to:

prepare financial statements in accordance with generally accepted accounting practice
have those financial statements audited in accordance with the Companies Act, and
prepare an annual report for shareholders in accordance with the Companies Act.

Did you also know? You don’t have to live your life like this. If your shareholders are on board, and you navigate the what’s and when’s of the opting out regime under the Companies Act, you can opt out of one or all three of these requirements. Of course, staying on top of your financial position as a company – and communicating with your shareholders on a regular basis – are essential to good governance, but you may prefer to take care of these in your own way rather than following the default approach.

How do you know if you’ve hit/exceeded the 10-shareholder threshold?

The golden rules are:

count the number of shareholders as at the first day of the financial year in question
count only holders of voting shares, and
count joint holders of share parcels (e.g. spouses/partners or trustees) as a single shareholder.

Who can opt out?

Any company with 10 or more shareholders can choose to opt out of one or all three of the default requirements, unless:

the company’s constitution expressly provides that section 207I of the Companies Act does not apply, or
it is a large company under the Companies Act, or it is a public entity. (In early April 2022, a large company is a company with >$66m in assets, or revenue > $33m, on a consolidated basis in each of the last 2 accounting periods).

What can you opt out of?

Any, or all three, of the default requirements described above.

If you have hit the 10 shareholder threshold and want to opt out of one or all of the default requirements – what do you do now?

You’ll need to get your shareholders on board, and you’ll need to keep a close eye on the calendar. Opting out of one or all of the default requirements requires a resolution approved by at least 95% of the votes of those shareholders entitled to vote and voting on the resolution. That resolution must also be passed within a specific time period.

For most companies, the opting period – within which a company can arrange for its shareholders to pass a resolution opting out of one or all of the default requirements in respect of a particular financial year – starts on the first day of that financial year (usually 1 April), and expires at the end of the day on the earlier of these two dates:

the date that falls 6 months after the start of that financial year. This will be 1 October if your financial year starts on 1 April, and
the date of your annual meeting of shareholders (AGM) to be held in that financial year. If you need to hold an AGM under the Companies Act, in most cases you’ll need to hold it on/before 30 September.

So, if you’re reading this in May 2022, and you want to opt out of the default financial reporting requirements for the financial year that runs 1 April 2022 to 31 March 2023, you’ll most likely need your shareholders to pass that resolution before midnight on 1 October 2022, or before midnight on the date of your AGM (if you’re holding an AGM in 2022), whichever comes first.

There are two ways to pass the opting out shareholders’ resolution:

by calling a meeting of shareholders before the opting period expires (your AGM would do, if you’re already holding one) and asking shareholders at that meeting to pass a resolution opting out of the relevant requirement(s). You’ll need a 95% majority of the shareholders attending the meeting and voting on the resolution to vote in favour of that resolution, or
by circulating a written resolution, which must be signed by shareholders holding at least 95% of the company’s voting shares before the opting period expires.

What can’t you opt out of?

This opting out process doesn’t affect your obligations under the Companies Act to keep accurate accounting records, and it doesn’t affect any bespoke financial reporting requirements that may apply under your company’s governance documents (i.e. the constitution and/or shareholders’ agreement). Finally, you’ll most likely still have to prepare financial reports for tax purposes – your friendly accounting/tax advisor will be able to give you a steer on that.

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governance lawyers