How To Approve A Startup Share Issue

Yes - if your New Zealand company is issuing shares, you usually need clear board approval before the shares are issued.

The nuance is that board consent is only one piece of the puzzle. Your constitution, shareholders agreement, existing shareholder rights, share class rights and the Companies Act 1993 can all affect what needs to happen before you bring on an investor, adviser or co-founder.

It can feel like a lot of paperwork for what is often an exciting milestone. The good news is that, once you know the order of steps, a share issue can be handled neatly and without unnecessary fuss.

Do You Need Board Consent To Issue Shares In New Zealand?

Yes, the board should approve the share issue before the company issues the shares.

Under the Companies Act 1993, the board generally has the power to issue shares, subject to the Act and your company constitution. In practice, that means your directors should make a proper decision to issue the shares, record the decision, and make sure the issue is allowed under the company's existing documents.

Board consent matters because issuing shares changes who owns your company. It can dilute existing shareholders, give someone new voting rights, and affect future fundraising.

For example, say Aroha runs a Wellington software startup. An adviser agrees to help with product strategy in exchange for 2% of the company. If Aroha simply emails, yes, you're in, but the board never approves the issue and the shareholders agreement is never updated, the cap table may become messy very quickly. Later, when an investor asks for clean company records, that missing approval can slow everything down.

A proper board approval helps show that the directors considered the decision, acted for a proper purpose and in the company's best interests, and authorised the steps needed to complete the issue.

What Should Directors Check Before Approving A Share Issue?

You should check the company's constitution, shareholders agreement and share register before you approve the share issue.

A director resolution for a share issue isn't just a rubber stamp. Before voting, the board should be comfortable that the company can issue the shares on the proposed terms and that the Companies Act 1993 requirements have been met.

Your Constitution

Your constitution may set rules about:

• whether directors can issue shares without shareholder approval
• pre-emptive rights for existing shareholders
• different classes of shares and the rights attached to each class
• quorum and voting rules for board meetings
• how written director resolutions can be passed

If your company doesn't have a constitution, the default rules in the Companies Act 1993 will carry more weight. Many startups do have a constitution, especially if they've taken investment or worked with co-founders, so don't assume the default position applies.

Your Shareholders Agreement

Your shareholders agreement can add extra approval steps. It might say that new shares can't be issued unless a certain percentage of shareholders agree, or unless existing shareholders first receive an offer to take up their pro rata share.

It might also require a new investor, adviser or co-founder to sign a deed of accession before they become a shareholder. That way, the new person is bound by the same rules as everyone else.

Your Current Cap Table

Before approving a share issue, check the current share register and cap table. You need to know:

• who currently owns shares
• how many shares are on issue
• what percentage each shareholder owns now
• what percentage each shareholder will own after the issue
• whether any options, convertible notes or other rights could affect the calculation

This is where small errors can become expensive later. If the number of new shares is wrong, or the dilution calculation doesn't match what was promised, you may need to unwind or correct the issue.

What Documents Sit Behind A Share Subscription?

You usually need more than a share subscription agreement to complete a clean share issue.

The share subscription agreement records the deal between the company and the subscriber. For example, it might say the investor will subscribe for 100,000 ordinary shares at $1 per share, with completion happening after board approval and any shareholder waivers are obtained.

However, the internal approvals and follow-up documents are just as important. Common documents include:

• Board papers or an approval note: a short summary of the proposed issue, the subscriber, the price, the share class and the reason for the issue.
• Director resolution or board minutes: the formal record that the board approved the share issue and the Companies Act resolutions needed for the issue.
• Director certificate: the statutory certificate signed by the directors who vote in favour of the issue, where required.
• Shareholder consent or waiver: used where existing shareholders need to approve the issue or waive pre-emptive rights.
• Share subscription agreement: the contract for the investor, adviser or co-founder to take up shares.
• Deed of accession: used where the new shareholder needs to join the existing shareholders agreement.
• Updated share register: the company's internal record of who holds shares.
• Companies Office notice: the filing that updates the public Companies Register after the issue.

If the shares are being issued to an adviser or co-founder, you may also need documents dealing with services, intellectual property, confidentiality and vesting. For example, if a product adviser receives equity for helping with your app roadmap, you'll want to be clear about what they need to deliver and whether a share vesting agreement should set out how the shares vest over time.

Templates can miss these moving parts, especially where your company already has a shareholders agreement or is issuing shares for non-cash consideration. The documents work best when they match the actual deal and your company records.

How Do You Pass A Director Resolution For A Share Issue?

You pass a director resolution by following your constitution and recording the directors' approval in writing.

For many startups, this is done as a written director resolution signed by the required directors. In other cases, the directors hold a board meeting, discuss the share issue and record the decision in board minutes.

Your constitution will usually tell you:

• how much notice directors need for a meeting
• how many directors must attend for a quorum
• whether directors can sign written resolutions electronically
• whether unanimous approval is needed for written resolutions
• what happens if a director has a conflict of interest

If you have a single-director company, you should still record the decision properly. A short written resolution or signed minute can be enough, but it should clearly state what has been approved.

What The Resolution Should Cover

For many share issues under sections 42 or 44 of the Companies Act 1993, section 47 requires the board to do more than approve the commercial deal. Before issuing the shares, the board must:

• decide the consideration for the shares, such as cash, services or other assets
• decide the terms on which the shares will be issued
• resolve that the consideration and terms are fair and reasonable to the company and to all existing shareholders
• if the consideration isn't cash, decide the reasonable present cash value of that consideration
• if the consideration isn't cash, resolve that the present cash value is fair and reasonable to the company and to all existing shareholders

The directors who vote in favour of the issue must sign a directors' certificate setting out the required matters. This isn't just a nice governance extra. For many share issues, it's part of the legal process for issuing shares properly.

A director resolution for a share issue should also approve:

• the number of shares to be issued
• the class of shares, such as ordinary shares or preference shares
• the name of the subscriber
• the issue price or other consideration
• the key terms of the share subscription agreement
• any shareholder waivers or consents required before completion
• the authority for someone to sign documents for the company
• the authority to update the share register and notify the Companies Office

If the company is issuing shares for services rather than cash, the board should be especially clear about what the company is receiving and how the present cash value has been assessed. New Zealand companies don't have par value shares, so the issue price and consideration need to be supported by a clear decision-making process.

Directors' Duties Still Apply

Directors should remember that their Companies Act 1993 duties apply when approving a share issue. These include acting in good faith and in the best interests of the company, using powers for a proper purpose, and exercising the care, diligence and skill that a reasonable director would exercise.

If a director is personally interested in the issue, for example because shares are being issued to them or to a company they control, that interest should be disclosed and managed. Your constitution and the Companies Act may also affect whether that director can vote.

Do Existing Shareholders Need To Consent?

It depends on your constitution, shareholders agreement and the rights attached to the shares being issued.

Under the Companies Act 1993, existing shareholders generally have pre-emptive rights when a company issues shares that rank equally with, or ahead of, their existing shares. In simple terms, they may have the right to be offered the new shares before the company issues them to someone else.

However, the company's constitution can remove or change those statutory pre-emptive rights. Existing shareholders can also waive their rights, often by signing a waiver or shareholder consent.

Your shareholders agreement may go further. It might require:

• approval from all shareholders
• approval from investors holding a particular percentage
• approval from a founder or investor director
• a pro rata offer to existing shareholders first
• a special process for issuing shares under an employee share scheme

You should also check whether the issue affects a particular class of shares. If the new shares change or prejudice the rights of an existing class, you may need approval from that interest group.

Getting this wrong can create real problems. An investor may refuse to complete the round, or an existing shareholder may say the issue was invalid or breached the shareholders agreement. Even if everyone is friendly today, clean approvals help protect the business when memories fade or relationships change.

What Do You Need To File With The Companies Office?

After the shares are issued, you usually need to notify the Companies Office within 10 working days.

The Companies Office keeps the New Zealand Companies Register, which is linked to your company's NZBN. Once the issue is complete, your company records and the public register should line up.

The filing generally records details such as the number of shares issued and the updated share allocation. You should also update the company's own share register at the same time.

Where a directors' certificate is required for the share issue, a copy generally needs to be delivered to the Registrar within 10 working days after it's given, subject to the statutory exceptions. In other words, your Companies Office step may involve both the notice of share issue and filing the directors' certificate.

Don't wait until your next annual return. The annual return isn't designed to fix a missed share issue filing from months earlier.

A practical process often looks like this:

1. Check the constitution and shareholders agreement.
2. Prepare the subscription agreement and any shareholder waivers.
3. Pass the director resolution approving the issue and the section 47 matters.
4. Have the directors who vote in favour sign the directors' certificate, where required.
5. Have the subscriber sign the documents and pay the subscription money, if applicable.
6. Issue the shares on the agreed completion date.
7. Update the share register.
8. Notify the Companies Office within 10 working days and file the directors' certificate where required.
9. Save all signed documents with the company's records.

If you're also changing directors, adopting a new constitution or putting a shareholders agreement in place at the same time, keep those steps separate in your checklist. They may have different approvals and filing requirements.

Common Mistakes To Avoid

A share issue doesn't need to be complicated, but a few common shortcuts can cause headaches later.

• Treating section 47 as optional: the board usually needs to decide the consideration and terms, resolve that they're fair and reasonable, and sign the required directors' certificate.
• Signing the investment documents before checking approvals: the subscription agreement should line up with the company's constitution, shareholders agreement and board approval.
• Forgetting pre-emptive rights: existing shareholders may need to be offered the shares first, or they may need to sign waivers.
• Issuing the wrong class of shares: ordinary shares, preference shares and other classes can carry very different rights.
• Leaving an adviser arrangement vague: if someone gets shares for services, be clear about deliverables, timing, IP ownership and how the present cash value of those services is assessed.
• Not getting a deed of accession: a new shareholder should usually be bound by the shareholders agreement from the moment they come in.
• Missing the Companies Office filing: the share issue should be notified within 10 working days, any required directors' certificate should be filed, and your internal share register should be updated.
• Not recording conflicts: if a director is connected to the subscriber, deal with the interest clearly in the board papers and minutes.

The aim isn't to create paperwork for its own sake. It's to make sure your cap table, investor rights and company records are reliable when your startup grows, raises again or brings in new people.

Key Takeaways

• Board consent is usually needed before a New Zealand company issues shares.
• Your constitution and shareholders agreement may add extra approval steps.
• For many share issues, the board must make section 47 fairness and, if relevant, present cash value resolutions, and the directors voting in favour must sign a directors' certificate.
• Existing shareholders may have pre-emptive rights unless those rights are removed, changed or waived.
• A share subscription agreement should be supported by board resolutions, consents, register updates, Companies Office filings and any required directors' certificate.
• Clean approvals make future fundraising and governance much easier.

If you'd like help with board approvals, share subscription documents, directors' certificates and Companies Office steps, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.