Fiduciary Duties For Startup Directors In NZ

Priya and Sam run a Wellington SaaS startup. Priya is a director and also owns a small design studio on the side. When the startup needs a new website, Priya wants to put her studio forward because she knows the product better than anyone.

That might be a perfectly sensible deal. It can also raise a fiduciary duty issue if Priya doesn't handle the conflict properly, especially if investors later ask why the work wasn't put to market or approved by the board.

For startup directors, fiduciary duties aren't just abstract legal concepts. They show up in everyday founder decisions: side projects, related party contracts, investor updates, hiring family members, using company information and approving payments when cash is tight.

What Is A Fiduciary Duty In NZ?

A fiduciary duty in NZ is a duty to act loyally and in the best interests of someone else, rather than putting your own interests first.

For company directors, this usually means you need to put the company first when you're making decisions as a director. You can't secretly profit from your position, misuse company information or let a personal interest influence a company decision without dealing with that conflict properly.

In New Zealand, director fiduciary duties sit alongside statutory duties under the Companies Act 1993. The Act doesn't use the word fiduciary for every duty, but several director duties reflect the same core idea: loyalty, good faith, proper purpose and careful decision making.

For a startup, this matters because your personal and company interests often overlap. You might be:

• a founder, director and shareholder at the same time
• working on another startup or consulting project
• using contractors you know personally
• negotiating with investors who want extra controls
• deciding whether to pay yourself, repay a founder loan or issue new shares

None of that's automatically wrong. The key is whether you identify the conflict, disclose it, document the decision and make sure the company is treated fairly.

What Director Duties Apply Under The Companies Act NZ?

The main director duties under the Companies Act NZ require you to act honestly, for the company, for proper purposes and with reasonable care.

The duties most likely to come up for startup directors include:

• Acting in good faith and in the best interests of the company: section 131 is the core duty. You need to make decisions for the company, not just for yourself or one group of shareholders.
• Using powers for a proper purpose: section 133 matters when you're issuing shares, approving transfers, managing voting rights or making decisions that affect control of the company.
• Complying with the Companies Act and the constitution: section 134 means your company constitution and company records aren't just admin. They can affect whether a decision is valid.
• Avoiding reckless trading: section 135 matters when the company is under financial pressure and directors keep trading in a way that creates a serious risk of loss to creditors.
• Not agreeing to obligations the company can't perform: section 136 is relevant when you sign supplier contracts, employment agreements or customer commitments while cash is uncertain.
• Using reasonable care, diligence and skill: section 137 expects you to turn your mind to the decision, ask questions and keep proper records.

These duties apply even if you're an unpaid founder director, a technical founder who doesn't handle the accounts, or the only director. You can't avoid them by saying another founder looked after the legal or financial side.

The practical point is simple: treat major decisions as company decisions, not informal founder chats. A short directors' resolution, clear minutes and a conflict of interest policy can save a lot of pain later.

When Does A Conflict Of Interest Happen For A Startup Director?

A conflict of interest happens when your personal interests, other business interests or duties to someone else could affect your judgement as a director.

It doesn't need to be dishonest. It also doesn't need to be a crisis. In startups, conflicts are common because everyone is wearing several hats.

Common Founder Conflict Scenarios

• Your side project competes with the startup: you build a similar tool, pitch to the same customers or use learnings from the company in a separate venture.
• Your other business supplies the company: your agency, studio or consultancy provides paid services to the startup.
• You hire someone close to you: a family member or close friend is offered a paid role or contractor arrangement.
• You receive a personal benefit: a supplier offers you a referral fee, commission or discount because of the company's purchase.
• You sit on another board: you owe duties to another company that may want the same opportunity, investor or customer.
• You control a shareholder: you act for an investment vehicle or family trust that has its own interests separate from the company.

Under the Companies Act, an interested director generally needs to disclose the nature and, if possible, the monetary value of the interest, or the extent of the interest if it can't be quantified. That disclosure should be entered in the company's interests register.

The company's constitution or shareholders agreement may go further. For example, it might say an interested director can't vote, the deal needs investor director approval, or certain related party transactions need shareholder consent.

Can A Director Have A Side Project Or Related Party Deal?

Yes, a director can have a side project or related party deal, but you need to manage the conflict openly and make sure the company isn't disadvantaged.

Let's go back to Priya. Her design studio quotes the startup $18,000 for a website rebuild. The startup has three directors: Priya, Sam and an investor director. A clean process might look like this:

1. Priya discloses the interest: she tells the board she owns the design studio and will benefit if the company accepts the quote.
2. The disclosure is recorded: the company records the nature and value of the interest in its interests register.
3. The board checks the deal is fair: Sam gets two other quotes, one for $16,500 and one for $22,000, and compares scope, timing and quality.
4. Priya steps back from the decision: even if the constitution allows her to vote, she doesn't lead the discussion or pressure the others.
5. The approval is documented: the minutes explain why the board approved the studio, including price, relevant expertise and delivery deadline.
6. The contract is written down: the studio signs a services agreement with scope, milestones, IP ownership, confidentiality and payment terms.

The outcome may still be that Priya's studio gets the work. The difference is that the decision is transparent and defensible.

Related party deals deserve extra care when investors are involved. Investors may worry that company money is being moved to founders, even where there's a genuine commercial reason. Clear approvals help protect trust, which is often just as valuable as the legal position.

What Should You Tell Investors About Director Conflicts?

You should tell investors enough to give a fair and accurate picture of any conflict that could affect the company or their investment decision.

That doesn't mean every minor detail needs a lengthy memo. It does mean you shouldn't hide related party payments, founder side projects, competing opportunities or special arrangements that would matter to a reasonable investor.

Investor updates are usually not formal legal disclosure documents, but they can still create legal risk if they're misleading. The Fair Trading Act 1986 can apply to misleading or deceptive conduct in trade, and inaccurate statements can also damage investor confidence and future fundraising.

For investor updates and board packs, consider including:

• a standing conflicts section: even if there are no new conflicts, say that
• related party payments: note who was paid, for what, and under what approval
• side projects: explain any overlap with the company's market, customers or technology
• material customer or supplier links: disclose if a director has a personal or financial connection
• board approvals: summarise approvals rather than leaving investors to piece things together

Be careful with confidential information too. If your startup handles customer data, investor reports shouldn't include personal information unless it's needed and handled consistently with the Privacy Act 2020. Most updates can use aggregated figures instead of naming individual customers.

What Documents Help Protect You And The Company?

The best documents for managing fiduciary duty risk are your company constitution, shareholders agreement, interests register, board minutes and written contracts, including any director service agreement or related party deal.

Templates can be useful for structure, but they often miss the commercial details that matter in a startup. A document should match your funding arrangements, decision making process and investor rights before you use it.

Conflict Of Interest Register Outline

Here's a simple outline you can use as a starting point for what to record.

1. Director name: write the full name of the director with the interest.
2. Date disclosed: record when the director first told the board.
3. Nature of interest: explain the relationship, ownership, role or benefit.
4. Monetary value or extent: add the dollar value if known, or describe the extent if it can't be measured.
5. Related transaction or opportunity: identify the contract, customer, supplier, side project or investment.
6. Decision making limits: state whether the director can receive papers, join discussions or vote.
7. Approval required: note whether board, investor director or shareholder approval is needed.
8. Outcome: record the final decision and where the minutes or resolution are stored.

Shareholders Agreement Protections

Your shareholders agreement can also reduce uncertainty by setting clear rules upfront. Common protections include:

• reserved matters that need investor consent, such as related party transactions over a set amount
• rules for issuing shares, option pools and founder dilution
• founder vesting and leaver provisions
• confidentiality and IP assignment obligations
• restraint or non solicitation clauses, where appropriate and enforceable
• information rights and regular investor reporting

If you're raising capital, these rules should be settled before money lands in the company account, not after expectations have already drifted.

What Should You Do If A Conflict Has Already Happened?

If a conflict has already happened, deal with it early, record what happened and get tailored advice before trying to unwind or explain it casually.

Start with the practical facts. Gather the contract, invoices, payment records, messages, board papers, investor updates and any notes from founder discussions. Work out who knew what, when the decision was made, whether the interest was disclosed and whether the company received fair value.

Then take these steps in order:

1. Pause any further action if needed: if the deal is still running, avoid making more payments or commitments until you've checked the position.
2. Disclose the conflict formally: make sure the board knows about it and the interests register is updated.
3. Check your constitution and shareholders agreement: look for voting restrictions, reserved matters and approval requirements.
4. Consider whether approval can be ratified: sometimes the board or shareholders can approve a transaction after the fact, but this depends on the circumstances.
5. Fix the commercial terms: if the company paid too much or didn't get proper IP rights, you may need to vary the agreement.
6. Plan the investor message: be clear, factual and consistent with the records.

Don't delete messages or rewrite history. If there has been a serious breach, the consequences can include a transaction being challenged, a director facing personal liability, removal from the board, investor rights being triggered or future fundraising becoming harder.

Key Takeaways

• Fiduciary duty in NZ is about loyalty: as a director, you need to put the company first when making company decisions.
• The Companies Act 1993 sets out key director duties, including good faith, proper purpose, care and avoiding reckless trading.
• Startup conflicts are common, especially with side projects, related party contracts, family hires and investor approvals.
• Disclose conflicts early, record them in the interests register and document board decisions clearly.
• Your constitution and shareholders agreement can set practical rules for voting, reserved matters, investor updates and related party deals.
• If a conflict has already happened, gather the records, pause further commitments where needed and get advice before trying to fix it informally.

If you'd like help with your shareholders agreement, conflict of interest process, board approvals or founder side project arrangements, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.