Legal Responsibilities Of A Substantial Shareholder In NZ Companies

When you’re growing a company, bringing in investors (or letting a co-founder increase their stake) can be a big milestone.

But once someone holds a large enough slice of the pie, they’re no longer “just another shareholder” in a practical sense. They can influence big decisions, change the direction of the business, and sometimes trigger extra legal steps that smaller shareholders don’t need to worry about.

That’s where the idea of a substantial shareholder comes in.

In this guide, we’ll explain what people usually mean by a substantial shareholder in New Zealand, why it matters for small businesses, and what legal responsibilities and risk areas you should be thinking about from day one (especially if you’re bringing on an investor, issuing new shares, or changing who controls the company).

What Is A Substantial Shareholder In New Zealand?

In everyday business terms, a substantial shareholder is someone who owns a big enough stake in a company that they can meaningfully influence outcomes.

In legal terms, the definition depends on what type of company you’re dealing with (for example, a private company versus a listed/public company).

Substantial Shareholder Vs “Substantial Product Holder” (Listed Companies)

If your company is listed (or you’re dealing with an entity that is subject to New Zealand’s financial markets rules), “substantial shareholder” is closely linked to the concept of a substantial product holder under the Financial Markets Conduct Act 2013 (FMC Act).

In broad terms, a person can become “substantial” when they hold (or control) 5% or more of a class of voting securities in a listed issuer, and then disclosure obligations can apply when they cross certain thresholds (moving above or below 5%, and further movements by certain increments).

These disclosure rules are designed to make sure the market knows who has real influence over a listed company.

For most small businesses, this won’t apply because you’re not listed and you’re not raising capital from the public in that way. Still, it’s helpful to know the concept exists, because your business might grow into a structure where these rules become relevant, or you might be dealing with investors who are used to these thresholds.

Substantial Shareholder In A Private Company (The Practical Meaning)

Most SMEs in New Zealand are private companies. In that context, “substantial shareholder” is usually a practical label rather than a defined legal status.

A shareholder might be considered substantial if they:

• Own a large percentage (for example, 25%, 33%, 50%+)
• Can block or pass special resolutions (depending on the thresholds in play)
• Has veto rights or enhanced voting rights (for example, through a shareholders agreement)
• Has the power to appoint or remove directors

So, even if there’s no single statutory definition you’re relying on day-to-day, the legal and commercial reality is that concentrated ownership changes how your company should be governed.

Why Having A Substantial Shareholder Matters For Small Businesses

If you’re a founder or small business owner, it’s tempting to think shareholding is just a matter of “who owns what percentage”.

In practice, once someone becomes a substantial shareholder, it can affect:

• Control: who can outvote who, and on what decisions
• Funding: whether new investors will come in (and on what terms)
• Exit options: whether you can sell the business smoothly
• Governance: how directors are appointed, and how disputes are managed
• Risk: whether the business ends up deadlocked or exposed to claims

It can also change the dynamics between founders. For example, you and a co-founder might start at 50/50, but if one of you later buys more shares (or someone new invests), the decision-making balance can shift quickly.

If you’re going through any kind of ownership change, it’s worth getting the structure right early, including documenting the rules clearly. A good starting point is thinking through the bigger picture of changing company ownership and what it means for control, voting, and future exits.

What Legal Responsibilities Does A Substantial Shareholder Have?

One common misconception is that shareholders (even substantial shareholders) automatically carry the same legal responsibilities as directors.

In New Zealand, directors have clear statutory duties under the Companies Act 1993. Shareholders usually don’t have those day-to-day duties, because shareholders aren’t managing the business.

However, substantial shareholders can still face legal responsibilities and risk in a few key ways.

1. Influence Can Create Risk (Especially If You Act Like A Director)

A substantial shareholder often has real influence. If that influence crosses the line into actually directing or controlling the board’s decisions, there can be increased legal and commercial risk.

For example, if a shareholder effectively “runs the company” while not formally being appointed as a director, they may be treated as a shadow director in some circumstances (for example, where the directors are accustomed to acting on that person’s instructions). If that happens, director duties and liabilities can become relevant.

The practical takeaway is simple: if you’re a substantial shareholder, be clear about whether you’re governing (as a shareholder) or managing (as a director/executive). And if you are managing, formalise it properly (including with appropriate appointment documents and service agreements).

2. Using Control Unfairly Can Lead To Claims (Minority Shareholder Remedies)

Even where a shareholder doesn’t owe “director duties” in the strict sense, how shareholders use voting power can still create legal risk-particularly where control is exercised in a way that harms other shareholders or the company.

Common problem areas include:

• Oppressive, unfairly discriminatory, or unfairly prejudicial conduct: minority shareholders can apply for relief where the company’s affairs are conducted (or an act is done) in a way that is oppressive, unfairly discriminatory, or unfairly prejudicial
• Misuse of voting power: for example, pushing through decisions that benefit one shareholder at the expense of the company or other shareholders (especially where there are related-party dynamics)
• Misrepresentation: where a shareholder makes promises or statements to other shareholders/investors that later become disputed

These issues are exactly why it’s so important to set expectations early and document how decisions are made, how disputes are handled, and how exits work.

3. Disclosure Obligations (Usually For Listed Companies, But Still Worth Understanding)

As mentioned above, if you’re dealing with a listed company environment, substantial shareholdings can come with formal disclosure requirements under the FMC Act (and often additional requirements under listing rules).

If your business is not listed, you typically won’t have those market disclosure obligations. But you might still have:

• Contractual disclosure obligations in investment documents
• Banking/finance disclosure obligations under loan terms (for example, notifying lenders of changes in control)
• Regulatory or licensing requirements in certain industries

This is one of those areas where getting advice early can save you a painful “we didn’t realise we had to tell anyone” moment later.

4. Takeovers And Control Thresholds (For Certain Companies)

If your company is a “code company” under New Zealand’s Takeovers Code (generally, certain larger companies with many shareholders), there are strict rules about acquiring “control” beyond certain thresholds (commonly 20%+).

Most small businesses won’t be code companies, but the underlying concept is still important: once a shareholder controls the company, the rules change.

Even in a private SME, your constitution or shareholders agreement might treat certain thresholds (like 25%, 50%, 75%) as trigger points for veto rights or special approval requirements.

How Does A Substantial Shareholder Affect Company Decisions?

From a small business perspective, this is where the “substantial shareholder” issue becomes very real.

Depending on your company’s governance documents, a substantial shareholder can affect:

Board Appointments And Day-To-Day Direction

A substantial shareholder may negotiate the right to appoint one or more directors. This can be reasonable (investors want oversight), but it needs to be carefully drafted so the board can still operate effectively.

If you’re bringing in an investor who will become substantial, it’s worth documenting:

• How many directors there will be
• Who can appoint and remove directors
• Whether the chair has a casting vote
• Whether certain decisions require investor director approval

Reserved Matters (Veto Rights)

It’s very common for substantial shareholders (especially investors) to ask for “reserved matters” or veto rights. These are decisions the company can’t make without their approval.

Examples might include:

• Issuing new shares
• Taking on significant debt
• Entering large contracts
• Buying or selling major assets
• Changing the business model

These rights aren’t automatically wrong, but if they’re too broad they can slow your business down or create deadlocks.

Ability To Block Special Resolutions

In many NZ companies, certain major decisions require a special resolution (often 75% shareholder approval, though your documents matter here).

That means a shareholder with 25% or more can sometimes block those changes, even if every other shareholder is in favour.

This can become a real issue when you’re trying to raise capital quickly, restructure, or agree on an exit.

Practical Steps If You’re Bringing In (Or Becoming) A Substantial Shareholder

Whether you’re the founder bringing in a major investor, or you’re the investor becoming the substantial shareholder, there are a few practical steps that help you stay protected from day one.

1. Be Clear On The Commercial Deal First

Before you get deep into legal documents, make sure you’ve aligned on key commercial points, such as:

• How much is being invested (or paid for the shares)
• What percentage the shareholder will hold after the transaction
• Whether there are different share classes
• Whether there are founder vesting or performance conditions
• Whether the shareholder will be involved in management

Once these are agreed, the legal work becomes much more efficient (and you’re less likely to miss something important).

2. Document The Share Movement Properly

Share transfers and share issues should be handled carefully. If you get the paperwork wrong, you can end up with:

• Disputes about who owns what
• Companies Office records not matching the “real” deal
• Problems when trying to raise funding later
• Tax and accounting confusion (so it’s worth getting accountant/tax advice on the structure as well)

If you’re moving shares around, make sure the steps are followed properly for how to transfer shares (and that your constitution and shareholders agreement are checked for any pre-emptive rights or consent requirements).

3. Don’t Rely On Handshake Understandings

When ownership is concentrated, relationship risk increases. Things can be friendly now, but businesses change fast.

It’s worth getting the key protections in writing so everyone knows what happens if:

• Someone wants to sell their shares
• A founder stops working in the business
• New investors come in
• The company gets an acquisition offer
• There’s a dispute or deadlock

This is exactly what a tailored Shareholders Agreement is designed to do.

What Documents Should You Have In Place?

If your company has (or is about to have) a substantial shareholder, your documents matter a lot more. Clear documents reduce the chance of disputes and give you a roadmap for decision-making.

Company Constitution

Your company constitution sets out the rules of the company, including how shares are issued and transferred, voting rules, and sometimes specific shareholder rights.

If you’re planning for growth or bringing in investment, a tailored Company Constitution can help ensure the company rules match the reality of how you operate (and how you want decisions to be made).

Shareholders Agreement

A shareholders agreement is often where the “real-life” rules live, particularly for private companies.

Common clauses that matter when a substantial shareholder is involved include:

• Decision-making thresholds and reserved matters
• Board composition and appointment rights
• Dividend policy (if any)
• Funding obligations (who has to contribute more capital, and when)
• Exit clauses (including tag-along and drag-along rights)
• Restraints, confidentiality, and IP ownership

If you’re unsure where to draw the line between what goes in the constitution and what goes in the shareholders agreement, it often helps to map the rules out first, then document them properly. The important thing is that the documents work together, not against each other.

Share Sale Or Share Subscription Documents

How the substantial shareholder got their stake matters. Did they buy shares from an existing shareholder (a share sale)? Or did the company issue new shares to them (a subscription / capital raise)?

Each route has different legal and commercial implications, and the paperwork needs to reflect what’s actually happening. (And if there are tax or accounting implications, you should also get advice from your accountant or tax adviser.)

In many cases, you’ll also want warranties and indemnities to reduce “surprise” risk (for example, undisclosed debts or disputes).

IP Ownership And Confidentiality Settings

When you bring in a major shareholder, due diligence often gets more detailed. A substantial shareholder (and their advisers) will usually want comfort that the company truly owns (or has proper rights to use) its intellectual property (brand assets, software code, designs, content, know-how) and that confidential information is protected.

If the IP is still personally owned by a founder or split across contractors, that can cause problems during investment and at exit.

While it’s not always top of mind, a major investment or ownership change is a good time to review how IP and confidential information are managed, and make sure key relationships are properly documented.

For example, if your substantial shareholder is also providing services or sharing sensitive information, you may need appropriate confidentiality clauses in place. (And if you’re collecting personal information from customers or users as you scale, you’ll also want a compliant Privacy Policy in place.)

Clear Company Processes For Big Decisions

Finally, remember that good documents are only half the solution. Your internal processes matter too.

Make sure you have a consistent approach to:

• Board meetings and minutes
• Shareholder approvals (and recording them properly)
• Conflicts of interest management
• Signing authority for contracts
• Keeping your Companies Office information up to date

These steps make it much easier to demonstrate good governance if there’s ever a dispute, a due diligence process, or a sale.

Key Takeaways

• A substantial shareholder is generally someone with a large enough stake to influence outcomes, and in listed-company contexts it can trigger formal disclosure rules (often around the 5% threshold).
• In small NZ businesses, the biggest impact of a substantial shareholder is usually control: voting power, board appointments, veto rights, and the ability to block or force major decisions.
• Shareholders typically don’t have the same statutory duties as directors, but substantial shareholders can still face legal risk if they act as a shadow director, or if control is exercised in a way that triggers minority shareholder remedies (including oppression-type claims).
• If you’re bringing in a major investor (or increasing a co-founder’s stake), document the arrangement properly, including the share movement and governance rules.
• Having the right foundations in place early, including a tailored Shareholders Agreement and Company Constitution, can prevent disputes and make future funding or a sale much smoother.
• Getting advice early is usually far cheaper (and less stressful) than trying to fix a broken ownership arrangement after a conflict or a failed raise.

If you’d like help setting up or reviewing your shareholder arrangements, or you’re planning an ownership change and want to make sure it’s done properly, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.