Unequal Dividends Between Shareholders In New Zealand: Rules & Pitfalls

If you run a company with more than one shareholder, you’ve probably had this moment: the business is finally profitable, you want to reward the people who backed you early, but not everyone contributed the same time, money, or risk.

So you ask the obvious question: can a company pay dividends to shareholders unequally?

In New Zealand, yes, it can be done - but only if you’ve structured things properly and follow the Companies Act 1993. If you get it wrong, paying dividends in a way that doesn’t match the rights attached to the shares can trigger disputes, repayment demands, potential director liability, tax complications, and claims that you’ve acted unfairly or breached duties.

Below, we’ll break down how unequal dividends work in New Zealand, how share classes and your company’s constitution fit in, and the common traps we see small businesses fall into.

What Counts As “Unequal Dividends Between Shareholders”?

A dividend is a distribution of value from a company to its shareholders (usually cash, but it can also be non-cash distributions).

When people talk about unequal dividends between shareholders, they usually mean one of these situations:

• Paying a dividend to some shareholders but not others (even though they all hold shares).
• Paying different amounts per share (e.g. Shareholder A gets $10,000 and Shareholder B gets $2,000 even though they hold the same number of shares).
• Paying dividends to one class of shares but not another (e.g. ordinary shares receive dividends, but a different class does not - or vice versa).

The key legal point is this: you generally can’t just “freestyle” dividend payments because everyone agrees in a meeting. In most cases, the company must follow:

• the Companies Act 1993 rules on distributions (including the solvency test), and
• the company’s governing documents and share rights (especially your constitution and any terms attaching to shares).

Companies Act 1993: The Core Rules You Must Follow Before Any Dividend

Before you worry about whether dividends can be unequal, you first need to make sure your company can legally pay any dividend at all.

1) Dividends Must Be Authorised By The Board

In many NZ companies, dividends are authorised by the directors (the board), rather than just being agreed by shareholders informally over email or in a casual conversation.

It’s common for small businesses to blur the line between “shareholders” and “directors” (often the same people). But legally, it still matters which hat you’re wearing when decisions are made - and whether there’s proper documentation. A Directors Resolution can be a simple but important part of keeping things clean.

2) The Solvency Test Must Be Met

Under the Companies Act, a company generally must satisfy the solvency test immediately after the dividend is paid. This broadly covers:

• Liquidity: can the company pay its debts as they fall due?
• Balance sheet solvency: are the company’s assets greater than its liabilities (including contingent liabilities)?

If directors authorise a dividend when the company is not solvent (or becomes insolvent as a result), the consequences can be serious. Depending on the facts and the statutory settings, this can include:

• directors facing personal liability (including compensation-type orders in some cases),
• recipients of the distribution being required to repay it in certain circumstances, and
• issues if the company later fails and a liquidator scrutinises past payments.

This is one reason it’s risky to treat dividends like “bonus payments” whenever cash is available. If what you really want is to pay someone for work performed, you may be thinking of salary, contractor fees, or management fees (and those have their own rules and tax treatment).

3) The Distribution Must Be Properly Recorded

Even in a friendly shareholder group, good record-keeping helps prevent future disputes - especially if someone leaves, you bring in a new investor, or you sell the business later.

At minimum, you’ll usually want a clear paper trail showing:

• the board resolution approving the dividend,
• the amount and calculation method,
• the date payable, and
• which shares (or share classes) are entitled.

If you’re planning for different rights between shareholders over time, it’s also worth locking down the ground rules in a Shareholders Agreement so expectations are aligned before profits hit the bank account.

Can You Pay Unequal Dividends If Everyone Holds The Same Shares?

This is where many small businesses accidentally step into dangerous territory.

If all shareholders hold the same class of shares with the same dividend rights, dividends are generally paid proportionately based on shareholding (in other words, the same amount per share), unless the company’s governing documents and the rights attaching to the shares clearly allow a different approach.

So, if you have two shareholders each holding 50 ordinary shares (50/50 ownership), a dividend on ordinary shares will usually mean they receive equal amounts.

If you instead pay one shareholder more than the other without a legal mechanism that allows it, you can create issues such as:

• breach of share rights (because you’re not treating the shares consistently),
• unfair prejudice / shareholder dispute risk (particularly if one shareholder feels excluded), and
• tax characterisation problems (IRD may scrutinise whether the payment is truly a dividend or something else).

It’s not that unequal dividends are “always illegal” - it’s that you need the right structure to do it properly. In most cases, that structure is different share rights (often via different share classes) set out in your constitution and/or the terms on which shares were issued.

Using Share Classes To Pay Unequal Dividends Between Shareholders

If you want unequal dividends between shareholders in a way that’s predictable and legally defensible, share classes are often the cleanest approach.

Different share classes can carry different rights, including rights relating to:

• dividends (whether they’re entitled at all, priority, or different calculation methods),
• voting rights, and
• capital distributions (e.g. on liquidation or sale).

Common Examples (In Plain English)

Here are a few examples of how NZ companies commonly structure dividend rights:

• Ordinary shares: dividends paid proportionately per share, standard voting rights.
• Non-voting shares: may receive dividends but don’t vote on most matters.
• Preference shares: may have priority to receive dividends before ordinary shareholders, sometimes at a fixed rate.
• “Founder” and “Investor” classes: sometimes used where investors negotiate preferential dividend or return rights.

The best structure depends on what you’re trying to achieve. For example:

• If one shareholder contributed more initial capital and wants a priority return, preference shares might make sense.
• If you want to reward a working founder differently from a passive shareholder, you might consider a structure that separates profit share from control - but you’ll need to do this carefully to avoid creating new conflicts later.

Your Constitution Needs To Match Your Plan

Share rights and share classes usually need to be supported by the company’s constitution and/or the terms on which the shares are issued (depending on your structure).

If your constitution is silent or inconsistent, you might find you legally can’t do what you thought you could. This is why it’s important to have a properly drafted Company Constitution that reflects how your small business actually operates - not just a generic template.

Also, if you’re changing share rights after the fact (for example, creating a new share class years into trading), you’ll usually need to follow the correct company processes and obtain any required approvals under the Companies Act, the constitution, and the terms attaching to the shares. Getting this wrong can set you up for disputes later, especially if someone claims they never agreed to their rights being varied or diluted.

Practical Steps To Set Up Unequal Dividend Rights (Without Creating A Mess)

If you’re considering unequal dividends between shareholders, here’s a practical roadmap we often recommend for small businesses.

1) Get Clear On The “Why” (Before You Touch The Legal Structure)

Start by clarifying what you’re trying to achieve. For example:

• Are you trying to repay one shareholder’s loan or capital contribution?
• Are you trying to reward someone for working in the business?
• Are you trying to pay an investor a preferred return?
• Are you trying to manage cashflow while still distributing profits?

Different goals often require different tools - and dividends aren’t always the right tool. Sometimes a loan repayment, salary adjustment, or service agreement is more appropriate (and lower risk).

2) Review Your Current Share Structure And Documents

Check what documents currently govern your company, including:

• your constitution,
• any shareholders agreement, and
• any share issue documents or special rights attaching to shares.

If you’re not sure what applies (or if documents have been copied and pasted over the years), it’s worth doing a clean review now - because dividend disputes often happen when the business is doing well, and relationships start to strain.

3) Decide Whether You Need New Shares, New Share Classes, Or A Different Arrangement

Often, paying unequal dividends properly means one of the following:

• issuing a new class of shares with different dividend rights,
• restructuring rights attached to existing shares (with proper approvals), or
• considering whether the payment should be structured as something other than a dividend.

If you’re bringing new shareholders in or changing who owns what, you’ll also want a clean process for how equity moves around - including rules for transferring shares and what approvals are needed.

4) Update Your Governance Documents So Everyone Is On The Same Page

Unequal dividends between shareholders can be commercially fair - but it needs to be documented so it doesn’t feel like a surprise later.

In practice, that usually means:

• updating the company constitution (if required),
• putting clear rules into a shareholders agreement (for example, how dividends are declared, whether certain classes have priority, and what happens if profits are reinvested instead), and
• making sure your Companies Office records and share registers are consistent with the structure.

If ownership has changed over time (for example, someone has joined or left informally), it’s worth tidying this up as part of the same project - changing company ownership without clean paperwork is one of the fastest ways to create dividend disputes.

5) Don’t Forget Tax And Accounting Settings

Dividends sit at the intersection of company law and tax/accounting - so you’ll want your lawyer and accountant aligned.

Some practical tax-related considerations can include:

• whether the dividend will be imputed (and whether you have imputation credits available),
• how the dividend is recorded in financial statements, and
• whether the payment could be recharacterised (for example, if it looks like salary or repayment of a shareholder advance).

This article is general information only and isn’t tax (or legal) advice. If you’re planning dividends - especially unequal dividends - it’s a good idea to get tailored advice from your accountant and lawyer early so you don’t end up undoing transactions later.

Common Pitfalls With Unequal Dividends (And How To Avoid Them)

Unequal dividends between shareholders often becomes a problem not because the idea is bad - but because the execution is rushed, informal, or based on assumptions.

Pitfall 1: “Everyone Agreed At The Time” (But Nobody Documented It)

Handshakes and text messages don’t age well.

A common scenario is when one shareholder later exits the business (or relationships break down), and suddenly the history of “special dividends” becomes evidence in a dispute.

How to avoid it: make sure the company has proper resolutions, clear share rights, and a shareholders agreement that matches how you plan to distribute profits.

Pitfall 2: Paying Dividends As A Substitute For Wages

If one founder works full-time in the business and the other doesn’t, it can feel “fair” to pay the working founder more via dividends.

The risk is that dividends are linked to share rights - not effort - and using dividends as quasi-salary can cause:

• company law issues (if the shares have equal rights), and
• tax treatment complications.

How to avoid it: consider whether employment income, contractor payments, directors fees, or another arrangement better reflects the reality (with the right contracts in place).

Pitfall 3: Forgetting Director Duties And Conflicts Of Interest

If directors approve a dividend that benefits themselves (for example, paying one shareholder-director but not another), you need to be especially careful that decisions are made properly and in the company’s best interests.

How to avoid it: use proper processes, record reasoning, and get advice if there’s a tension between shareholders or a risk of claims of unfairness.

Pitfall 4: Trying To “Fix It Later” When You Bring In An Investor Or Sell

When you’re raising capital or preparing to sell, messy dividend history and unclear share rights can become a due diligence issue.

Buyers and investors typically want to understand:

• who is entitled to profits,
• whether any class has priority returns, and
• whether any shareholder can block dividends or force distributions.

How to avoid it: build a clean structure early, and keep it updated as the business evolves. If you’re planning an investment round, you may also want to look at how your share rights fit with capital raising documents like a Term Sheet.

Pitfall 5: Confusing Dividends With Other Shareholder Payments

Sometimes the company pays money to a shareholder and calls it a “dividend” when it’s actually something else (like a loan repayment, reimbursement, or payment under an agreement). That can create confusion for:

• other shareholders,
• your accountant, and
• future investors or buyers.

How to avoid it: label and document payments correctly, and keep your company records consistent with what’s actually happening.

Key Takeaways

• Unequal dividends between shareholders are possible in New Zealand, but you usually need the right share rights (often via share classes) and the right documentation.
• Before paying any dividend, directors must ensure the company meets the Companies Act 1993 requirements (including the solvency test) and properly authorise and record the dividend.
• If shareholders hold the same class of shares with the same rights, dividends will generally need to be paid proportionately per share (unless the share rights and company documents validly provide otherwise) - paying one shareholder more can create legal, dispute, and tax risks.
• A well-drafted constitution and shareholders agreement can prevent confusion and conflict by clearly setting out dividend rights, decision-making rules, and what happens as the business grows.
• Common pitfalls include informal “everyone agreed” arrangements, using dividends like wages, ignoring director duties, and leaving messy structures until you’re raising capital or selling.
• Because dividend planning touches company law, governance, and tax/accounting, it’s worth getting tailored advice early so your structure matches your commercial goals.

If you’d like help setting up a dividend structure (or reviewing your share rights, constitution, or shareholder arrangements), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.