How to issue shares in a NZ company

Introduction

As with most aspects of managing a company, a company's power to issue shares is subject to the COMPANIES ACT 1993 and to the contents of the company's constitution (if there is one). Subject to any restrictions in the Act or the constitution, the company's board of directors may issue shares, at any time, to any person and in any number, as the board chooses. Issuing shares is therefore entirely at the board of directors' discretion.

Shares must be issued after a company is first registered

After a company has been registered, it must issue to the person or people named as shareholders in the application for registration the number of shares specified in the application to be issued to that person or those people.

Notice of share issue must be lodged with the Registrar of Companies

If a company issues shares, it must deliver to the Registrar of Companies a notice in a prescribed form within 10 working days after the shares were issued.

If the company fails to lodge the notice as required, every director of the company will be deemed to have committed an offence and be liable to a penalty.

Shareholder approval can overcome restrictions in the constitution

If a company is unable to issue shares because of restrictions in its constitution, the board of directors may issue the shares if it obtains approval from the shareholders in the same way as would be necessary to alter the constitution to allow the share issue. This is done by a special resolution of shareholders, which usually requires a 75 percent majority.

Existing shareholders have pre-emptive rights over new shares

The company must give existing shareholders the option to buy any newly issued shares. This is called their "pre-emptive right".

If the shareholder declines to buy the newly issued shares then the shares are offered to outside buyers. If the shares are issued to outsiders on more favourable conditions than apply to existing shareholders, then the shares must first be offered back to the shareholders on those more favourable conditions.

There may also be provisions in the constitution, or in any agreement that may be in place, giving non-shareholders a pre-emptive right.

How are shares paid for?

By law a shareholder is not required to provide anything of value in exchange (consideration) for the issue of new shares, unless this is expressly required in the constitution. However, if consideration is required, it may take any form, including cash, promissory notes, contracts for future services, real or personal property or other securities.

Before shares are issued a company's board must decide what consideration, if any, will be required for the issue of the shares and the terms on which they will be issued. The board must be satisfied that the conditions are fair and reasonable to all existing shareholders.

At what point are shares deemed to be issued?

Shares are deemed to have been "issued" when the shareholder is registered on the company's share register (see How to maintain a company share register).

Issue of shares is void if it increases any person's liability to the company

If the issue of shares would result in increasing the liability of a person to the company or in imposing a new liability on a person to the company, the issue will be void if it is done without that person's written consent.

Cautionary notes

• The law dealing with shares and securities is detailed and complicated. Often large amounts of money are involved and many people may be affected by decisions taken. It is strongly recommended that you seek the services of a lawyer who is experienced in securities law before undertaking to issue shares in a company.