Shares and shareholders FAQs

Shareholders are investors in a company.  They pay money into the company in return for shares.  The amount shareholders pay for shares is determined by agreement with the company.  They do not participate in the management of the company, other than by voting on the appointment and removal of directors.

• Issuing shares
• How much do shareholders pay for their shares?
• What value should I set for my company shares?
• What are company shares worth?
• What is the difference between the nominal and paid up capital of a company?
• Distributions to shareholders
• Rights of shareholders
• What are shareholders liable for if the company goes into liquidation?
• Exception to limited liability

Issuing shares

After incorporation a company must issue to any person named in the application as a shareholder, the number of shares that the application says the shareholder will receive.

After the first issue of shares, the board of a company may issue shares at any time, to any person, and in any quantity it sees fit.  This power is subject to the provisions of the Companies Act 1993 and any provisions in a company's constitution that may modify its right to issue shares. 

The Registrar must receive notice of the share issue in the prescribed form.  This must be filed with the Companies Office within ten working days of the issue.

• Go to the Maintain Company Details online service

How much do shareholders pay for their shares?

When you form your company, you decide what the shares will be worth at start-up.  For example, you may decide to issue 1,000 shares of 25 cents each and take up 800 shares (80%) yourself.  You may then decide to issues the remaining 200 shares to a business partner, your children, or perhaps a key staff member.

What value should I set for my company shares?

When you register your company, you can set any value you choose for your company shares.  The value of a share when it is first issued is called its 'nominal value'.

You then assign them in any proportion agreed by the company director(s).

For example, 500 shares at .50 cents each, (total company capital: NZ$250) split between two directors:

• Director A: 400 shares (NZ$200)
• Director B: 100 shares (NZ$50)
   

What are company shares worth?

When you form your company, you decide how many shares should be issued for that company, and what their value will be.  The shares at the start are worth the issue value you set on them (for example, 1 cent, 25 cents or NZ$1 per share).  This is called the nominal value of the share.

However, as your business grows, becomes more profitable and acquires more assets, the real or market value of the shares is also likely to grow.  When it comes time to sell or pass on your business, you can negotiate the sale value of the shares based on an agreed valuation for each share.  Calling in an expert outside opinion in the form of a registered valuer can help you determine the current worth of the shares.  For example, a share originally valued at 25 cents (the Nominal value) may now be worth far more.

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What is the difference between the nominal and paid up capital of a company?

When you form your company, you choose the number of shares and their value, for example, 10,000 shares at NZ$1 each.  The nominal capital of the company’s shares is therefore NZ$10,000.

In most cases, the shareholders allotted these shares pay for them immediately by cash or cheque into the new company, so these shares become fully 'Paid Up'.

However, shareholders may decide only to pay up only a portion of these shares at the beginning, for instance, only 10% or NZ$1,000, intending to pay up the balance later.  The Balance Sheet will continue to show that the shareholders owe the company the balance of $9,000 for the unpaid portion of their allotted shares.

Any lenders who ask to see your company Balance Sheet before advancing funds will note that the nominal capital of the company looks impressive at NZ$10,000, but that the shareholder(s) have only paid up NZ$1,000 of this.  They will take this in account when advancing funds to you.  For instance, they may require the shareholders to invest more money in the business before they will offer more funding.

Distributions to shareholders

The board of a company may authorise a distribution by the company at any time, and of any amount, and to any shareholders it sees fit.  But before doing so it must:

• be satisfied, on reasonable grounds, that the company will be able to satisfy the solvency test immediately after the distribution.
• ensure that it does not breach section 53 of the Companies Act 1993, or any provision in its constitution relating to distributions.

Directors who vote in favour of a distribution must sign a certificate stating that the company can satisfy the solvency test and give the grounds for that opinion.  A company satisfies the solvency test if:

• it is able to pay its debts as they become due in the normal course of business.
• the value of the company's assets is greater than the value of its liabilities including contingent liabilities.

Rights of shareholders

A shareholder is a person who holds shares in a company.  In most cases shareholders do not participate in the management of the company however they have the right to vote on the appointment and removal of directors.
 

What are shareholders liable for if the company goes into liquidation?

The limited liability structure of a company limits the liability of shareholders to the capital they own in the company.  Shareholders are liable for any unpaid portion of this capital.

Take the situation of a company that is put into liquidation owing more to creditors than the company owns in net assets.  The liability of shareholders in such a liquidation position is limited to the fully paid up portion of shares they own.

For example, if a shareholder owns 1,000 shares in a company with a value of NZ$1 each, the shareholder is liable for the full NZ$1,000.  However, if the shareholder has only paid up NZ$250 towards the 1,000 shares issued to that shareholder (value NZ$1 each), then the shareholder remains liable to creditors for the balance of NZ$750 in unpaid capital.

Exception to limited liability

This means making sure that at all times the company is solvent and can meet its debts.  If the director has been guilty of reckless trading then the director can be held financially liable for any debts incurred while the company was trading recklessly.  This can put privately owned assets at risk (such as a house or car).