Investment in shares is a topic of huge interest at the moment.
Last year in 2020, we saw $2.7 billion dollars spent by NZ’s private business sector on research and development (Stats NZ).
So when we think about what happens to your money in exchange for shares, those funds will likely be used to support the growth of that business. Where that capital injection can be used to fund the company’s endeavours to enter new markets, develop service delivery via digital means and/or enhancing local manufacturing.
Whether you’re an existing NZ shareholder or thinking about becoming one, here are JH LAW’s top 5 things to know about being a shareholder. Let’s get into it!
#1 What should shareholders know about tax?
There are certainly tax conversations to be had about owning shares. However, without going into too much detail here, there is one concept we can note being imputation credits.
How Credits Work: If you get dividends from a company, those dividends will usually have imputation credits attached. Imputation credits represent income tax already paid by the company and allow shareholders to use these imputation credits when they go to pay tax on their received dividends.
In essence, this means company profits are not taxed twice.
Not Enough Credits: If your dividends are not fully imputed (i.e. not enough company tax was paid) then resident withholding tax (RWT) will apply. What happens here, is that the company paying the dividend will deduct RWT (at a rate of 33%) before making payment to you as shareholder.
#2 How are shareholders entitled to dividends?
Frequency of Dividends: A company can authorise a distribution at any time and for any amount (Section 52). However, there is a responsibility on the directors to ensure that the company will still be solvent after any distribution of a dividend.
Benefits of a Dividend Policy: Ideally, the company should have a dividend policy. This is a guide for directors to know how much income to retain as earnings, to invest back into the company to support its growth, and how much to pay its shareholders via dividend.
The ratio between the dividend and retained earnings can vary, correlating to the stage of a company, and a position that prudent investors will look for when deciding which company to entrust their funds with.
#3 How do shareholders influence company decision?
Shareholder Input & Consent: How often you’re called on by the board of directors to help decide what to do can depends on various factors, but largely comes down to a question of control.
It depends on how many shares you hold and whether they’re voting or non-voting ones. The board will get you to complete what's called a resolution, where they know that they will need at least 50% (ordinary resolution) or 75% (special resolution) shareholding consent before proceeding with certain company transactions.
Use the Shareholders Agreement: Assuming you have enough voting shares in a particular company, it helps to look for a list in the shareholders agreement that typically outlines all the different scenarios that shareholders can expect to provide input and consent.
Stay Informed: When you’re not also a director of the company, it can be hard to know what’s going on or how well (or not well) the company is performing. Thus, it is ideal to invest in companies that regularly produce updates to its shareholders (i.e. quarterly reporting) and reasonable access to company records.
#4 What is the extent of liability for a shareholder?
Limited Liability: A shareholder’s liability is limited to any amounts owing by them on shares they own (and any personal guarantees given) (Section 97). A company’s debts are the responsibility of the company itself.
Take Care with Guarantees: Do watch out if you are asked to provide a personal guarantee for the company’s lending. More than often, a bank will do its due diligence to find out who the shareholders are and require a guarantee from each one (even minority shareholders). When this happens, do your best to limit that guarantee or negotiate no guarantee at all.
#5 Are shareholder details private and kept from the public?
Public Disclosure: The NZ Companies Office shows the details of shareholders and where they reside. If the company does not maintain correct details of its shareholders, they can incur a penalty fine (Section 87(4)).
Suggestions for Reform: This position has over recent years sparked chatter to privatise shareholder details. This is akin to what we see for shareholders in the UK, Canada, Hong Kong and Singapore. However for shareholders in NZ, we will have to wait and see.
Please reach out to Janey at janey@jhlaw.nz if you have any questions regarding the above. The above is purely for informational purposes, where JH LAW will need to determine if the above information is applicable or appropriate to your particular situation.