What to Watch as a Shareholder
If you invest into a company by buying shares in that company, you become a shareholder. You have the right to a share in the profits of the company, and in theory may have a say in the running of the company when attending shareholder meetings. You as the shareholder will be hoping for increasing profits in the company so that the value of the shares will increase as the underlying value of the company shares increase accordingly. Increasing profitability and earnings can be reflected in increasing dividend paid out to the shareholders in one form or the other.

When a company decides to change from a private company to a public company, it registers with the NZ Stock Exchange, prepares financial reports for future shareholders, and then ‘floats’ shares to the public. One reason for doing this is so the company can raise required capital for expansion, debt retirement, or a number of other reasons we will discuss later.

Note that the company is not borrowing money from the public sector; it is offering ownership to the investing public. Unlike government stocks or bonds, where the government raises capital by borrowing from the public sector, and promising to repay the principle and interest at a given maturity date, shares reflect ownership.

Your Rights as a Shareholder in a Closely Held Company
One of the characteristics of the Companies Act 1993 (Act) is the wide range of remedies available to shareholders. As a shareholder you have a number of options available if you feel you have been wronged by the company, by other shareholders or by individual directors.

The Companies Act offers a number of actions for disgruntled shareholders including:

  1. A personal action which can be brought when there is a wrong done to your personal rights as a current or former shareholder. These are taken against a director for a breach of a duty owed to you as a shareholder.

  2. A derivative action, where an individual shareholder sues the directors in the name of and on behalf of the company. This is particularly useful, as most statutory directors' duties are owed to the company rather than to the shareholders individually. Often the company will be unwilling to act as it is under the control of the directors who are alleged to have breached their duties.

Other statutory rights you have as a shareholder include:

  1. The right to request a statement of rights, to inspect the company 's records and to obtain information about the shares held by the company.
  2. The right to ensure that the company appoints an auditor to audit the financial statements of the company.
  3. The right to vote against the company entering into a major transaction and if the resolution is passed, to require the company to purchase your shares at fair value.
  4. The right to apply to the court for a variety of orders, if you consider that you have been, are, or are likely to be unfairly prejudiced by any act of the company, or by any conduct of the company’s affairs.

Such orders include:

  • Directing that the company 's records be rectified.
  • Setting aside an action by the company or board in breach of the Act or coy 's constitution.
  • Requiring the company or another person to buy your shares or to pay you compensation regulating the future conduct of the company 's affairs.
  • Altering or adding to the company 's constitution.
  • Appointing a receiver for the company.
  • Putting the company into liquidation.

A useful way of anticipating solutions for contentious issues that may arise between shareholders is to contractually prescribe suitable remedies and dispute resolution mechanisms in the form of a shareholders' agreement. This is a private contractual arrangement between the shareholders. A shareholders' agreement is recommended in closely held companies to record the rights and obligations of shareholders.

Shareholders and the IRD
When you invest in specific shares you have all the risk. Direct share portfolios need to be well managed. One advantage of a direct share portfolio for a New Zealand investor is that any capital gains are not taxed if the investor is not deemed to be a trader by the IRD.

A direct share investor needs to access when to buy and sell shares and where the economy is in the business cycle.

The IRD definition of a trader is quite loose. Court cases over recent years have indicated that the IRD may deem an investor as a trader if they have traded more than 5-7 shares in the previous 12 months. It is important to have the correct ownership structure for your direct share portfolio.