The Companies Act 1993 (“the Companies Act”) states directors are:
responsible for the management and decision-making of Company Limited, and
appointed and removed by ordinary resolution of the shareholders.
Therefore, Mate A, B and C could pass a resolution appointing additional shareholders or removing Investor D as a director. What can Investor D do about this?
The Companies Act enables Investor D to call for voting on the resolution to be by poll. This means that the number of shares held by each investor is counted. If Investor D held 5 million shares then his vote would win. However, if all Investors held the same number of shares then Investor D would lose.
What can be done to protect Investor D? The parties can enter into an agreement (commonly called a Shareholder Agreement or an Equity Investor Agreement (“the Agreement”)) that states each investor has the ability to appoint one director and only remove that director.
How do directors vote?
The Companies Act says that each director has one vote. Therefore, Mate A, B and C could overrule Investor D any decision. For example, Mate A – the farm manager wants a 20% pay increase. Mate B and C are happy to give Mate A this increase. Investor D thinks it is too much!
Investor D may require, in the Agreement, that his director’s vote counts for 3 votes while Mate A, B and C each have one vote. This ensures that Mate A, B and C can not make decisions without Investor D’s agreement. In other words Investor D’s investment in Company Limited is not being put at risk without his agreement.
It also protects Mates A, B and C who can vote together causing a deadlock in the decision-making. This means that the proposal does not go ahead until all Directors agree.
However, if Investor D required 5 votes to reflect his greater investment in Company Limited then Mate A, B and C are at risk of Company Limited being run by Investor D.
Ensure all Investors have the same goals for Company Limited
Problems occur between investors when their goals for Company Limited are not the same. Investor D may be looking for short term gains while Mates A, B and C may be looking for long term gains.
If the Agreement clearly expresses what the objectives of the parties are and how Company Limited is going to achieve those objectives then it is unlikely a dispute will arise between the investors.
Major Transactions
Company Limited wants to purchase more land as well as construct new milking sheds. Doing so is a major transaction for Company Limited.
The Companies Act requires major transactions to be approved by 75% of the shareholders. Therefore, Mates A, B and C could pass the major transaction resolution even though Investor D disagreed.
Investor D could call for the decision to be voted on by poll (by shares held) or alternatively, the Agreement could state that major transactions must be approved by all investors.
Farm Manager – Mate A
In our example Mate A wears three different hats in relation to Company Limited.
He is a shareholder (by investing $1 million)
He is a director
He is an employee of Company Limited (the farm manager)
Each hat has different rights, obligations and responsibilities. As Mate A is a director, he is also his own boss. The Agreement needs to clearly state that Mate A will not be involved in any decisions of Company Limited in relation to the farm managers employment.
If Investor D is not happy with the farm manager performance then Company Limited must take all steps required by employment legislation to correct Mate A’s lack of performance.
The Agreement needs to cover whether or not Mate A must resign as a director and sell his shares in Company Limited if s/he is no longer the farm manager.
In summary
The Agreement needs to cover whether or not Mate A must resign as a director and sell his shares in Company Limited if s/he is no longer the farm manager.
