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A Preference Share Agreement is a critical legal document that governs the issuance of preference shares by New Zealand companies seeking to raise capital while maintaining existing control structures. Under New Zealand law, preference shares offer investors certain preferential rights over ordinary shareholders, particularly regarding dividend payments and capital distribution, making them an attractive financing option for both companies and investors.

When do you need this document?

You need a Preference Share Agreement when your company requires significant capital injection but existing shareholders want to preserve voting control and management authority. This document is essential for growth-stage companies expanding operations, established businesses undergoing restructuring, or companies implementing strategic partnerships with institutional investors. The agreement is particularly valuable when traditional debt financing is unsuitable or when investors seek equity participation with enhanced protection. You'll also require this document when converting existing debt to equity, facilitating management buyouts, or establishing employee share schemes with preferential treatment.

Key legal considerations

The agreement must clearly define dividend rights, including whether dividends are cumulative or non-cumulative, the dividend rate calculation method, and payment priority over ordinary shares. Capital rights provisions should specify preference shareholders' entitlements upon liquidation or winding up, typically ensuring they receive their investment back before ordinary shareholders. Voting rights clauses determine whether preference shareholders have voting privileges and under what circumstances these rights activate. Redemption terms outline when and how the company can buy back preference shares, including any mandatory redemption triggers. Anti-dilution provisions protect preference shareholders from value erosion through subsequent share issues, while conversion rights may allow preference shares to convert to ordinary shares under specified conditions.

Legal requirements in New Zealand

Under the Companies Act 1993, your company must have appropriate constitutional authority to issue preference shares, which may require shareholder approval and constitutional amendments. The Financial Markets Conduct Act 2013 imposes disclosure obligations when offering shares to the public or wholesale investors, including preparation of disclosure documents and compliance with fair dealing provisions. You must ensure the agreement complies with the Contract and Commercial Law Act 2017 regarding contract formation and enforceability. Tax considerations under the Income Tax Act 2007 affect dividend imputation and shareholder tax treatment, requiring careful structuring of dividend arrangements. The Financial Reporting Act 2013 may impose additional reporting obligations depending on your company's size and public accountability. Directors must also consider their duties under the Companies Act when recommending preference share issues, ensuring the arrangement serves the company's best interests and complies with the solvency test requirements.