Director Profit Sharing Agreement Template for New Zealand

A Director Profit Sharing Agreement is a crucial legal document that aligns your director's interests with your company's financial performance. This agreement creates a formal structure for sharing profits between your company and directors, ensuring transparency and legal compliance while incentivizing strong leadership and business growth.

When do you need this document?

You need a Director Profit Sharing Agreement when recruiting high-caliber directors who expect performance-based compensation, particularly in competitive industries where traditional fixed fees may not attract the right talent. This document is essential for private companies, professional services firms, and growth-stage businesses where director compensation should reflect company success. You'll also need this agreement when restructuring existing director compensation packages to include profit participation, or when investors require performance-linked executive compensation as a condition of funding.

Key legal considerations

The agreement must clearly define how profits are calculated, including whether this refers to net profit, EBITDA, or other financial metrics. You need to specify performance criteria, minimum profit thresholds, and payment timing to avoid disputes. The document should address what happens if the director's appointment terminates mid-year, including pro-rata calculations and clawback provisions. Tax implications are critical—the agreement must clarify whether payments are treated as director fees, employment income, or distributions, as this affects both company deductions and director tax obligations. You should also include confidentiality clauses to protect sensitive financial information and non-compete provisions if appropriate.

Legal requirements in New Zealand

Under the Companies Act 1993, director profit sharing arrangements must comply with sections 131-138 regarding director duties, particularly the duty to act in the company's best interests. The agreement must not conflict with the director's fiduciary obligations or create situations where personal profit could compromise decision-making. You need shareholder approval if the profit sharing arrangement constitutes a major transaction or if required by your company's constitution. The Income Tax Act 2007 governs how these payments are taxed, requiring proper classification and PAYE obligations where applicable. If your profit sharing includes equity components or securities, the Financial Markets Conduct Act 2013 may require additional disclosure obligations. The agreement must also comply with the Contract and Commercial Law Act 2017 for enforceability, including proper consideration and clear terms to avoid uncertainty in performance or payment obligations.