Reserved matters in a shareholders agreement

Last updated: September 2022 | 4 min read

During the negotiation of the terms of a shareholders agreement, dealing with reserved matters is likely to be the most contentious part. They are one of the most important points to consider.

What are reserved matters?

Reserved matters are the actions that the company, its directors and shareholders must not do without the explicit approval by at least a certain proportion of specific persons, usually either directors or shareholders. The decision is ‘reserved’ for certain people.

They are usually things that are exceptional rather than day-to-day, and that don’t require quick decision making.

Why include them?

The law already requires that certain actions require the consent of shareholders.

However, these shareholder rights are fairly limited and whether a motion is passed or failed depends on how the holders of the majority of shares vote, not necessarily the wishes of the majority of owners.

Within a shareholders agreement, company owners can increase the statutory requirements for consent and introduce requirements for decisions on which the law is silent, perhaps giving directors rather than shareholders the power to make them, or perhaps changing the basis from each share gives one vote to something else such as each person has one vote regardless of ownership proportion.

A reserved matters provision strengthens decision making rights of minority shareholders, giving them greater say on matters that are most important to them.

Common reserved matters

A list of reserved matters could be very long or very short. There is no standard list because why a majority shareholder (or several large ones) would want to concede their power to smaller ones very much depends on the dynamics of each company individually.

However, common reserved matters are:

  • adopting new articles of association for the company such that holders of greater than 75% of the voting shares are required to agree to it
  • varying non-voting rights attached to shares, including paying dividends and other distributions
  • winding up or restructuring the company
  • buying and selling shares (either of the company, or of another business)
  • entering into joint venture arrangements or partnerships
  • borrowing money, increasing borrowing limits or guaranteeing obligations of third parties
  • transacting with directors or shareholders to prevent 'self-dealing' (such as selling stock to a shareholder or taking a loan from a director)
  • changing the terms of employment of any director or senior staff member
  • employing new staff (at a senior level)
  • approving or amending a business plan or budget
  • litigating disputes or settling claims
  • making gifts or charitable donations
  • changing accounting policies
  • appointing or removing auditors, accountants or solicitors

The reserved matters may also be fairly general such as ‘anything outside the ordinary course of business’ or ‘entering into long term contracts’. The potential problem with such actions is that it is often hard to define at the time the decision is made whether it falls under the definition of a reserved matter.

Are reserved matters voted on at board of directors level or shareholder level?

Typically reserved matters are voted on by shareholders because it is the minority owners who benefit most from having a say in such decisions.

However, because no owner will want to paralyse the day-to-day operations of the business by forcing the business to wait for shareholders to get together, discuss the issue and then vote, a reserved matter might be delegated to the directors to decide on.

This might happen particularly where the subject of the reserved matter is important enough to require transparency over how the decision is taken, but not high risk so as to jepardise the business if a poor decision is made.

However, directors need to consider that they have a duty to act in good faith and in the best interests of the company. If a director represents a minority shareholder there may be a conflict if that directors votes for their shareholder but against all other directors.

Limitations and qualifications on reserved matters

Reserved matters may be limited (or qualified). This allows a minority shareholder to gain some power (or for a majority one to concede some) but only to a limited extent. For example, there may be a monetary limit above which a vote is required – for example, on borrowing money. Below that limit, a vote does not need to be taken.

Alternatively, reserved matters may be limited where the matter is ‘material’, ‘significant’ or ‘substantial’. These are subjective qualifications, which while in theory give minority shareholders voting rights on important matters, may be difficult to enforce.

Drafting a reserved matters list

Care should be taken to make sure that reserved matters are drafted so that they give the control intended. A poorly drafted matter may give limited say over something is important to an owner, or give someone unintended leverage over a different issue.

Because your reserved matters list is so specific to your business, the common matters in our shareholder agreement templates may or may not include those things you can negotiate voting power over. However, we recommend that you look at them for examples on how to word reserved matters.

© 2000 - 2024 Net Lawman Limited.
All rights reserved