Founders and shareholders will usually want to preserve a certain level of control over the company through voting powers, board representation and ownership rights. One of the ways this is commonly addressed in a Shareholders’ Agreement (SHA) is through a reserved matters clause, which imposes additional approvals before certain company actions or decisions can be taken.
This article provides an overview of how reserved matters clauses work, why they are negotiated in SHAs, and the types of matters they usually cover.
How reserved matters works
Depending on how the reserved matters clause is drafted, this may require:
- a higher voting threshold to be met, such as 75% shareholder approval; or
- the consent of a specific party, such as a founder or investor.
Even if a party holds majority control, they may still be unable to proceed with certain reserved matters without obtaining the required approval, particularly where there are:
- multiple co-founders,
- minority investors,
- strategic shareholders,
- joint venture partners, or
- investor-backed companies.
For example, a founder may want flexibility to run the business efficiently, while an investor may want visibility and approval rights over major decisions that could affect the value of their investment.
The commercial purpose behind reserved matters can differ depending on the transaction:
- Fundraising transactions: Founders may lose majority control over time and want veto rights over key decisions
- Joint venture arrangements: Business partners may want involvement in major strategic decisions affecting the joint venture
- Co-founder structures: Founders may want alignment and oversight over significant company actions
- Strategic investments: Investors may want approval rights over matters that could materially affect their investment
- Acquisitions: Buyers may negotiate reserved matters where founders continue managing the company post-completion
In practice, reserved matters are often intended to ensure that key stakeholders remain involved in major strategic decisions.
Shareholder reserved matters
Reserved matters are usually drafted as shareholder reserved matters, where certain strategic or company-level decisions require shareholder approval before the company can proceed.
Common examples include:
- share issuance and fundraising
- major borrowings or liabilities
- expenditure above certain limits
- major investments
- approval of annual budgets or business plans
- entry into material contracts or transactions
- disposal of key assets
- changes to board composition
- dissolution of a company
- changes to business activities
- dividend decisions
The scope of reserved matters is subjective and depends on the dynamics between the parties. Properly drafted reserved matters should protect key stakeholders without unnecessarily slowing down routine management and operational decisions.
Board reserved matters
A SHA may also include board reserved matters, where certain decisions require the approval or consent of a specific director, such as a founder-appointed director or investor-appointed director.
This is usually used for operational or management-level matters, and less common in smaller founder-led companies where the founder is both a shareholder and director.
Is a reserved matters clause a must?
Not necessarily. Some companies may choose not to use a detailed reserved matters list at all and instead require the approval of the founder for company resolutions generally. This may be workable where the company is small and has a relatively straightforward management structure.
Furthermore, the Companies Act 2016 provides default approval thresholds for certain corporate actions, though these statutory thresholds may not necessarily cater to the commercial dynamics or approval arrangements agreed between shareholders.
That said, a properly drafted reserved matters list can provide greater clarity on which matters require specific consent and help reduce disputes or disagreements over approval requirements as the business and shareholder structure evolve.
Let ELP tailor your SHA
Reserved matters are a key component of a properly drafted SHA, but other clauses require equally careful drafting to ensure the shareholder structure remains commercially workable and properly protected as a whole. If you require assistance with SHA drafting, review or negotiations, contact us for an initial consultation.
