Reserved Matters List
By Joanne Hue, Last updated: 2022-06-02 (originally published on 2022-03-12)
What is a Reserved Matters List and what is it for?
There are certain matters or actions which must not be undertaken by the company or its subsidiaries without the approval or special majority of the board or shareholders. In the case of reserved matters list, special approval is required which is more than and above what is required by the general law. Such provisions afford protection to the minority shareholders who generally don’t take part or influence the decisions making process of the company where general approval is required by the law.
These are actions that are beyond the ordinary course of a company’s business. It is always difficult to finalize the list of matters which will come under the list. The negotiation on such matters by the shareholders definitely influences the actions of a company or its subsidiaries. Apart from this, there are other important considerations to be taken into account which includes:
- Regular business or day-to-day operations of the company or its subsidiaries should not be unreasonably delayed.
- The concerns of the minority shareholders should be addressed so that the veto afforded is not used for collateral purposes.
What are the common Reserved Matters?
There is no exhaustive list of the reserved matters. However, some of the common reserved matters related to all of the shareholders’ agreements are as follows:
- Amendment of the constitution of the company.
- Changing the capital structure of the company.
- Paying dividends or making distributions.
- Varying the rights attached to the shares.
- Winding up or restructuring procedures of the company.
- Dealing with intellectual property of the company.
- Buying or selling shares or entering into any kind of collaborations or joint ventures.
- Bringing any material changes to the operations of the business.
- Changing the terms of the employment of the key executives.
- Fulfilling any obligations towards third parties (such as borrowing money or giving guarantees).
- Transactions involving directors, shareholders etc.
Which Reserved Matters are found in some, but not all of the model shareholders’ agreement?
There are some reserved matters which are not included in all of the model shareholders’ agreements but included only in some of them. Such matters include:
- Commencement of litigation proceedings or claims.
- Making gifts or charitable donations.
- Amending or approving the budget or the business plan.
- Making changes in the appointment of auditors, accounting policies or practices.
There are some matters which are versions of the common reserved matters in broader terms such as:
- Undertaking anything “outside the ordinary course of business.”
- Entering into unusual, onerous, material or long term contracts.
It is interesting to note that some of them are not always of concern as they prevail only for a certain period of time such as the reserved matters on initial coin offerings. The users of model shareholders’ agreements will want to carefully determine if the list is right for them.
Which Reserved Matters are generally exercised at the board level or at the shareholder level?
It is known that decisions of a company are usually made at the board level or the shareholder level. Therefore, they are generally drafted at the board or shareholder level.
At Board level: The reserved matters at the board level are those which are decided by the board to run the company. This allows certain decisions to be vetoed by the director representing the minority shareholders. Even after drafting such provisions, the director has to consider his general director’s duties while exercising the power given by the reserved matters. He has to act in good faith and in the best interest and towards the success of the company.
Some common reserved matters which are dealt with at the board level include:
- Employing and changing terms of the employment.
- Granting security interests on the company’s assets.
- Incurring financial indebtedness.
At the shareholders level: the reserved matters at the shareholders level require approval of shareholders. One may consider the following situations before deciding whether a matter is included as a reserved matter at the shareholder level.
- Whether the matter requires consideration of the duties of the director.
- Whether it will be difficult to track shareholders than directors which may lead to delay in the decisions.
However, it should be noted that the approval of reserved matters is more common at the shareholders level and the common reserved matters at the shareholders level have been stated above.
What are some common limitations or qualifications to these reserved matters?
The limitation or qualifications imposed on the reserved matters are generally a matter of negotiation which reflects:
- The level of control or influence required by the minority shareholders and majority shareholders for their investments and contributions respectively.
- To ensure that the matters which are vetoed as reserved matters will not be used in an unintended manner.
- To ensure that the decision making process of the company will not be unreasonably delayed.
- Setting monetary limits before approval is required. For ex: only debt incurred after a certain threshold will be require the approval of shareholders.
- Using terms such as material or substantial means that only material contracts or changes require reserved matter approval.
- Matters which have been approved in a business plan or budget do not have to be approved again as a reserved matter.
The reserved matters list should be settled in the shareholder’s agreement with proper care and thought. A poorly drafted list of reserved matters can hamper the day-to-day business of the company or can result in either insufficient control or influence for minority investors. In the worst scenario, a poorly drafted reserved matters list can be abused in certain situations or could give a party a veto outside of what was intended. Therefore, careful consideration must be given to the list of the reserved matter.