What are reserved matters, and how does it work for startups?

Reserved matters are a standard clause that can be found in a shareholders agreement, especially when dealing with more sophisticated investors like venture capitals and institutional entities like corporates.

What is a reserved matter, and what is it for actually?

The reserved matters set out a list of actions or items which the company cannot carry out without special approval by a certain number of people or even by a single person approved at the board or shareholder level.

In other words, reserved matters are an additional level of approval above that may be needed by the existing companies law. It gives further control and protection for those shareholders that may have a smaller minority stake in a company that may not be able to veto or influence decisions on those items if the approval threshold is only applicable under the usual companies law.

For example, a new investor or a venture capital may want to say if your company decides to form a new company or even acquire another company.

To be put it bluntly, reserved matters change your shares ownership’s practical value regarding voting rights. Technically, a minority shareholder with only 10% stake in the company may be more powerful than a majority shareholder with 60% stake if the board or shareholder needs to get the minority shareholder agreement before a matter gets passed by the board of directors or shareholders of the company.

What to look out for in reserved matters list

Depending on how sophisticated the investors you’re dealing with, finalising reserved matters lists can be challenging and always tricky. It all boils down to the negotiation and the founders’ experience dealing with the usual commercial terms in a shareholders agreement. Having an excellent commercial lawyer with experience in dealing with startups can highlight the common industry standards terms.

Here are a few considerations that you should pay attention when it comes to drafting good reserved matters:

The reserved matters should not slow down or even paralyse the company’s day-to-day operations, including its management team.

The reserved matters address legitimate concerns of minority shareholders like venture capitals or strategic investors. The veto power is not used as a ‘collateral’ reasons but only as a ‘nuclear option.’

What are every day reserved matters inside a startup’s shareholders agreement?

Every shareholder’s agreement may differ in terms of style, and the commercial lawyer engaged in preparing the shareholder’s agreement. The list of reserved matters can even be potentially longer depending on the extent of control that a minority shareholder wishes to impose against the company’s potential actions. Here are the usually reserved matters in a shareholders agreement:

  • adopting or amending the existing constitution of the company
  • altering the rights attached to shares, changing the capital structure of the company
  • declaring dividends or distributions
  • entering into joint ventures or collaboration with third parties
  • borrowing money or guaranteeing the obligations of third parties
  • hiring new employees or changing the existing employment terms of the critical management team
  • dealing with intellectual property assets

When you receive an investment term sheet, please go through the reserved matters clause carefully so that you know what you’re getitng yourself into. It’s good to engage a good startup lawyer as early as possible to highlight what are standard terms so that you don’t give too much control to the investor and get back to growing your company.

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