Reserved Matters are a specific set of significant business decisions, such as selling the company, issuing new shares, or taking on major debt, that require formal approval from shareholders rather than being left solely to the discretion of the board of directors.
Reserved Matters are a specific list of significant business decisions that cannot be made by the company's directors alone. Instead, these actions must be formally approved by the company's shareholders, typically through a majority or super-majority vote. Whilst the board of directors manages the day-to-day operations, Reserved Matters act as a "lock" on major strategic shifts or high-risk corporate changes, ensuring that those with an ownership stake have a final say on the most critical issues.
In a standard company setup, directors have broad powers to sign contracts and hire staff. However, once you bring in external investors or have multiple partners, you will likely introduce Reserved Matters. These usually include actions like selling the company, issuing new share capital, changing the company constitution, or taking on significant debt. By defining these matters clearly, you prevent a situation where the board could fundamentally change the business without the owners' permission.
For founders, Reserved Matters are a core part of corporate governance. They provide a balance of power between management and owners. In Irish startups, these are almost always documented in the shareholders' agreement. Understanding these restrictions is vital, as taking a "reserved" action without the required shareholder consent can lead to legal challenges, breach of contract, and personal liability for the directors involved.
Investors insist on Reserved Matters as a form of minority protection. When a venture capital fund or angel investor takes a 10% or 20% stake, they do not control the board of directors. Without Reserved Matters, the majority owners or the founders could potentially dilute the investor’s stake by issuing millions of new shares or sell the company's assets behind their back. These clauses ensure that the investor has "veto power" over actions that could destroy the value of their investment.
Even if an investor doesn't have a seat on the board of directors, Reserved Matters allow them to monitor and control high-level risks. It forces the founders to keep the investors informed and aligned on major strategic pivots. This level of oversight is a standard requirement in almost every professional subscription agreement and term sheet in the Irish ecosystem.
Common examples of Reserved Matters include any changes to the company's share structure, such as an up round of funding or a change of shareholders. They also frequently cover the appointment or removal of directors, changes to the business plan, and entering into any joint venture agreement.
Financial thresholds are also common; for instance, any expenditure over €50,000 might be a Reserved Matter. Other examples include the commencement of significant litigation, the declaration of dividends, or any transaction between the company and one of its directors (often called a "related party transaction"). By listing these, shareholders ensure that the company’s cash and assets are used appropriately.
As mentioned, Reserved Matters are primarily found in the shareholders' agreement. This is a private contract between the owners, making it the ideal place for sensitive commercial vetoes. However, some Reserved Matters may also be mirrored in the company constitution, which is filed with the company registry and is a public document.
During due diligence, a potential buyer or new investor will scrutinise these documents to see who actually has the power to "block" a future sale of the company. It is important that these two documents are consistent; if there is a conflict between the constitution and the shareholders' agreement, it can lead to complex legal disputes.
To proceed with an action listed under Reserved Matters, the board must formally request shareholder approval. This is usually done by holding a general meeting or, more commonly in small startups, by obtaining a "written resolution" signed by the required percentage of shareholders. The percentage required (e.g., 75% or 90%) will be specified in your agreement.
It is vital that these approvals are recorded in the company's compliance calendar and minute books. If you issue shares without a valid shareholder resolution, the issuance could be deemed "void," meaning the new investor doesn't legally own the shares. This is a common and expensive mistake identified during due diligence in later funding rounds.
Ignoring Reserved Matters is a serious "default" under your shareholders' agreement. If directors bypass a veto, the aggrieved shareholders can sue the company for breach of contract or seek an injunction to stop the action from taking place. In extreme cases, this can lead to the removal of the directors or the triggering of "bad leaver" provisions, causing founders to lose their own equity.
Beyond internal disputes, failing to respect Reserved Matters damages the company's relationship with its backers. It signals a lack of professional governance, which can prevent you from raising future capital. Professionalism in following the "rules of the game" is just as important as the company's growth metrics for long-term success.
Reserved Matters can be amended, but this usually requires the consent of the very people who have the protection—the shareholders. As a company matures or moves through various funding rounds (like a Series B funding), the list of Reserved Matters is often renegotiated. For example, early-stage angel investors might have many vetos, but these might be replaced by a more streamlined list once a larger VC firm takes over the lead.
Founders often try to negotiate "thresholds" for Reserved Matters to ensure they still have the flexibility to run the business. For instance, rather than asking for permission to hire every employee, you might only need shareholder consent for "C-level" hires or those with a salary above a certain level. This ensures that Reserved Matters provide protection without causing operational paralysis.
