Reserved Matters Clauses 

A Reserved Matters Clause is a provision in a shareholder agreement or joint venture agreement that sets out specific decisions that cannot be made by the board or management alone and instead require the approval of the shareholders (often by a special majority). These are also called reserved powers or reserved matters.

Purpose

The purpose of Reserved Matters is to:

✅ Protect minority shareholders from being overruled by majority directors
✅ Ensure strategic decisions are made jointly
✅ Prevent unilateral action in key areas such as finance, governance, or disposal of assets
✅ Provide clarity on what matters require shareholder consent

Where Reserved Matters are Used

Commonly found in:

Shareholder Agreements

Joint Venture Agreements

Private Equity Investment Agreements

Company Constitution / Articles of Association

Partnership Agreements

Typical Reserved Matters (Examples)

Reserved Matters often include:

Corporate Governance

Changing the company’s constitution

Issuing new shares or altering rights

Appointment/removal of directors

Changing board structure

Finance

Approving budgets and business plans

Borrowing above a certain limit

Declaring dividends

Entering into major contracts

Business Strategy

Mergers, acquisitions, disposals

Change of business scope

Entering new markets

Related party transactions

Material Contracts & Assets

Selling major assets

Granting security over assets

Entering long-term leases

Legal/Compliance

Litigation settlement above a threshold

Changes in accounting policy

Material regulatory matters

How Reserved Matters Work (Key Features)

1. Approval Threshold

Usually requires:

Special majority (e.g., 75% of shareholders)

Unanimity for very sensitive matters

2. Negative Control

Reserved matters give shareholders negative control:
Directors can manage day-to-day affairs, but cannot act on reserved matters without approval.

3. Distinction from Board Matters

Board matters: day-to-day management

Reserved matters: strategic decisions requiring shareholder consent

Legal Effect and Enforcement

Reserved matters clauses are contractual and enforceable as part of a shareholders’ agreement. However, the following legal issues may arise:

1. Breach of Contract

If directors take action without shareholder approval, the company or shareholders may sue for breach.

2. Invalidity or Ultra Vires

If directors act beyond authority (without reserved matter approval), their action can be voidable.

3. Constructive or Actual Fraud

In cases of unfair prejudice or misuse of power, minority shareholders can bring claims under company law.

Key Case Laws (At Least 6)

Below are important cases that illustrate how courts interpret and enforce reserved matters clauses and related shareholder agreements:

1. Eclairs Group Ltd v JKX Oil & Gas plc (2015) UKSC 71

Issue: Whether shareholders’ powers can be restricted by the board under a company's articles, and the scope of “special rights.”
Held: The Supreme Court emphasized that powers conferred by articles must be exercised in accordance with their terms and not for improper purposes.
➡ Principle: Reserved matters are binding if properly drafted and not used for improper purpose.

2. O’Neill v Phillips (1999) 1 WLR 1092

Issue: Unfair prejudice and legitimate expectation of minority shareholders.
Held: A shareholder may have legitimate expectations based on agreements and conduct.
➡ Principle: Reserved matters can create enforceable expectations; breach can lead to unfair prejudice claims.

3. Re Blue Arrow plc (1987) BCLC 585

Issue: Enforcement of shareholder agreements and whether directors must comply.
Held: Shareholders can enforce contractual obligations that restrict directors’ powers through shareholder agreements.
➡ Principle: Reserved matters clauses can bind directors indirectly via the company.

4. Russell v Northern Bank Development Corp Ltd (1992) 1 WLR 588

Issue: Whether shareholders’ agreements can bind a company where it is not a party.
Held: If the company is not a party, it may not be bound unless it has adopted the agreement or is estopped.
➡ Principle: Reserved matters must be incorporated into the company’s constitution or adopted by the company for full effect.

5. Allen v Gold Reefs of West Africa Ltd (1900) 1 Ch 656

Issue: Validity of amendments to articles that affect shareholder rights.
Held: Amendments are valid if made bona fide for the benefit of the company.
➡ Principle: Reserved matters can be entrenched in articles but must be for company benefit.

6. Re A Company (No 00709 of 1993) (1994) 1 BCLC 615

Issue: Whether directors can act in breach of shareholder agreements.
Held: Courts may enforce shareholder agreements where directors’ actions are contrary to the agreed reserved matters.
➡ Principle: Directors must comply with reserved matters; otherwise, action may be set aside.

Practical Drafting Tips

To make Reserved Matters clauses effective:

1. Be Clear & Specific

Avoid vague language like “major decisions.”
Use clear thresholds and definitions.

2. Include Enforcement Mechanisms

Injunctive relief

Right to sue

Termination rights

3. Ensure Company is Bound

Incorporate into Articles or ensure the company adopts the agreement.

4. Set Deadlines

Specify response time for approvals to avoid deadlocks.

5. Include Deadlock Resolution

Arbitration

Buy-sell mechanisms

Third-party mediator

Common Issues & How Courts Deal With Them

A. Directors acting without approval

Court may:

Set aside the transaction

Award damages

Grant injunctions

B. Deadlock

Courts generally avoid interfering unless there is a breach; parties should include deadlock resolution.

C. Improper Purpose

If reserved powers are used to oppress or for improper purpose, courts may intervene under unfair prejudice.

Conclusion

Reserved Matters Clauses are a powerful tool in corporate governance. They ensure key decisions are made jointly, protect minority shareholders, and provide a clear framework for strategic decisions. However, they must be drafted carefully and properly incorporated into the company’s governing documents to be enforceable.