What reserved matters means
Reserved matters are the decisions a majority cannot take alone.
Company law works on majorities. Ordinary resolutions pass on a simple majority and special resolutions on a higher one, and a shareholder with enough votes can decide almost everything.
That leaves a minority investor exposed. They put money in, they hold twenty percent, and the majority can then change the business, issue shares that dilute them, borrow against the company, pay themselves and sell the company, all without asking.
Reserved matters answer that. The shareholders agreement lists decisions that require the consent of a named shareholder or of a stated percentage, and the company undertakes not to take them without it.
The effect is a veto over specified matters rather than control of the company. The majority still runs the business; it simply cannot do the listed things unilaterally.
How it is used
The list is negotiated, and a typical one covers a recognisable set.
Issuing shares or granting options.
Changing the memorandum or articles.
Borrowing above a stated amount, or granting security.
Selling the company, or selling a substantial part of the business or its assets.
Changing the nature of the business.
Declaring a dividend.
Entering related party transactions, including with directors or their connected persons.
Appointing or removing directors.
Approving the annual budget, and material departures from it.
Hiring above a defined salary threshold.
Commencing or settling significant litigation.
Winding the company up.
Where the consent sits matters as much as the list. Investor consent gives one party a veto. A supermajority of shareholders is more balanced. Board reserved matters requiring an investor director's approval are a lighter alternative.
Thresholds should also be sized to the business. A borrowing limit that made sense at incorporation becomes an obstacle at scale, so the numbers should be reviewed rather than fixed forever.
Key features
- Decisions requiring specified consent regardless of shareholding
- Set out in the shareholders agreement rather than in company law
- Give a minority investor a veto over defined matters
- Typically cover share issues, borrowing, sale, dividends and related party deals
- Consent may sit with a named shareholder, a percentage, or a board seat
- Thresholds should be sized to the business and reviewed
How this works in Nigeria
Reserved matters are the practical answer to the Nigerian minority shareholder problem, and they work far better than the statutory remedies.
CAMA provides relief where conduct is unfairly prejudicial to a member, and it is real. It is also litigation: slow, expensive and adversarial, pursued after the damage is done.
A reserved matters clause prevents the damage. The majority cannot issue shares diluting the minority, cannot take the company into debt, and cannot sell the business, without the consent the agreement requires.
The related party transaction item deserves particular emphasis in Nigerian companies. Value leaves closely held businesses through arrangements with connected persons: a company owned by the majority shareholder supplying services, premises leased from a director, or a management fee to a related entity. Requiring minority consent for related party transactions above a threshold addresses the single most common route by which minority value is extracted.
The dividend item is the second. A minority in a profitable Nigerian company that never declares a dividend, while the majority takes a large salary, has a real grievance and a slow remedy. A reserved matter over dividend policy, or an agreed distribution formula, prevents it.
The drafting risk is overreach. A list of forty reserved matters, with a veto held by a minority investor, can paralyse a company that needs to move. Keep the list to decisions that genuinely affect the investment, and set thresholds that leave ordinary trading alone.
Reserved matters vs special resolution vs veto share
Three ways a decision can be made harder to take.
A special resolution is a statutory mechanism requiring a higher majority of shareholders for defined matters such as amending the articles or changing the name. It protects anybody holding enough shares to block it, and no more.
Reserved matters are contractual. The shareholders agreement lists decisions requiring specified consent, which can be given to a shareholder holding any percentage, including a small one. It is bespoke and it binds only the parties.
A veto share, sometimes called a golden share, is a class of share carrying special rights set out in the articles. It is constitutional rather than contractual, so it binds the company and is visible in the public documents.
A minority investor negotiating protection usually takes reserved matters, because they are flexible and private. Where the protection must survive a change in shareholding or bind third parties, the articles are the better home.
Limits and risks
Reserved matters bind only the parties to the agreement, so a new shareholder who did not sign is not caught unless the transfer provisions require adherence.
An extensive list can also paralyse a company, and an investor with a veto who is slow to respond becomes an operational problem rather than a protection.
Breach gives a contractual remedy, which is damages and possibly an injunction, rather than automatically invalidating the decision as against third parties.
And the thresholds date. Limits set at incorporation become obstacles as the business grows, so the agreement should provide for review.
Worth knowing
Put related party transactions on the reserved matters list with a low threshold. Value leaves closely held Nigerian companies through supply contracts, leases and management fees with entities the majority owns, and it is the single most common route by which a minority is squeezed out.
Questions people ask
What are reserved matters?
Decisions the company cannot take without the consent of specified shareholders, set out in the shareholders agreement, regardless of who holds a majority of the shares.
What is typically on the list?
Issuing shares, changing the articles, borrowing above a limit, selling the company or a substantial part of the business, changing the nature of the business, declaring dividends, related party transactions, appointing directors and approving budgets.
Why do minority investors want them?
Because company law works on majorities. Without reserved matters a twenty percent investor can be diluted, see the business changed and the company sold, with no say in any of it.
Can a reserved matters list go too far?
Yes. A long list with a veto held by an investor who responds slowly paralyses the company. Keep it to decisions that genuinely affect the investment and set thresholds that leave ordinary trading alone.
What happens if the company breaches a reserved matter?
It is a breach of contract, giving damages and possibly an injunction. It does not automatically invalidate the decision as against a third party who dealt with the company in good faith.
Which matters most in a Nigerian company?
Related party transactions and dividend policy. Those two are how minority value is most often extracted in closely held Nigerian companies, and reserved matters prevent it far more effectively than litigation.