Reserved Matters in a Shareholders' Agreement

In a small company, the founders are usually the directors as well as the shareholders, so the difference between the two roles can feel academic. It stops being academic when founders disagree. Reserved matters in a shareholders' agreement are how you decide, in advance, which big decisions the board cannot take alone. Pre-emption rights are how you decide who gets first refusal when shares are issued or sold. Together they control two things founders care about most: who decides, and who owns.

Who decides by default

Under the model articles, the directors are responsible for managing the company's business and may exercise all its powers (model articles, article 3). Shareholders can direct the directors by special resolution, which needs 75% of the votes (article 4, and Companies Act 2006, section 283).

So the board takes most decisions, and a founder who is outvoted at board level may have little real say, even on something as big as taking on serious debt. That is the gap reserved matters fill.

What reserved matters in a shareholders' agreement are

Reserved matters are a list of decisions the company will not take until the shareholders have approved them at an agreed level. They are written into the shareholders' agreement as a promise between the shareholders about how they will use their votes.

That structure is deliberate. The House of Lords held in Russell v Northern Bank Development Corporation Ltd [1992] 1 WLR 588 that a company cannot contract out of its statutory powers, but shareholders can validly agree among themselves how they will vote. The Founders & Shares agreement follows that line: clause 5.4 binds the shareholders as shareholders, not the company, and does not require any director to breach their duties.

Reserved matters in the Founders & Shares agreement

Schedule 2 of the agreement sets out a house-default list of 12 decisions, plus an optional 13th. They include:

changing the nature of the business;
issuing, buying back or changing the rights of shares;
borrowing, guarantees and spending above a figure you set;
appointing or removing directors, or changing their pay;
approving the accounts and budget, and declaring dividends;
selling all or a substantial part of the business, or winding up;
changing the articles, name or registered office;
transactions with a shareholder or someone connected with them; and
optionally, dealing with core intellectual property.

Against each one you choose an Approval Level:

Approval Level	What it needs
Simple Majority	More than 50% of the Voting Shares
Qualified Majority	At least 75% of the Voting Shares (fixed)
Unanimous Consent	Every shareholder who holds Voting Shares
Not reserved	The directors decide alone

"Voting Shares" leaves out shares of a founder who is leaving and whose shares are in the compulsory sale process, so a departing founder cannot block decisions on the way out.

Three things founders miss

Blank means unanimous. Any item left without a single Approval Level needs Unanimous Consent. That gives every shareholder a veto over it. Do not leave rows half-finished.

You give up a free vote. Once a reserved matter has been approved at its level, every shareholder must vote for whatever resolution is needed to carry it out, even if they voted against it. That includes a special resolution the law would otherwise let them block. If you want to keep a real veto, choose Unanimous Consent.

The law still applies on top. Approval under the agreement is in addition to any resolution the Companies Act or the articles require. Changing the articles still needs a special resolution (section 21). And no agreement can stop the company removing a director by ordinary resolution at a meeting (section 168); see how to remove a shareholder for how the pack handles that.

If you are 50/50, Simple Majority and Qualified Majority both need you both, so in practice every reserved matter needs you both. Pair the list with the deadlock steps: our post on 50/50 shareholder deadlock covers those.

The pack's "Every Vote Counts" worksheet walks you through each row with worked examples for common splits.

Pre-emption rights on new shares: the Companies Act 2006

When a company allots new ordinary shares, the Companies Act gives existing ordinary shareholders a right of first refusal, in proportion to their holdings (section 561). The offer must stay open for at least 14 days (section 562(5)).

A private company with only one class of shares can switch that statutory right off, either in its articles or by special resolution (section 569). The model articles do not do it.

The Founders & Shares agreement replaces the statutory procedure with its own (clause 11). New shares must first be offered to the existing founders in proportion to their holdings. Each has 14 business days to accept and pay. Anything not taken up can go to others only at the same or a higher price, and only if the newcomer signs a deed of adherence.

You promise to switch off the statutory right, so you do not run two procedures with different timetables. The Signing-Day Pack includes template wording for the special resolution and a filing checklist. You must sign it and file a copy at Companies House within 15 days (section 30). The pack does not do that step for you. Issuing shares is also reserved matter 2, so it needs approval at the level you chose.

Pre-emption rights on transfer of shares

There is no general statutory right of first refusal when a shareholder sells existing shares. The model articles only let the directors refuse to register a transfer (article 26). If you want founders to get first refusal, the shareholders' agreement has to say so.

Clause 12 of the Founders & Shares agreement does:

A founder who sells must sell all their shares, not just some.
They first offer them to the others by a Transfer Notice giving the price and the name of any outside buyer.
The others have 14 business days to challenge the price. If no price is agreed within a further 14 business days, an independent accountant sets Fair Value.
If the accountant sets the price, the seller can withdraw within 5 business days.
The others then have 14 business days (bracketed) to accept. Silence counts as declining.
Shares not taken up can go to the named buyer, at no lower price and on no better terms than were offered to the founders, once the buyer signs a deed of adherence. An optional 60 business day deadline applies.

A transfer to a family member (spouse, civil partner, parent, sibling or child) is allowed outside this process, but only once they sign a deed of adherence. Transfers to companies or trusts are not allowed. Remember that these rules bind the people who sign the agreement; the pack does not change your articles, so read shareholders' agreement vs articles of association on why that matters.

Share sales can have tax consequences, including stamp duty. Take advice from an accountant.

When you need a solicitor

The pack suits 2 to 4 individual founders with one class of ordinary shares. Take advice from a solicitor if you have more than one share class (section 569 is then not available and the template is not safe), outside investors who want their own vetoes, or you want reserved matters or pre-emption written into your articles.

This is general information, not legal advice on your situation.

The Founders & Shares shareholders' agreement pack includes the reserved matters schedule, the Every Vote Counts worksheet and the pre-emption resolution wording. Common questions are answered in our shareholders' agreement FAQs.

Reserved matters in a shareholders' agreement, and how pre-emption rights fit in

Who decides by default

What reserved matters in a shareholders' agreement are

Reserved matters in the Founders & Shares agreement

Three things founders miss

Pre-emption rights on new shares: the Companies Act 2006

Pre-emption rights on transfer of shares

When you need a solicitor

Sources

Related Templates for Founders

Related reading

Prenup for Founders