Halvorsen & Reith

Reserved matters and veto design for international holding structures

Reserved matters and veto design determine which board and shareholder decisions in an international holding structure require more than an ordinary majority, and which single shareholder or class can block them outright. Get the drafting wrong and a minority investor holds no real protection despite paperwork that says otherwise, or a majority shareholder finds that a small stake can freeze the group indefinitely. This page sets out when the drafting needs to be revisited, what a proper review produces, and what the engagement does not cover under the firm's advisory perimeter.

A joint venture agreement is renegotiated, a family holding company brings in a second generation as shareholders, or a private equity investor takes a minority stake with a board seat attached. In each case, the constitution and any shareholders' agreement are read together for the first time in years, and it becomes clear that the veto list was drafted for a different ownership structure than the one that now exists.

What follows sets out the trigger points that make this review necessary, the sequence in which the work is delivered, where jurisdiction changes the analysis, and the boundary of what this engagement covers.

The situation this work addresses

Reserved matters and veto design sit at the point where corporate governance stops being a drafting exercise and starts deciding who actually controls a company. A board resolution passed by a simple majority might still need a separate consent from a class of shares before it takes effect, or it might not need any consent at all, depending on wording drafted years earlier for a different set of shareholders. The gap between what the constitution says and what the current shareholders assume it says is where disputes start.

The work is usually commissioned in one of three situations. An investor is negotiating entry into a company that already has a constitution and wants to know what a minority stake will actually protect before signing anything. An existing shareholder group is adding a new class of shares, a new jurisdiction of incorporation, or a new layer in a holding structure, and the reserved matters list has never been revisited to match. Or a dispute has already surfaced, a board decision was taken without a consent that a shareholder now says was required, and the question is whether the veto held, and what happens next.

In all three, the underlying question is the same: which decisions can the board take alone, which need shareholder approval, and which need the approval of a specific class or a specific shareholder holding a defined percentage. Shareholder rights that exist only informally, by understanding between the parties, do not survive a change of ownership, a dispute, or the death of a founder. They survive only if they are written into the constitution or a shareholders' agreement in terms that a registry or a court will actually enforce.

What triggers it and why the timing matters

The most common trigger is a financing round or a new joint venture partner arriving with their own list of matters they expect to control, typically a veto over further share issues, over changing the business, over incurring debt above a defined level, or over removing a director they nominated. The second most common trigger runs the other way: a founder or family shareholder group discovers, usually during a dispute, that the veto they believed they held was never actually drafted into the constitution, only discussed at the time the company was set up.

Timing matters because the point at which reserved matters are embedded in the constitution, rather than left in a side letter or a shareholders' agreement binding only the parties to it, is also the point at which they become visible to anyone who inspects the company's constitutional documents on the public record. Once amended articles carrying the veto are filed and the entry becomes visible on the register, a gap in its scope cannot be reversed by an informal side letter between the parties; closing it requires a further filing that must itself clear the same voting threshold that created the gap in the first place. The jurisdiction-specific version of this analysis, for example reserved matters and veto design in the Abu Dhabi Global Market, sets out how the amendment threshold and the filing point are treated under that jurisdiction's own company law.

A board of directors that acts without realising a matter is reserved does not necessarily act unlawfully, but the resolution can be challenged later, and by then the decision, a share issue, a change of business, a director's removal, may already have taken effect. The earlier the veto list is tested against the current ownership and the current business, the fewer decisions are taken on an assumption that turns out to be wrong.

Before instructing a review, it helps to have three things confirmed internally.

If a veto is being added or changed as part of a new investor's entry, the director appointment letters going out to any nominee the investor is bringing onto the board need to reflect the same reserved matters list, or the appointment terms and the constitution will say two different things about what that director can decide alone.

Review your appointment terms. Write to info@hreithlaw.com with the jurisdiction and the structure.

What a reserved matters and veto design review produces, in sequence

A reserved matters and veto design review does not produce a single document. It produces a sequence, because each stage depends on the answer to the one before it.

Where the veto is designed to protect a specific class of shares rather than a shareholder personally, the underlying share class structure has to be checked first, since a veto attached to the wrong class protects nobody; see share class structuring for how that class is created and defined. A separate note on the board resolutions a reserved matters change actually requires sets out the resolution wording in full, for boards that want to see the mechanics before instructing the drafting stage.

The matrix is the working document a board actually uses once the review is finished; the amendment is what gets filed. Between the two sits the judgment call this kind of work turns on: whether a given protection belongs in the constitution, where it binds anyone who later becomes a shareholder, or in a private shareholders' agreement, where it binds only the current signatories and is easier to renegotiate without becoming visible on the register.

Where this differs by jurisdiction

The mechanics of a veto differ by jurisdiction in three respects that a review has to check locally rather than assume. First, whether a reserved matter can be written into the constitution itself, binding on any future holder of the relevant shares, or whether the jurisdiction's company law only recognises it as a contractual right between the parties to a shareholders' agreement. Second, what threshold the local company law sets as the default for amending the constitution, and whether that default can be raised for a specific class of decision or only for amendments generally. Third, what becomes visible on the public register once a veto is embedded in the constitution rather than kept private in a shareholders' agreement, since filing requirements, and what a counterparty or regulator can see by searching the company, vary by registry and are not the same question in every jurisdiction covered by this practice.

The statutory filing that follows a constitutional amendment is what closes off the option of treating the veto as provisional; once filed, correcting an error means a further amendment, not a quiet withdrawal. The distinction between a veto that binds only the parties to an agreement and one that runs with the shares is explored further in this comparison of contractual and constitutional veto protection, and the same distinction affects how a drag-along provision is drafted and enforced, covered separately in a comparison of drag-along enforceability.

This page covers the design question across the jurisdictions in which the firm advises. The jurisdiction-specific position for a given company, what its own companies registry actually requires, and what the default amendment threshold is under its own company law, should be confirmed for the specific jurisdiction of incorporation before a veto is drafted, not assumed from how a similar structure was handled elsewhere.

What this service does not include

This review does not include acting as, supplying, sourcing or arranging a director, company secretary, nominee shareholder or trustee for the company whose constitution is being amended, and it does not include any activity for which a trust or corporate service provider licence is required. That boundary is set by the licensing regimes of the jurisdictions this practice covers, not by a preference about how the firm wants to work; arranging for another person to act as director or nominee is, in a number of these jurisdictions, itself a licensed activity, and the firm holds no such licence. None of this review touches the company's beneficial owner register, which is filed separately and under its own rules.

What the engagement delivers instead is the analysis a board and its shareholders need before they instruct whoever will actually hold the office or fill the seat: the reserved matters mapped against the current ownership, the threshold each one needs, the clause language, and the sequence of board and shareholder approvals required to adopt it. Appointing the director, registering the change of shareholder, or filing the amendment with the registry is carried out by the company itself, through its own officers or its existing registered agent.

Once the amendment is filed and the veto is live, any director who signs a resolution outside its scope is exposed personally to a challenge that did not exist under the previous version of the constitution, and the terms of their own appointment are the first place that exposure needs to be checked.

Review your appointment terms. Write to info@hreithlaw.com with the jurisdiction and the structure.

Frequently asked questions

Who inside the company is responsible for reserved matters and veto design?
Responsibility sits with the board of directors as a whole, not with one director or the company secretary, because it is the board that has to recognise when a proposed resolution falls within a reserved category and route it to whichever shareholder or class consent it needs. Treating this as an administrative task for the secretary to flag is the most common reason a veto gets missed, since the secretary has no independent view of what the business is actually about to do.
What evidence should the board keep on reserved matters and veto design?
The board minute recording that a matter was identified as reserved, and the written consent obtained before the resolution was passed, are what a court or a counterparty will ask for if the decision is later challenged. A minute that simply records the resolution, without recording that the reserved-matter question was considered, leaves no record that the check was ever made.
What happens if reserved matters and veto design is not addressed?
A resolution passed without a consent it needed can be challenged by the shareholder or class whose veto was overridden, and the challenge can reach transactions the board believed were already settled, a share issue, a change of business, the appointment or removal of a director. The company is left arguing, after the fact, that the decision should stand despite the missing consent, which is a weaker position than checking the veto list before the resolution was passed.
How often should reserved matters and veto design be reviewed?
There is no fixed interval that suits every company; the trigger is a change in who holds shares, who sits on the board, or what the business does, not a date on a calendar. A structure that has taken on a new investor, added a jurisdiction, or issued a new class of shares since the veto list was last checked is already overdue for a review, whatever the calendar says.
Does reserved matters and veto design change for a foreign-owned company?
The design question is the same, but the answer depends on the company law of wherever the company is incorporated, not on where its shareholders are based. A foreign owner does not get a different veto mechanism, only a different local threshold and filing point to check under that jurisdiction's own rules.

Margot Enskog, expert author, constitutional documents. Margot focuses on the design and enforceability of shareholder protections across multi-jurisdiction holding structures, including reserved matters, veto rights and share class terms. She works from the constitution outward, testing how a given protection actually holds once a company is incorporated, financed and, eventually, disputed.

By Sofia Anselm