Reserved or veto or affirmative vote matters or consent rights
are a bunch of contractually-agreed matters provided in a joint
venture agreement or a shareholders agreement that need consent of
all the partners before being approved and implemented.
They cannot be implemented unless the partners agree, even if the
majority partner has sufficient shareholding to approve them. These
matters generally protect the rights of the minority
Due to the importance of reserved matters, minority shareholders
are seen fiercely negotiating for them when a joint-venture
agreement is discussed.
Some instances: amendments to the charter documents, declaration of
dividend, creation and issue of new shares, appointment and removal
of auditors, change of company's name or registered office,
disposal of company's assets, investment in other entities
beyond a certain value, company's dissolution, corporate
restructuring, etc. Since these are critical matters, it is
important that they are legally enforceable. Otherwise, their
purpose will be defeated.
The Companies Act, 1956, provides that matters before the
shareholders may be approved by a simple majority vote - more than
50% vote - or a special majority vote - at least 75% vote. For
example, declaration of dividend requires only a simple majority
vote, while a change of company's name requires a special
In a 50:50 joint venture, reserved matters are 'generally'
not provided. This is because a partner cannot pass a resolution
with his 50% vote - he will need the vote of the other partner. To
that extent, both partners are sufficiently protected.
However, the situation in a 51:49 venture is different. A 51%
partner is in a position to pass all matters that require a simple
majority. The consent of the 49% partner is required only for
matter requiring special majority. In a 76:24 venture, the
situation is such that the majority partner is in a position to get
all matters passed without the consent of the minor partner,
irrespective of whether they require simple or special
Therefore, in all partnerships that are not equal, it is critical
for the minority shareholder to be protected through reserved
As for legal enforceability of these matters, the issue has never
been tested and there are no direct judicial precedents on this
One view is that these matters are enforceable - both against
joint-venture partners and against the joint-venture company if the
matters are incorporated in the bylaws or the articles of
association (AoA) of the company. This view arises as there is
nothing in the Companies Act that prohibits contractual agreement
on such matters.
There is, however, another view: under the Act, shareholders have
the right to vote in direct proportion to their shareholding. Being
a legal right, it cannot be denied to them by the company.
Therefore, if a shareholder has requisite shareholding to pass a
matter by a simple or a special majority, the company cannot deny
that right, even if the shareholders have contractually agreed
So, as a company cannot deny this right, it cannot be legally bound
to honour reserved matters and the shareholder has freedom to vote
on his shares in the manner he wants and have resolutions passed,
provided he has the requisite shareholding to pass them. Therefore,
a provision contrary to this in the bylaws will be against the Act
and, hence, void.
In a less-known matter of Jindal Vijayanagar Steel, such a question
- though not directly on reserved matters - came before the Company
Law Board (CLB). There was a provision in the shareholders
agreement requiring shareholders' mutual consent to shift the
company's registered office. However, this provision was not
incorporated in the AoA of the company.
The CLB held that this clause requiring mutual consent cannot be
forced on the company as the provision was not incorporated in the
It also held that such a clause when incorporated in the AoA would
run contrary to the spirit of the Act and, so, would become void.
The CLB reasoned that the Act permits shifting the registered
office by a special majority vote and a denial of that right to a
shareholder with the requisite majority will be against the spirit
of the Act.
Although there are no direct judicial precedents on the issue and,
therefore, reserved matters hold good, it is worth considering the
above decision while agreeing on reserved matters.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.
Whilst trade and barter have existed since early times, the modern practice of forming business relationships through the means of contract has come into existence only since the industrial revolution in the West.
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