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 shareholders.

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 majority vote.

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 majority.

Therefore, in all partnerships that are not equal, it is critical for the minority shareholder to be protected through reserved matters.

As for legal enforceability of these matters, the issue has never been tested and there are no direct judicial precedents on this point.

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 otherwise.

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 company's AoA.

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.