EO Explained: Reserved Matters
Continuing our series of articles explaining Employee Ownership (EO) we explain reserved matters – what are they and why are they important.
Reserved matters are items that require approval from the shareholder of a business, which in an EO company is the Trust.
They form one of the main checks and balances that the trust, as majority shareholder, has over the activities of the trading company board and its leadership team.
Reserved matters are most typically those matters that will have a significant impact on the viability and long-term sustainability of the business. Examples may include:
- Making a significant financial investment in the business, for example for a new IT system;
- Moving head office location or entering into a new lease;
- Opening a centre in a new location.
Most frequently, these types of significant decisions being made by a trading company board form part of a long-term strategy for the business, so trustees may already be aware of them before they are brought to the trust for approval.
Reserved matters that have not gained approval could put the directors of the trading company at legal and financial risk, both collectively and individually, whether or not the action taken was successful or put the business at risk.
Listing Reserved Matters
Often mistrust and misunderstanding arises from a mismatch between the trading company board and the trustees as to what constitutes a reserved matter.
Confident trading company boards may not believe that there is a requirement to seek trustee approval for their decisions.
Immature or inexperienced trading company boards may seek to bring more matters to the trust board for approval, consciously or unconsciously seeking this approval to validate their decisions.
Having a clear list of reserved matters, including any financial hurdles, ensure that clarity between the two forums is in place, reducing any misconceptions about when and about what trustees should be notified.
Reviewing the reserved matters on an occasional basis also ensures that any financial limits in place are adjusted in line with the size of the company. A financial hurdle for approval set when a company transitioned to EO may have different impacts if the business has significantly grown or contracted.
Reserved Matters in Practice
Often reserved matters are brought to trustees in a single subject ad hoc meeting of the trustees. This allows the information provided to be discussed in isolation of any wider company reporting, giving time and focus for sufficient reflection and decision making.
It is rare that the first time a topic is raised with trustees is at an ad hoc trustee meeting. Prior information and discussions may have provided a direction of decision making, a proposal for the future or an indication of a significant matter being under consideration.
In many cases, the approval from the trust may be staged, giving approval for continuation of development or investment with reporting back as milestones are reached, further decisions are needed or changes are made. This may be the case where a matter may take many months to develop and may evolve with changes during the process.
An example of this could be a move of the main office of the business, where this may be staged into:
- consideration as to whether a move is right at this time and the reasoning for the initial decision, then
- subsequent approvals may be sought when the new location is identified, and a new lease is due to be signed;
- Further approvals may be needed if the move will also coincide with other significant investment such as a new IT system.
Documenting Reserved Matters
Given their significance, there should always be a clear, documented audit trail of the information being brought to trustees, the trustees having an opportunity to consider the proposal and the outcome of that decision making.
Meeting minutes are sufficient for this purpose, but ensure that the matter being presented and the outcome of the discussion is clearly defined and documented.
Whilst this may appear to be corporate administration, future challenge of any decision, by any party, is more easy to defend, and quicker to resolve, if meeting minutes are kept and available for reference.
Conclusion
Whilst there are some reserved matters that are defined by law, many are company bespoke so it is important to know what these are in your organisation, and ensure that they are readily available for reference.
Trading boards should see referring matters to the trust as being a beneficial route to validating their decisions and documenting matters at the time of decision making. The discussion with trustees may also raise different perspectives that could support the decision as it progresses.
Trustees should be aware of these matters and ensure that they give them appropriate focus when they are raised.
Reserved matters can be easy to identify and apply, but it is often surprising how frequently they fall through the gaps of a robust governance structure and can potentially come back to bite at a later stage in a company’s evolution.
Within IDTs members we have independent trustees who have experience of discussing, approving and documenting reserved matters, from significant spends, to moving office, and reacting to an offer to purchase the business. If you are unclear about your reserved matters, in the first instance review your legal documentation then speak to your legal advisers or your independent trustee. If you would like a more general chat on this topic, contact us at info@directorsandtrustees.co.uk
