Meaning
Contractual power granted to a minority shareholder to block specific board or shareholder decisions. Veto rights provide protection against being outvoted on matters that could change the nature of the investment. These powers are usually documented in the shareholders agreement or the articles of association.
Board Control
Investors use these blocks to prevent the majority from taking actions like issuing new debt or selling the company. The presence of veto rights ensures that the minority retains a say in the strategic direction of the firm.
Reserved Matter
Specific lists in the contract define exactly which actions are subject to this power. If the board wants to change the business plan the veto rights allow a single holder to stop the motion.
Blockade Potential
Negotiations often stall when a holder exercises the power to stop a necessary merger or funding round. While this protects the individual it can lead to a deadlock that harms the company. To prevent this many agreements include a sunset clause that removes the veto rights once the investor sells a certain percentage of their stake.
Buyout provisions might also trigger if a block is used repeatedly against the interests of the majority.
