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Irrevocable Proxy

An enforceable power granted by the owner to another party to exercise his voting rights independently without requiring his consent

What is an Irrevocable Proxy?

An irrevocable proxy is an enforceable power granted by the owner to another party to exercise his voting rights independently without requiring his consent each time. Typically, most proxies are usually revocable, but some agreements may include specific clauses that require the proxy to be irrevocable for a specified period. The owner of the shares cannot revoke the irrevocable proxy until the expiry of an agreed duration of time.

 

Irrevocable Proxy

 

The reason for making a proxy irrevocable is to absolve the agent in the agent-principal relationship of his/her actions when acting in the capacity of the principal. Any decisions that the agent makes are assumed to be in the best interests of the principal. Therefore, he/she is not held liable for their actions before the expiry of the proxy. However, when the agent has a personal interest in the business, they are unlikely to be absolved by the law for consequences resulting from their actions.

 

Criteria for an Irrevocable Proxy

Several situations make a proxy irrevocable for a specified period, including:

  • The proxy holder is an existing shareholder of the company or has agreed to purchase shares of the company in the future.
  • The proxy holder is one of the pledgees of the company’s shares.
  • The proxy holder has an existing employment contract with the company (under specific circumstances).
  • The proxy holder is one of the parties in a voting agreement.
  • The proxy holder has advanced some form of credit to the company.

 

How Irrevocable Proxies Work

Irrevocable proxies are based on the same ideology as revocable proxies. Both types of proxies are based on an agent-principal agreement where the principal gives the agent the power to act on their behalf during voting and decision-making processes. By appointing an agent, the principal faces the risk of the agent’s unpredictable (and possiby unwanted) dealings with third parties as long as the agent retains the proxy authority.

The agent represents the principal, and his/her actions are taken as the principal’s actions. However, in most proxy agreements, the principal retains some form of control, depending on how the agent performs, and has the right to revoke the agent’s powers.

When the agent representing the principal has a stake in the organization, this means that his/her actions may have a significant impact on the company’s decisions. In most cases, proxies that have a proprietary interest in the organization where they also act as agents of the principal are irrevocable. This means that the principal may not terminate the relationship before the expiry of the agreed period. Also, the proxy will be irrevocable if the principal explicitly provided for the irrevocability at the onset of the agreement.

 

Legal Treatment of Irrevocable Proxy

There are different views on the legality of irrevocable proxies. Initially, irrevocable proxies faced a lot of hostilities from the courts, since they perceived proxies as a way of suspending the ordinary rights of the actual owners and their voting rights. In the court’s opinion, such authorizations need to be voided since they are against public policy.

One of the instances when the court deems irrevocable proxies unenforceable is when the proxy has a proprietary interest in the organization. For example, the proxy holder may have lent money to the company or be an existing employee. However, according to a Delaware statute, a proxy may be made irrevocable regardless of whether the proxy has a personal interest in the company or its stock.

In some jurisdictions, irrevocable proxies are recognized under various circumstances. For example, In New York, courts have upheld irrevocable proxies that were accompanied by a pledge. They are also recognized when the irrevocable proxy is granted in return for credit, or if the purpose is to retain control of the company or maintain a corporate policy.

 

Example of Irrevocable Proxy

Irrevocable proxy is illustrated in the case of Haft vs Haft. The CEO of the company and a controlling shareholder of the company induced his son to become the company’s President and COO. The father transferred a controlling block of stock to the son, in exchange for the grant of a lifetime irrevocable proxy to vote the stock.

Later, there was a dispute on the composition of the board of directors and the validity of an option to buy back the shares held by the son. In reaction, the son revoked the father’s proxy. When the case was presented before a Delaware court, the court ruled that the proxy was enforceable, and the father’s interest in the stability of his position as the CEO appeared as an interest to support irrevocability under the Delaware statute.

 

Related Readings

Thank you for reading CFI’s explanation of an irrevocable proxy. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Capital Structure
  • Stockholders Equity
  • Voting Trust
  • Sweat Equity

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