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. 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.
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 is in the best interests of the principal, and therefore, is not held responsible for his/her actions before the expiry of the agreed period. However, when the agent has a personal interest in the business, he/she is unlikely to be absolved by the law for any 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 powers to act on their behalf during voting and in decision-making processes. By appointing an agent, the principal faces the risk of the agent’s unpredictable and unwanted dealings with third parties as long as the agent retains the actual authority.
In the dealings, the agent represents the principal’s personality, and his/her actions will be 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, it means that his/her actions will have a significant impact on the decisions taken by the company. In most cases, proxies that have a proprietary interest in the organization where they also act as agents of the principal are irrevocable. It 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 legal 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. i.e., when the lender has lent money to a shareholder or is an existing employee of the organization. The other instance is when the agent-principal agreement explicitly provides for irrevocability. According to a Delaware statute, a proxy made be made irrevocable regardless whether the proxy has an interest in the stock itself or the organization.
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 conserve a fixed 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 the 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.
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