Voting by Proxy

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Vote Soliciting 
Vote soliciting is the process by which an interested party sends out documentation and proxy statements to investors to ask them for their vote on an issue. State and federal law often dictate the information required to be included in any such solicitation.

Proxy Contest 
When an issue to be voted on by shareholders at an annual or special meeting is contested, a proxy contest will often result. In a proxy contest, management, who originated the issue, and a group of shareholders contesting management’s objectives, will solicit proxies from the general shareholder voting pool in order to ensure that they obtain a sufficient number of votes to pass or defeat the initiative.

Management / Shareholder Initiative 
When an issue is placed on a company’s ballot for shareholder voting at an annual meeting, that issue must have originated either from management or from the shareholders themselves. If the issue is placed on the ballot by management, it is referred to as a “board” or “management” initiative, and is binding on the company if passed. If the issue was placed on the ballot by shareholders, it is referred to as a shareholder initiative. Typically, shareholder initiatives are not binding on the firm, but rather, are considered “precatory” meaning simply that they indicate the shareholders’ desire for the board to act in the way specified in the initiative.

Record Date 
When a company sets the date for an annual meeting (or the declaration of a dividend) the board will also set a record date for a day some time before the annual meeting occurs. This day is known as the “record date”. On that date, anyone who is a shareholder is entitled to vote at the meeting (or receive the dividend). If the person chooses to sell her shares after that date, she is still entitled to vote at the meeting and the new owner is not allowed to vote (unless a proxy is issued by the old shareholder.)

Introduction to Proxy Voting

Oftentimes, situations (such as geographic constraints) occur that make it difficult or impossible for shareholders to actually vote at the various shareholder meetings. Alternatively, situations occur where certain actions undertaken by management or other shareholders are so critical to those interested that they may solicit the votes of shareholders prior to the actual meeting’s occurrence. In either of these situations, the shareholder may decide to grant a proxy to a third party in order to insure that his or her vote is cast.

Proxy voting is a fairly straightforward process. The shareholder who wishes a third party to vote for him will issue him a proxy statement. The proxy statement will provide certain information:

  • The name of the shareholder issuing the proxy
  • The party who will actually vote (typically, this need not be another shareholder)
  • The number of shares held by the party
  • The vote (yes or no to a particular question or the name of the board member that the proxy holder is authorized to vote for)
  • The duration of the proxy (how long it will be effective)

The above, while not an exclusive list, constitutes the basic requirements designated by most states as the necessary elements of the proxy. After the proxy is completed, a copy of it is retained by the shareholder and the voting party, and a third copy is typically forwarded to the company secretary, who keeps the proxy until the actual date of the vote. 

EXAMPLE: A group of shareholders was particularly concerned about a recommendation by management that shareholders adopt a plan to sell the stapler-making business line of Office, Inc. Given their concern, the shareholders decided to mount a proxy contest to defeat management’s initiative. Thus, they distributed a set of information to shareholders that described why the stapler line was critical to the success of the firm. In addition, the packet sent to shareholders also included a proxy statement, to be completed by the shareholder, which indicated that the group would be allowed to vote the shareholder’s shares on the issue at the upcoming meeting. In response to the group, management mounted its own proxy solicitation campaign in support of the sales initiative.

In most cases, companies will allow voting by proxy for virtually any issue that can be brought to a vote, and some states require that proxy voting must be allowed on all issues. The problem that arises is the access that shareholders have to other shareholders to obtain such proxy authorization. Obviously, if the Board or officers of the corporation are seeking proxy authorization, they can simply enclose the proxy authorization form with the notice of the annual meetings that must be sent to the shareholders in any case. In order to afford an equal forum to shareholders who may be running a campaign against the Board or officers, federal law requires that that corporation include proxy materials of shareholder groups with the notice of the annual meeting that is being sent to the shareholders. See 15 USCS § 78n(b). This requirement applies whether the proposal that the shareholders are trying to include involve economic reasons or even if the proposal addresses “social concerns that are related to the company’s functioning.” See Lovenheim v. Iroquois Brands, Ltd., 618 F. Supp. 554 (D.D.C. 1985).

It also should be noted that for purposes of a quorum (a requirement that exists in many corporations that a certain percentage of the shareholders must be present for an election before the election results can be binding), once the proxy is completed and filed, those shares are considered present at the vote and may be counted towards the quorum requirement.

Finally, it is worth noting that proxy rules vary a fair bit from state-to-state, and that some of the proxy rules are administered by the Securities and Exchange Commission (SEC) of the federal government. See 15 USCS § 78n. Additionally, proxy law can become fairly complicated when shares are held by brokerage houses who then wish to vote the shares on behalf of shareholders.

EXAMPLE: Market Meter Inc. had a proxy contest underway to solicit votes for a proposed merger of the company. Market, as a publicly traded company, was required by the SEC to hold its proxy solicitation in compliance with federal securities laws. In attempting to secure as strong a number of votes as possible for its proposal, management solicited proxies from several major broker-dealers that held a large number of Market’s stock for later sale to investors.

Proxy Duration and Scope

It is important to note that whenever a shareholder issues a proxy, the issuance of the proxy comes with certain rules attached. Proxies are limited as to both the nature of the voting to be conducted and the duration of the proxy. 

First, as to scope, a shareholder may limit the scope of the proxy to any issue that he or she chooses. Thus, if, at an upcoming meeting there are to be three directors elected and five issues put to a vote of the shareholders, the shareholder may issue a proxy for voting on any one of the five issues or on the director election, but can retain the power to vote the other issues herself. 

While this may sound a little unclear, the purpose behind it is simple. If there is an important issue coming before a corporation (e.g., the sale of a major business line) that is going to be up for shareholder vote, there may be a group of shareholders interested in making sure their particular view is the one that wins out on the day of the vote. As such, that group of shareholders might well solicit a proxy for the vote on the sale of the business, but not request proxies for any other issues. Thus, on the date of the election, the shareholder will still be able to vote on the other topics and in the election, but if she granted a proxy for the business sale issue, the party to whom she gave her proxy will cast her vote.

EXAMPLE: Clarice had planned her schedule so that she would be able to attend the annual meeting of a company in which she held a large number of shares. Several weeks prior to the meeting, Clarice received a proxy solicitation regarding a board initiative to change some of the dividend rights of the class of stock she held. While Clarice knew that she would be at the meeting to vote on all of the issues presented at the meeting, she wanted to send a message to management that she supported the initiative and would join with the directors to pass it. As such, she completed the proxy statement and returned it to the shareholder group to send to the company’s secretary, including an indication on the proxy that the scope of the proxy was limited to the dividend rights issue only.

In addition to scope, it is also possible that a shareholder may limit (or extend) the length of time for which her proxy may last. Most states automatically limit proxy duration to a period of eleven months or less. The logic here is that they presume that while the shareholder may wish to have her vote cast for her at one year’s meeting, she may not wish to give away her voting power indefinitely. At the same time, many states do allow shareholders to issue proxies that will last for successive years.

Irrevocable Proxies 

It is also important to note that states may limit the possibility of a proxy appointment being irrevocable. Often when a shareholder is solicited for a proxy, the party doing the solicitation may state that the issuance of a proxy is irrevocable until the time of the vote, or the proxy may itself state something to that effect. The reason why the party may request such a proxy to be irrevocable is that it may be hoping to tie up that vote until the time of the meeting so as to ensure that the vote will not be given to the other side.

As we have seen already, however, the power of a shareholder to vote is probably the single most important power that a shareholder has as it is her sole means for voicing her opinion and having a measure of control over the company which she owns. Thus, courts and state legislatures are often very hesitant to allow parties soliciting a proxy to make the proxy “irrevocable” under any circumstances. As a result, many states have laws indicating that a proxy, freely given and without consideration, may be revoked even if they provide language to the contrary.

Note, however, that the law stated above is modified when the proxy in question is considered a “proxy coupled with an interest.” An “interest” is legal jargon for saying that when the proxy was issued, the party soliciting the proxy gave something of value to the party who issued the proxy in exchange for the proxy appointment. In the case of a “proxy coupled with an interest”, most states will view language stating that the proxy is “irrevocable” as enforceable language. In fact, a “proxy coupled with an interest” to vote on a particular issue is considered a legal interest in the corporation for many purposes, including the fact that it often allows the holder of the proxy standing to challenge the actions of the corporation in court. See Simcox v. San Juan Shipyard, Inc., 754 F.2d 430 (1st Cir. 1985). A typical example of such a situation is as follows:

EXAMPLE: Dave, a few weeks prior to the annual meeting, had purchased shares of Inc. Co. from Brandy. Dave was particularly interested in investing in Inc. Co. because he believed that the company should sell a major business line and distribute the cash as a dividend to shareholders. However, Dave had purchased the shares from Brandy after the “record date” for the annual meeting’s voting cutoff. As such, when he purchased the shares, Dave required that Brandy issue him an irrevocable proxy allowing him to vote the shares. Shortly before the meeting, Brandy contacted Dave and said that she wanted to revoke the proxy as she had decided that the sale of the business line would be bad for the company and her friends who were still investors. Dave, an attorney by trade, informed Brandy that it was impossible for her to revoke the proxy as Dave had purchased the shares on the stipulation that the proxy be issued, and thus, he held a proxy coupled with an interest, thereby making the proxy irrevocable under the law.

Cumulative Voting

Generally, each outstanding share is entitled to one vote, unless the articles provide otherwise. The articles may provide for cumulative voting in the election of directors, in which each share may cast as many votes as there are board vacancies to be filled. For example, if there are four director spots open, each voting share is entitled to cast four votes. The votes may be cast for a single candidate, or divided among the candidates in any way the shareholder wishes.

Voting Trusts and Agreements

While proxies are a useful tool for both shareholders and management, there are occasions when they are simply not strong enough to effect the desired ends. In other words, while proxies are excellent for dealing with short-term issues that may occur in only one election, sometimes shareholders may wish to create a situation that provides an enforceable voting alliance well beyond the typical duration of a proxy. In such situations, the shareholders seeking such assurances may consider one of two standard options. 

First, the shareholders might decide to enter into a voting agreement. A voting agreement is a contract and is not unlike any of the standard contracts that you have already encountered in your studies. As with any other contract, the voting agreement will state the nature of the agreement, specify the parties involved, and provide consideration. However, as the name indicates, a voting agreement will have, as its sole purpose, the goal of providing an enforceable means of making the contracting parties vote a certain way that is prearranged in the contract. The benefits of the voting agreement as opposed to a proxy are that they may be unlimited as to duration and may also provide clear remedies for violation (so long as those remedies conform to the rules applicable to any contract).

EXAMPLE: Harold and Maude were major investors in Steel Co. As investors, they believed that Harvey was the single best person to run the company and would be so for as long as the company was in business. Believing so fervently in their support for Harvey, Harold and Maude created a voting agreement that stated that for so long as Harvey was running for the company’s board, they would vote for him. After a few years, Harvey was charged with embezzling funds from Steel Co. Maude, believing that Harvey was guilty, chose to vote against him at the next board election. Harold, his belief in Harvey’s innocence still strong, heard of Maude’s action and sued her for breach of contract when Harvey ultimately lost the election. 

When voting contracts were first introduced, there was some question as to their legality and enforceability. Some states viewed them as “vote buying” type arrangements and refused to enforce them. While some states still persist with that view and continue to outlaw voting agreements, most states allow their use. In fact, most states provide that such voting agreements can be enforced specifically by forcing the parties to vote in a manner consistent with the agreement (as opposed to monetary remedies, which are the more usual remedies for breach of contract). See Montana Code Annotated § 35-1-533

The second standard method for providing surety in voting alliances is the stronger of the two, the “voting trust.” A voting trust takes the concepts of the proxy and voting agreements and carries them one step further. As a trust, a voting trust is something of a quasi-entity under the law. In other words, in creating a voting trust, the parties who are creating the arrangement define a set of rules and mechanisms for administering the trust, appoint a trustee to vote the shares (often the company’s secretary), and transfer property – i.e., their shares – to the trust itself. Each of these aspects mimics the organization and management of a trust that you might be familiar with from your study of trust and estate law. The only difference here is that the purpose of a voting trust is not for administering the assets of a decedent, but solely for the casting of the votes controlled by the shares transferred to the trust. See NY CLS Bus Corp § 621.

Voting trusts are the strongest of the various voting arrangements largely by virtue of the formality that is required to create them. Typically, given all the formalities that the shareholder must comply with to create the trust, courts will enforce their administration agreements (i.e., how the trust is supposed to vote) because it is clear that the shareholder was not fooled into the arrangement (as might happen with a simple proxy agreement). Therefore, it can be assumed that the shareholder truly intended the trust to act as his or her intermediary when it comes to voting the shares. 

EXAMPLE: Paul and Ringo were long-term investors in Yule Tide, Inc. Their families had founded Yule Tide together, three generations ago, and wanted the company to always continue producing the small, brass Christmas stars that had made the company famous. However, the rising price of brass over the years had made it difficult for the company to maintain the high profit margin to which it was accustomed. Thus, every year, there was a board initiative that attempted to sell the brass star business. Nevertheless, Paul and Ringo wanted to keep the business within the family. Thus, they created a “voting trust” with the intent of defeating any such initiative. Paul and Ringo created the “P&R Trust” and they both signed the legal title to their shares over to the trust. The trust was managed by Paul’s attorney, who was given specific instruction to always vote against the star sale initiative.

See Mannheimer v. Keehn, 30 Misc. 2d 584 (N.Y. Sup. Ct. 1943).