Think You Hold Irrevocable Proxies?

Think You Hold “Irrevocable Proxies” To Back Up Voting Agreements With Large Investors And/Or Dissidents? Think Again!

Three times is always the charm for us with respect to potentially troublesome issues – and sure enough, three times in the past four months we encountered “issues” with shareholder meetings where management had trouble perfecting what they thought were “irrevocable proxies” that ran to them.

Yes, you can have a legally binding voting agreement, where one or more voters agrees to vote as management directs on some or all issues, and typically the agreement grants an “irrevocable proxy” to a designated of.fi  of the company, as it should .

But major problems can arise because of the mostly- paperless way that proxy systems work these days: Where IS that “irrevocable proxy” you think you are “holding”? How, exactly, do you go about executing it? And sometimes, dissident shareholders – whether by accident or by design – can breach their agreements undetected!

The fi instance we saw this season - at a large-cap company’s fi shareholder meeting - set off a mad scramble to straighten out the paperwork and to avoid potentially big double-voting, since all of roughly two- dozen large shareholders who had executed voting agreements held their shares in street-name. And Oops! In the scramble to mail materials, who thought of this? They had all been sent proxy materials and Voting Instruction Forms.

The main task here was to quickly draft something simple to all of these power-hitters that reminded them of the voting agreement – and that, while they were most welcome to attend the meeting, the CEO of the company would be voting their shares, so please don’t bother to vote on the web, or by phone - or mail anything back. Next year, we advised, work with your Broadridge rep - and with your insiders’ bank and broker custodians – to assure that no VIFs are issued for the shares that are covered by voting agreements. The best practice, we say, is to send the Notice of Meeting and Proxy Statement – with a “Form of Proxy” (a copy of an actual proxy card marked “Form of Proxy” works fi and with a nice note, reminding them that their votes will be cast by someone from management, per the voting agreement.

There is another potential wrinkle to note here, however - when the agreements allow shareholders to vote on certain kinds of items as they wish – which is fairly common. So if there should be proposals like that on the agenda, a bit of extra communication – and a bit of extra work on your part will be involved – to be sure the voting gets done pursuant to the agreement.

Soon thereafter we encountered another somewhat unusual situation – a shareholder vote to ratify voting restrictions on “control shares” - where there were specifi “caps” on the percentage of shares that certain large shareholders could vote on certain kinds of transactions at a shareholder meeting - with the proposal itself being one such example. Here, the “name of the game” was (a) to be sure that all such shareholders were properly identifi and (b) to be sure that the votes of all of such shares that were held their bank or broker custodians were properly “capped” - which required much the same drill by the company, the various bank and broker clients of Broadridge, the proxy tabulator and by the Inspector as the “voting agreements” as the earlier case did.

But fast on the heels of cases one and two.check this one: In early December we received a call from an attorney we’d worked with in a proxy fi two years ago, which ended with a ‘standstill agreement’ from the dissident that included a written agreement to vote as management recommended for a period of several years.

“We are pretty certain that the holder has breached the agreement. We noted a vote against two of the management positions that exactly matched the position the dissident holds” he told us. “What do you think we should do?”

“If it were us, we’d send a letter to the holder informing him of what appears to be the case, with a copy of the standstill agreement enclosed. At the same time, we’d send a letter to Broadridge, with the two documents enclosed – and copy the shareholder too - demanding that the tabulation be immediately adjusted to conform to the agreement.” Broadridge, of course, acts only on instructions from its bank and broker clients, but promptly put the company in touch with the proper person at the shareholder’s custodian…so “case closed”…sort of… Actually, as our attorney friend pointed out, the dissident shareholder – whether by accident (??) or by design – was acting in contempt of court – so, at a minimum, a nice “hole card” to have should the shareholder return again, once the standstill agreement lapses.

Something new - and important, we’d say - to add to your Shareholder Meeting Checklists.