Under Section 212(b) of the Delaware General Corporation Law, a stockholder may exercise voting rights through a proxy agent—that is, a person empowered to vote in the stockholder’s stead. Such an arrangement is commonly referred to as a “proxy.” And under Section 212(e), a proxy may be made irrevocable “if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power.” But, once established, does an irrevocable proxy bind only the individual stockholder who granted the proxy, or does it also bind subsequent holders of the stock, too? As recently explained by the Delaware Court of Chancery in Hawkins v. Daniel, C.A. No. 2021-0453-JTL (Del. Ch. Apr. 4, 2022), the answer depends on the language of the proxy agreement.
Hawkins owns 88% of the limited partnership interests in MedApproach L.P. (the partnership), a dissolved Delaware limited partnership. The partnership, in turn, owned 75% of the issued and outstanding equity of N.D. Management Inc. (the majority shares).
The previous owner of the majority shares executed an irrevocable proxy (the irrevocable proxy) in favor of three individuals (the holders). As initially envisioned, the irrevocable proxy’s purpose was to bridge a gap in corporate governance regimes during a tumultuous ownership change; however, the irrevocable proxy evolved into a long-term arrangement.
When the partnership’s predecessor-in-interest subsequently acquired the majority shares, the predecessor executed a written addendum to the irrevocable proxy in which the predecessor bound itself and certain affiliates to the irrevocable proxy. The addendum also included language regarding when a subsequent buyer of the majority shares would have to bind itself to the irrevocable proxy. And when the partnership acquired the shares, it executed an agreement to be bound by the irrevocable proxy.
The partnership’s partnership agreement required that its assets be liquidated upon termination of the partnership. After the partnership dissolved in February 2021, a disagreement arose regarding whether the sale of the majority shares should be subject to the irrevocable proxy.
Hawkins ultimately filed an action in the Court of Chancery seeking, among other things, a declaration that the majority shares should be marketed and sold free from the irrevocable proxy. The defendants, one of whom is a holder, asserted that the irrevocable proxy serves as a permanent control arrangement. Thus, the central disagreement between the parties was whether the irrevocable proxy ran with the shares and would bind all subsequent purchasers.
Irrevocable Proxies Are Interpreted Against the Proxyholder
The Court of Chancery began its discussion with an overview of how the court interprets irrevocable proxies.
As with other types of contracts, the bounds of an irrevocable proxy are determined by the language the proxy agreement. If the language is plain and unambiguous, then it controls.
But if the language is ambiguous, then the court “departs from ordinary principles of contract interpretation,” such as the use of extrinsic evidence to resolve an ambiguity. Because a proxy decouples the power to vote the stock from the economic interest in the stock, the proxy arrangement upsets the typical presumption in Delaware courts that stockholders vote in their economic interest. Irrevocable proxies are even more suspect because they purport to create a “non-terminable separation of ownership from voting power.” Accordingly, “proxies [are] interpreted narrowly and when there is an ambiguity, [are] read as not restricting the right to vote the shares.” Hawkins at 30-1 (quoting TR Investments v. Genger, at *20 (Del. Ch. July 23, 2010), aff’d, 26 A.3d 180 (Del. 2011). “Put differently, any ambiguity is construed against the proxyholder.”
Applying these principles to the parties’ dispute, the court explained that, for the irrevocable proxy “to bind irrevocably not only the principal that creates it but also a subsequent principal, ‘the language of the proxy itself’ must ‘plainly indicate that the proxy [is] to run with the [s]hares if they are sold.’” Hawkins at 34 (quoting Genger, at *20).
Court of Chancery Finds That This Proxy Does Not ‘Run With’ the Stock
Based upon a detailed analysis of the language of the irrevocable proxy, the court concluded that the proxy did not run with the shares.
The parties agreed that no express term of the irrevocable proxy stated that it would bind subsequent purchasers of the majority shares. To Hawkins’ mind, that was enough for the court to conclude that the irrevocable proxy did not run with the shares. But the defendants contended that the agreement as a whole, as well as the intent of the drafters, led to the conclusion that the irrevocable proxy was meant to create a permanent voting arrangement binding all subsequent transferees.
The court agreed with Hawkins. The irrevocable proxy did not plainly and unambiguously state that it bound subsequent transferees. Indeed, in different provisions, the language referred to the narrower term “assigns” but not the broader term “transferees.” And there was no language on transfer restrictions in any parts of the irrevocable proxy where such language would logically be found. At best, the irrevocable proxy was ambiguous on the point, and under the interpretive rules applicable to proxies, any ambiguity had to be interpreted against a grant of authority that would run with the majority shares.
Key to the court’s analysis was the existence of the addendum. In the court’s view, the inclusion of the addendum was “powerful evidence against [the defendants’] argument that the irrevocable proxy runs with the majority shares” because “[i]f it did, there would not have been any need for the addendum.” And beyond that, the addendum’s language indicated that its transfer restrictions only applied to transfers between affiliates of the partnership’s predecessor-in-interest, not to transfers to unaffiliated third parties.
The court in Hawkins followed a line of cases holding that proxies, especially irrevocable ones, must be interpreted narrowly and against the grant of authority. Here, that resulted in the conclusion that the irrevocable proxy at issue did not run with the shares. If the rights incident to the irrevocable proxy are to create a permanent arrangement binding on all subsequent transferees, then the would-be proxyholders should craft plain and unambiguous language addressing the full scope of the irrevocable proxy.
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