One fine day, your lawyer calls you up to remind you “hey, you have to have your annual shareholder meeting and approve your financial statements!” Now, the Board of Directors, (which, as we learned, includes representatives of the major investors), reviewed and approved the statements at their last meeting. As such, instead of making your investors—all busy people— take an hour or so out of their lives to find time for a meeting to discuss and approve a document already discussed and approved by their representatives, you decide to send out a unanimous written resolution together with the statements and have everyone sign off.
You quickly receive it back from the major investors. The problem, however, is getting it back from the former employees who exercised their options when they left and are now shareholders. They aren’t on the Board, so they weren’t present for the Board review. But, again, they are shareholders, and therefore, need to approve. George, who used to be in accounting and has always been an total annoying control freak, wants more in-depth explanation on the company’s burn rate. Rebecca is at some silent mediation retreat in Tibet and unreachable. John doesn’t understand the document at all, and won’t sign off until he does.
In the end, what should take a week takes a month.
Now, imagine if what you were trying to do was sell the company. Google is sitting there, twiddling its thumbs, waiting for you to come back with final approval so they can add your company to their empire and continue on with their quest towards world domination and knowing absolutely everything you do, as opposed to mostly everything. And the whole thing is being held up because George doesn’t think the price is fair, no one has a clue where Rebecca is now and John, as usual, doesn’t understand the deal.
Honey, you need a proxy.
What is a proxy?
In this context, a proxy is where one person is authorized to act on behalf of, or represent, another person. “Proxy” also refers to the document which grants this authority. Proxy agreements are frequently incorporated into ESOP plans. In the proxy agreement, the shareholder gives the Board of Directors or another party the right to either serve as shareholder’s proxy themselves or to nominate someone to serve as the proxy.
So, what does this mean in practice?
Once the proxy is in place, shareholder information, voting and other non-financial rights are assigned to the proxy. This includes things such as:
- attending shareholder meetings;
- receiving reports or updates on the company status;
- participating in any shareholder votes;
- signing off on shareholder written consents;
Financial rights, such as the right to receive dividends, would not be affected. So if a dividend were issued, that money will be paid to the shareholders and not to the proxy!
In the examples given above, the proxy would act on George’s, Rebecca’s and John’s behalf and would sign off on the consent approving the financial statements and vote on the proposed deal with Google. It is important to note that the proxy would not need to consult with them first; the authority covers the full process.
When do you sign off on a proxy?
Technically, the time to sign off on a proxy is when the employee exercises their option and buys the shares. That being said, what you don’t want to happen is to get to a deal point and discover that one of your employees exercised options but you forgot to sign them off on a proxy. To avoid that scenario, at my company, our standard option agreement includes a proxy agreement, and we sign recipients off on the proxy at the same time they sign off on the option grant agreement itself. (I tell them why, but also tell them that it’s non-negotiable). If they then exercise their options in the future, the signed proxy is already on hand. Our legal counsel and trustee (I owe you a post on this) also receives copy of the original option agreement whenever someone exercises an option, and serves as a backup check. I would rather have to collect a missed proxy signature now, when nothing interesting is going on, than in the future, as part of trying to close a deal.