proxy

proxy, a term denoting either a person who is authorized to stand in place of another or the legal instrument by which the authority is conferred. It is a contracted form of the Middle English word “procuracie.” Proxies are now principally employed for certain voting purposes. A proxy may in law be either general or special. A general proxy authorizes the person to whom it is entrusted to exercise general discretion throughout the matter in hand, while a special proxy limits the authority to some special proposal or resolution. In English and American bankruptcy proceedings creditors may vote by proxy, and every instrument of proxy, which may be either general or special, is issued either by the official receiver or trustee.

The greatest modern importance of proxies is in their use in shareholder voting. The Companies Act (2006) in the United Kingdom and state statutes in the United States provide that voting by shareholders of limited liability companies and of corporations shall be in person or by proxy. The separation of share ownership from management, in corporations in which shareholding is widely held by the public, has made the proxy a powerful control weapon, since a majority of shareholders can rarely be assembled in person for meetings at which directors are elected. Because annual shareholders’ meetings are usually required by law, the management of such corporations can and normally does solicit the proxies of all shareholders at the company’s expense, obtains the proxies of a quorum and majority, and votes the proxies for directors of its choice.

Lack of protection of absent shareholders led to enactment of provisions in the Securities Exchange Act of 1934 authorizing the Securities and Exchange Commission (SEC) to issue regulations governing proxy solicitations. These regulations and later amendments apply to proxies in corporations whose shares are traded on stock exchanges and to all other corporations having total assets of $10 million or more and 2,000 or more shareholders. They require solicitations for proxies to be accompanied by statements informing the shareholder of the measures, so far as known, that will be acted upon at the meeting, and naming and giving detailed information about the directors proposed to be elected or reelected. The proxy itself must show that it is solicited by management, must give the shareholder an opportunity to instruct the proxy how to vote, and must be signed and dated. In 2007 the SEC adopted rules governing the use of “e-proxies”—proxy materials made available to shareholders via e-mail or publicly available Web site.

These regulations have made it easier for groups of shareholders to contest management control, although in widely held corporations the cost is extremely high. When a contest takes place, the reasonable costs of solicitations may lawfully be charged by successful or unsuccessful management groups, or by successful groups of dissident shareholders, to the company. However, the cost to an unsuccessful dissident group falls on its financial backers. The uncertainty of the outcome of such contests is heightened because a proxy is usually revocable until actually voted at the meeting. When a shareholder gives more than one proxy, as often happens, only the last-dated proxy counts.