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Volume XII, Number 188

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Vice Chancellor Laster Finds Choice Of California Law In Proxy To Be "Facially Valid"

Over a decade ago, I posited the following question:  "Should a proxy card specify a choice of law?"  In a recently issued ruling, Vice Chancellor J. Travis Laster noted in the following lengthy footnote that choice of law can be an important issue with respect to a proxy, found that the choice of California law was facially valid and highlighted a potentially important distinction between California and Delaware law in this regard:

The above-the-line text articulates principles of Delaware law.  A potentially important choice of law issue lurks in the background.  To determine the law that governs a proxy arrangement, a court ordinarily looks to the law of the state of incorporation of the corporation whose shares are the subject of the arrangement.  See, e.g., Del. C.§ 212(b) (specifying requirements for proxy arrangement that can be used to vote shares in a Delaware corporation); Companies Law, § 22(1), Sched. 1, Table A §§ 57-60 (2016 rev.) (Cayman Is.) (specifying requirements for proxy arrangement that can be used to vote shares in a Cayman Islands company).  This court has held that parties to a proxy arrangement involving the shares of a Delaware corporation can select the law of another jurisdiction to govern the arrangement, as long as there is a "material relationship" between the law selected and the subject of the agreement.  Genger Trial, 2010 WL 2901704, at *21 n.143 (cleaned up).  The Irrevocable Proxy selects the law of the State of California to govern its terms "[e]xcept to the extent required by the corporate or other provisions of the laws of the Cayman Islands." JX 5 § 3.  When the Irrevocable Proxy was executed, Danco GP was chartered in the Cayman Islands, and its principal place of business was in New York.Cf.JX 10; JX 13.  Pike was the owner of the Proxy Shares, and he lived in California. JX 6.  The choice of California law (unless overridden by Cayman Islands law) was thus facially valid, and no one has offered a credible reason why it would not govern.

In litigating this case, however, the parties have relied almost entirely on Delaware law. . . .

California appears to depart from Delaware law in a manner that would be more favorable to the plaintiff.  Delaware law states generally that "[a] duly executed proxy shall be 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." 8 Del. C. § 212(e).  California law "enumerates certain specific instances sufficient to support the irrevocability of a proxy."  Cal. Corp. Code § 705(e) Legis. Comm. cmt. e (West 1975).  The Irrevocable Proxy is not supported by any of the enumerated instances.

This decision nevertheless follows the parties' lead and interprets the Irrevocable Proxy according to Delaware law.

Hawkins v. Daniel, 2022 Del. Ch. LEXIS 77.  The Genger Trial cited by the Vice Chancellor is the same case that I cited eleven years ago: TR Invs., LLC v. Genger, 2010 Del. Ch. LEXIS 153, 2010 WL 2901704, at *20 (Del. Ch. July 23, 2010), aff'd, 26 A.3d 180 (Del. 2011).  While I don't disagree with the Vice Chancellor as to where a "court ordinarily looks" in terms of choice of law, the state of incorporation is a dubious direction.  A proxy is an agency relationship between a shareholder and the proxyholder.  As such it seems to me that a court should more appropriately turn its gaze toward the choice of law principles applicable to the agency relationship,

So why not include a choice of law on the proxy card?

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XII, Number 101
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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