Salamone v. Gorman

Facts

Both P and D filed actions in the Court of Chancery pursuant to 8 Del. C. §225 each contending that their respective slates of directors constitute the valid board. According to Ds, all of whom were employees and directors of Westech at the time of the trial, the Voting Agreement provides for a per capita, not a per share, scheme. According to P, the founder of the company and its majority stockholder, the Voting Agreement provides for a per share scheme and entitles him to remove and designate new directors, as he purported to do in 2013. Westech was founded in 1994 and became a public company in 2001. P was one of seven founding members of Westech and served as the chairman of Westech's Board from 1999 through August 2013. He was also the majority stockholder of Westech common stock and the total voting shares at all relevant times. Westech has two classes of stock authorized and outstanding: 4,031,722 shares of common stock, and 338 shares of Series A Preferred Stock. The Series A Preferred Stock votes together with the common stock on an as-converted basis and each share of Series A Preferred Stock is entitled to cast 25,000 votes. P owns, directly or indirectly, approximately 2.4 million shares of common stock (or nearly 60% of Westech's common stock outstanding), and approximately 173 shares of Series A Preferred Stock (or 51% of the 338 shares outstanding). P holds nearly 54% of Westech's total voting power. Neither Dura nor Salamone (Ds) has ever owned Westech stock. Another D owns, directly or indirectly, nine shares of Series A Preferred Stock. Ds contend that P's mismanagement and profligate spending caused Westech to experience severe financial distress from 2005 to 2011. As a result, the company needed an infusion of capital. P alleges that Westech raised capital in 2011, not because of financial distress, but instead because of his desire to expand the sales base of the business and to acquire other broker-dealers. The company issued a new series of Series A Preferred stock and Series A Convertible Notes in the fall of 2011. As part of the transaction, the parties executed a Voting Agreement. At that time Westech's board consisted of P, P's uncle, and Halder. The Board expanded to seven members. The agreement stated that: Any member of the Board who would otherwise have been designated in accordance with the terms thereof shall instead be voted upon by all of the stockholders of the Company entitled to vote thereon in accordance with, and pursuant to, the Company's Restated Certificate of Incorporation, including the Series A Preferred Stock Certificate of Designation. Section 1.4 of the Agreement addresses the removal of Board members wherein (i) such removal is directed or approved by the affirmative vote of the Person, or of the holders of more than fifty percent (50%) of the then outstanding Shares entitled under Section 1.2 to designate that director or (ii) the Person(s) originally entitled to designate or approve such director or occupy such Board seat pursuant to Section 1.2 is no longer entitled to designate or approve such director or occupy such Board seat. Section 7.17 provides: All Shares held or acquired by an Investor and/or its Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement, and such Affiliated persons may apportion such rights as among themselves in any manner they deem appropriate. P resigned from the board effective August 7, 2013. One week after resigning, P sent a letter to Westech attempting to remove Halder from the Board and elect Greg Woodby in his place. He also purported to elect Barry Williamson to fill the Key Holder seat vacancy. On August 21, 2013, P entered into a Stock Purchase Agreement with Pallotta in which Gorman obtained control over Pallotta's 80 shares of Series A Preferred stock. P then attempted to elect himself to the Board as the Pallotta Designee and to designate Barry A. Sanditen to the other Series A Designee seat, by written consents signed by P and four other stockholders. The new directors (P, Sanditen, Woodby, and Williamson) attempted to call a board meeting for August 26, 2013. Dura and Salamone (Ds), the remaining undisputed directors, were given notice of the meeting but did not attend. At that meeting, the purported Board voted to remove Dura and elect Daniel Olsen and T.J. Ford to serve as the Section 1.2(e) independent directors. At the annual meeting, two competing sets of directors presented different slates for election by the stockholders. P's slate garnered the majority of votes with 5,969,288 and 3,375,000 votes cast in favor of Ds. Ds claim that P's nomination of a separate slate of directors violated the terms that he had agreed to under the Voting Agreement. Because they read the Voting Agreement as providing for a per capita, not a per share, scheme. P argues that the Voting Agreement provides for a per share scheme. Both parties filed §225 actions. The Court of Chancery found no contemporaneous evidence explaining how the Key Holders were chosen. The Court of Chancery also found no contemporaneous evidence to support Ds' triumvirate theory or their broader claim about the need to limit P's control over the board. After reviewing the agreement and the preference in Delaware for a per share scheme unless the relevant governing documents clearly specify otherwise, the Court of Chancery ultimately held that Section 1.2(b) of the Voting Agreement provides for a per share scheme, but that Section 1.2(c) provides for a per capita scheme. It held that the Voting Agreement did not violate 8 Del. C. § 212(a) because Section 218 of the DGCL explicitly permits stockholders 'to construct a contractual overlay on top of that mechanism to agree to vote their shares in accordance with [a] more specific scheme.' The Chancery found that P's removal of Halder as the Key Holder Designee was valid, but that Gorman's attempts to elect Woodby and Williamson were not because P did not have the consent of the other Key Holders. It found that P's attempts to remove Dura and elect Olsen and Ford as independent directors under Section 1.2(e) were invalid because the other Key Holders did not approve. It concluded that the remaining three seats (including the two Key Holder seats) were vacant. On appeal, P claims that the trial court erred and that Salamone, Gorman, Williamson, Sanditen, Woodby, Olsen and Ford were all validly elected as members of the Westech Board. Ds contend the trial court erred, but that Salamone, Halder, Dura, Wolf, and McMurray were all validly elected as members of the Westech Board. We do not agree with either side and affirm the Court of Chancery's ruling that Section 1.2(b) sets forth a per share scheme and Section 1.2(c) sets forth a per capita scheme.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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