Salamone , 106 A.3d 354 ( 2014 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
GARY SALAMONE, MIKE DURA, §
and ROBERT W. HALDER, §
§ No. 343, 2014
Defendants Below, §
Appellants/Cross-Appellees, § Court Below:
§
§ The Court of Chancery
§ of the State of Delaware
v. §
§ Consol. C. A. No. 8845-VCN
JOHN J. GORMAN, IV, §
§
Plaintiff Below, §
Appellee/Cross-Appellant. §
Submitted: October 8, 2014
Decided: December 9, 2014
Before STRINE, Chief Justice, HOLLAND, RIDGELY and VALIHURA,
Justices, JOHNSTON, Judge,∗ constituting the Court en Banc.
Upon appeal from the Court of Chancery. AFFIRMED IN PART and
REVERSED IN PART.
Michael J. Maimone, Esquire (argued), Gregory E. Stuhlman, Esquire, and E.
Chaney Hall, Esquire, Greenberg Traurig, LLP, Wilmington, Delaware, for
Appellants/Cross-Appellees.
Stephen B. Brauerman, Esquire (argued), Neil B. Glassman, Esquire, Vanessa R.
Tiradentes, Esquire, and Sara E. Bussiere, Esquire, Bayard, P.A., Wilmington,
Delaware, for Appellee/Cross-Appellant.
VALIHURA, Justice:
∗
Sitting by designation pursuant to Del. Const. Art. IV § 12.
Defendants Below, Appellants/Cross-Appellees Gary Salamone
(“Salamone”), Mike Dura (“Dura”) and Robert W. Halder (“Halder,” and together
with Salamone and Dura, the “Management Group”) appeal from a Court of
Chancery Memorandum Opinion dated May 29, 2014, and Order and Final
Judgment dated June 24, 2014.
This case involves a dispute between two competing sets of stockholders and
directors about the composition of the board of Westech Capital Corporation
(“Westech”), a financial services holding company headquartered in Austin, Texas.
Both parties brought actions in the Court of Chancery pursuant to 8 Del. C. § 225
(the “§ 225 actions”), each contending that their respective slates of directors
constitute the valid board. The crux of the case for both sides is the interpretation
of a Voting Agreement signed by the purchasers of Westech Series A Preferred
stock (the “Series A Preferred Stock”) in September 2011. According to John J.
Gorman, IV (“Gorman”), 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.
According to the Management Group, 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. Because Gorman’s attempt to remove and
replace directors was not approved by a majority of the (individual) holders of the
1
preferred stock (as opposed to the holders of a majority of shares), they argue that
Gorman’s attempts to change the board composition were invalid.
On August 27, 2013, both parties filed § 225 actions in the Court of
Chancery. The two cases were consolidated, with Gorman as plaintiff and the
Management Group as defendants. The Court of Chancery’s Memorandum
Opinion, issued on May 29, 2014, held that one clause of the Voting Agreement set
forth a per capita scheme to designate directors, but another contested provision
set forth a per share scheme to designate directors. Thus, the Court of Chancery
determined that Gorman’s actions were only partially valid, and that the Westech
board consisted of two members of the Gorman slate and two members of the
Management slate, with three vacant seats. Both parties appealed to this Court,
arguing that the Court of Chancery’s decision was partially incorrect.
The Management Group raises three issues on appeal relating to the
interpretation of the Voting Agreement. They assert that: (1) the trial court erred
in holding that the director candidates are designated under Section 1.2(b) by the
vote of a majority of “shares” rather than the individual “holders” of Series A
Preferred Stock; (2) the trial court correctly held that the director candidates are
designated under Section 1.2(c) by a majority vote of the individual Key Holders,
but erred in holding that the directors who are Key Holder Designees may be
removed by a majority vote of the Series A Preferred Stock controlled by the Key
2
Holders; and (3) the trial court erred in holding that Section 7.17 did not mandate
the aggregation of stock transferred by a Series A Preferred stockholder to
“Affiliates” for purposes of the per capita scheme.
In his cross-appeal, Gorman contends that the Court of Chancery erred in
holding that the Key Holder Designees are designated on a per capita basis. He
further contends that the Court of Chancery erred in holding that a per capita
scheme would not violate Section 212(a) of the Delaware General Corporation
Law (“DGCL”).
We affirm in part and reverse in part.
I. FACTUAL AND PROCEDURAL HISTORY 1
A. The Company and the Parties
Westech, which was founded in 1994 and became a public company in
2001, is a holding company with one primary operating subsidy, a broker-dealer
named Tejas Securities Group, Inc. (“Tejas”). Gorman 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 of 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
1
The relevant facts are drawn from the record and the Court of Chancery’s Memorandum
Opinion. In re Westech Capital Corp., 2014 WL 2211612 (Del. Ch. May 29, 2014) [hereinafter
Westech].
3
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. According to the parties’ pre-trial
stipulation, Gorman 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). 2 Because Westech’s Series A Preferred stockholders have 25,000
votes for every one share of Series A Preferred Stock, Gorman holds nearly 54% of
Westech’s total voting power.
Neither Dura nor Salamone has ever owned Westech stock. Dura, who
served as interim Chief Executive Officer (“CEO”) before Salamone, was elected
to the board in late 2012.3 Salamone became CEO of Westech sometime in early
2013, and has served on the board since that time. Halder has been involved with
the company since 2002. He has served as President and acting Chief Operating
Officer (“COO”) of Westech, and interim COO of Tejas. He was also elected to
Westech’s board in or around 2009.4 He owns, directly or indirectly, nine shares
2
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B4.
3
The previous CEO, James B. Fellus, was terminated in October 2012, according to Anthony
Peter Monaco’s deposition testimony. App. to Appellant’s Opening Br. at A1057. Gorman
testified that he discussed having Dura join the board in August 2012, before Dura became an
employee of Westech. App. to Appellant’s Opening Br. at A1230.
4
Halder could not recall during his deposition the exact date he was elected to the Board. App.
to Appellant’s Opening Br. at A804-05.
4
of Series A Preferred Stock in the company. Halder resigned as a Westech
employee in June 2014.
B. The Series A Preferred Stock Transaction
According to the Management Group, Gorman’s mismanagement and
profligate spending caused Westech to experience severe financial distress from
2005 to 2011, particularly a rapid decline in net capital in 2011. Because of the
nature of Westech’s business, the crisis could have been fatal: the company was
required to maintain minimum capital levels by its counterparties, clearing houses,
and its regulator, the Financial Industry Regulatory Authority (“FINRA”). As a
result, the company needed an infusion of capital.
Gorman disputes this account of events. He 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. 5
Nonetheless, the parties do not dispute that the company issued a new series of
Series A Preferred stock and Series A Convertible Notes in the fall of 2011. Four
primary groups of investors bought these shares: (1) James J. Pallotta (“Pallotta”),
5
In his affidavit, Gorman states that: “In the months leading up to the Series A Preferred
offering, Westech had sufficient capital reserves to satisfy FINRA’s regulatory requirements and
the requirements of APEX Clearing Corporation. In addition to its cash on hand, Westech also
had access to a $1 million letter of credit if it needed capital reserves. We planned to use the
additional capital raised by the issuance of Series A Preferred Stock for growth and expansion,
whether internally or by acquisition.” App. to Appellee’s Answering Br. and Cross-Appellant’s
Opening Br. at B882-83. Halder disputes these assertions in his affidavit. See App. to
Appellant’s Reply Br. and Cross-Appellant’s Answering Br. at AR161.
5
a friend and long-time client of Gorman’s; (2) James B. Fellus (“Fellus”), who had
been a consultant to Westech but became CEO after the transaction, and members
of Fellus’ family; (3) a group of Westech employees, including Halder; and (4)
Gorman himself.
Investor Investment Shares
Pallotta $2M 80 (preferred only)
Fellus $600,000 cash + $1M note6 64 (preferred and notes)
Employees $2M 81 (preferred and notes)7
Gorman $1.8M 72 (preferred and notes)
C. The Voting Agreement
As part of the Series A Preferred Stock transaction, the parties executed a
Voting Agreement on September 23, 2011.8 The Voting Agreement was signed by
Halder, Gorman (including as custodian for other accounts), Pallotta, Fellus, and
approximately 25 other investors, most of whom were employees who purchased
6
Fellus never made any of the payments owed on the note, and eventually defaulted. Westech
filed a lawsuit against him in the United States District Court for the Western District of Texas
for his default on the promissory note. Westech, 2014 WL 2211612, at *1, n.10. They also
engaged in arbitration proceedings through FINRA Dispute Resolution, in which Fellus was
ordered to pay Westech and Tejas approximately $1 million. App. to Appellee’s Answering Br.
and Cross-Appellant’s Opening Br. at B35-41. Fellus claimed in his deposition that he believed
Westech (particularly Gorman) was engaging in “fraudulent activity” and did not want to “put
more good money behind bad money.” App. to Appellant’s Opening Br. at A708, A729.
7
See App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1111; Voting
Agreement Schedule A, App. to Appellant’s Opening Br. at A612-18.
8
The parties also executed other documents, including indemnification agreements, an investor
rights agreement, and a co-sale agreement, as part of the same transaction.
6
only one or two shares. 9 There are only a few independent holders of Westech
common stock who are not bound by the Voting Agreement. According to the
Voting Agreement itself, its purpose was to ensure that the new investors would be
represented on the board: “in connection with [the Series A Preferred Stock
Purchase Agreement] the parties desire to provide the Investors with the right,
among other rights, to designate the election of certain members of the board of
directors of the Company. . . .” 10
Before the Series A Preferred Stock issuance, Westech’s board consisted of
Gorman, Gorman’s uncle (Charles Mayer), and Halder. Under Section 1.2 of the
Voting Agreement, the Board expanded to seven members with the members to be
determined as follows:
1.2 Board Composition. Each Stockholder agrees to vote, or cause
to be voted, all Shares owned by such Stockholder, or over which
such Stockholder has voting control, from time to time and at all
times, in whatever manner as shall be necessary to ensure that at each
annual or special meeting of stockholders at which an election of
directors is held or pursuant to any written consent of the
stockholders, the following persons shall be elected to the Board:
(a) One person designated by Mr. James J. Pallotta (“Pallotta”) (the
“Pallota [sic] Designee”), for so long as Pallotta or his Affiliates
continue to own beneficially at least ten percent (10%) of the shares of
9
Voting Agreement, Schedule A, App. to Appellant’s Opening Br. at A612. The Management
Group contends in their brief that although Schedule A to the Voting Agreement lists 48 holders,
pursuant to Section 7.17, shares held by affiliated persons and entities are aggregated, and that
after aggregating the holdings listed, there are 26 holders. Appellant’s Opening Br. at 15, n. 2.
10
Voting Agreement Recitals, App. to Appellant’s Opening Br. at A539.
7
Series A Preferred Stock issued as of the Initial Closing (as defined in
the Purchase Agreement);
(b) One person who is an Independent Director and is designated
by the majority of the holders of the Series A Preferred Stock (together
with the Pallotta Designee, the “Series A Designees”);
(c) Two persons elected by the Key Holders, who shall initially be
John J. Gorman IV and Robert W. Halder (the “Key Holder
Designees”);
(d) The Company’s Chief Executive Officer, who shall initially be
James Benjamin Fellus (the “CEO Director”), provided that if for any
reason the CEO Director shall cease to serve as the Chief Executive
Officer of the Company, each of the Stockholders shall promptly vote
their respective Shares (i) to remove the former Chief Executive
Officer from the Board if such person has not resigned as a member of
the Board and (ii) to elect such person’s replacement as Chief
Executive Officer of the Company as the new CEO Director; and
(e) Two individuals with applicable industry experience not
otherwise an Affiliate (defined below) of the Company or of any
Investor and who are Independent Directors mutually acceptable to
the Series A Designees and the Key Holder Designees of the Board.
To the extent that any of clauses (a) through (e) above shall not be
applicable, 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.
For purposes of this Agreement, an individual, firm, corporation,
partnership, association, limited liability company, trust or any other
entity (collectively, a “Person”) shall be deemed an “Affiliate” of
another Person who directly or indirectly, controls, is controlled by or
is under common control with such Person, including, without
limitation, any spouse or child of such Person, or trust or similar entity
which controls, is controlled by or is under common control with such
Person or any general partner, managing member, officer or director
8
of such Person or any venture capital fund now or hereafter existing
that is controlled by one or more general partners or managing
members of, or shares in the same management company with, such
Person. For purposes of this Agreement, “Independent Director” has
the meaning set forth in Nasdaq Rule 5605(a)(2).11
The parties also based their arguments on other provisions of the Voting
Agreement, including Section 1.4 which addresses the removal of Board members
as follows:
1.4 Removal of Board Members. Each Stockholder also agrees to
vote, or cause to be voted, all Shares owned by such Stockholder, or
over which such Stockholder has voting control, from time to time
and at all times, in whatever manner as shall be necessary to ensure
that:
(a) no director elected pursuant to Sections 1.2 or 1.3 of this
Agreement may be removed from office unless (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;
(b) any vacancies created by the resignation, removal or death of a
director elected pursuant to Sections 1.2 or 1.3 shall be filled pursuant
to the provisions of this Section 1; and
(c) upon the request of any party entitled to designate a director as
provided in Section 1.2(a), 1.2(b) or 1.2(c) to remove such director,
such director shall be removed.
If permitted by applicable law, the Board shall execute any written
consents required to remove a director or to fill a vacancy created by
resignation, removal or death pursuant this Agreement, and, if
required by applicable law, all Stockholders agree to execute any
11
Voting Agreement § 1.2, App. to Appellant’s Opening Br. at A540 (emphasis added).
9
written consents required to remove a director or to fill a vacancy
created by resignation, removal or death pursuant this Agreement, and
the Company agrees at the request of any party entitled to designate
directors to call a special meeting of stockholders for the purpose of
electing directors if such a special meeting of stockholders is required
by applicable law.12
The meaning and importance of Section 7.17 was also disputed during the
trial. That provision provides:
7.17 Aggregation of Stock. 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. 13
The parties presented sharply different versions of the negotiating history
that led to the Voting Agreement. Gorman claimed that the new board structure
was meant to appease his friend, Pallotta, by providing him with a designated
board seat and to ensure that together, they would “own a majority of the fully
diluted shares.”14 By contrast, the Management Group contended that the Voting
Agreement was intended to limit Gorman’s control over the board by bringing in
other constituents, namely: Westech employees, represented by Halder;
management, represented by the CEO; and the other major investor, Pallotta.
Before the Series A Preferred Stock issuance, Gorman owned the majority of
12
Voting Agreement § 1.4, App. to Appellant’s Opening Br. at A541 (emphasis added).
13
Voting Agreement § 7.17, App. to Appellant’s Opening Br. at A550.
14
Westech, 2014 WL 2211612, at *5.
10
common shares, and by all accounts dominated Westech’s board. Various
members of the Management Group testified that the purpose of the Agreement
was to replace Gorman’s one-man rule with a “triumvirate” of Halder, Fellus, and
Gorman, which would reportedly encourage compromise. 15
D. Gorman’s Attempt to Regain Board Control
By 2013, when the events leading to this case occurred, Salamone had
replaced Fellus as the CEO, and therefore as the designated CEO Board member. 16
Pallotta eventually designated his employee, Anthony Peter Monaco, Jr.
(“Monaco”), to fill the Pallotta Designee seat under Section 1.2(a) of the Voting
Agreement. Pallotta did not designate Monaco, who had negotiated the Voting
Agreement with Westech on Pallotta’s behalf, until March 2012, five months after
the Series A Preferred Stock offering closed. According to Monaco’s deposition
testimony, the delay was caused by Pallotta’s fear of over-committing Monaco,
and Pallotta’s apparent belief that he did not need immediate representation on
Westech’s board because he trusted Westech’s management. Only after Pallotta’s
attorney resigned and “there was no one to advise him against it” did Pallotta
designate his preferred director. 17 As specified in Section 1.2(c) of the Voting
15
See App. to Appellant’s Opening Br. at A879, A695-96, A1010, A1074-75. See also Westech,
2014 WL 2211612, at *6 (“[The Management Group] argue[s] that the possibility of deadlock
would encourage compromise.”).
16
As noted, Dura replaced Fellus as interim CEO, and was then replaced by Salamone.
17
App. to Appellant’s Opening Br. at A1026-28.
11
Agreement, Gorman and Halder held the two Key Holder director seats. Finally,
Dura held a Board seat as one of the independent directors referenced in Section
1.2(e). The remaining two seats (i.e., the other Series A designee under Section
1.2(b) and the other Independent Director under Section 1.2(e)) were vacant. 18
Gorman resigned from the board effective August 7, 2013. 19 Both sides
engaged in finger-pointing. The Management Group asserted at trial that Gorman
was unhappy as he could no longer use Westech as his “personal piggy-bank.”20
Gorman testified that he left because he disagreed with Halder and Salamone’s
leadership. One week after resigning, Gorman sent a letter to Westech attempting
to remove Halder from the Board and elect Greg Woodby in his place. The letter
stated that Gorman was acting as the holder of more than fifty percent of the issued
and outstanding Westech voting stock held by the Key Holders. He also purported
to elect Barry Williamson to fill the Key Holder seat vacancy. 21 Gorman’s letter
cited Sections 1.2 and 1.4 of the Voting Agreement as his authority to elect or
remove Key Holder Designees as the majority stockholder.
18
According to Fellus’ deposition, immediately after the Agreement was signed, the board
consisted of Halder, Monaco, Gorman and Fellus; Dura was only added “just prior to [Fellus’]
leaving.” App. to Appellant’s Opening Br. at A660.
19
Thus, as of August 7, 2013, the Board consisted of Messrs. Dura, Halder, Monaco and
Salamone, with three vacancies.
20
Westech, 2014 WL 2211612, at *7.
21
App. to Appellant’s Opening Br. at A635.
12
On August 21, 2013, Gorman entered into a Stock Purchase Agreement with
Pallotta in which Gorman obtained control over Pallotta’s 80 shares of Series A
Preferred stock. 22 Pallotta’s designee, Monaco, later resigned from the Board.
While the sale was pending,23 Pallotta issued to Gorman a proxy to vote his shares.
At the same time, Gorman 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 Gorman and four other stockholders. 24
Two days later, the purported new directors (Gorman, Sanditen, Woodby,
and Williamson) attempted to call a board meeting for August 26, 2013. Dura and
Salamone, 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.
Westech’s Annual Meeting took place as scheduled on September 17, 2013.
The two competing sets of directors presented different slates for election by the
stockholders:
22
App. to Appellant’s Opening Br. at A636-37. A trust in Gorman’s wife’s name purchased
Pallotta’s shares along with Gorman under the Purchase Agreement.
23
According to Section 2.12(c) of the Investor Rights Agreement, no preferred stock could be
sold without first notifying the company. App. to Appellant’s Opening Br. at A235. Gorman’s
attorney was apparently concerned about receiving “some pushback from certain people at the
Company as to the validity of the sale.” App. to Appellant’s Opening Br. at A647.
24
App. to Appellant’s Opening Br. at A623-34. The other stockholders were Arch Aplin,
Williamson, Woodby, and Ford.
13
Board seat Gorman Slate25 Management Slate
(a) Pallotta designee Gorman Vacant
(b) Other Series A designee Ford Mark McMurrey
(c) Key Holder designee (1) Woodby Halder
(c) Key Holder designee (2) Williamson Michael Wolf
(d) Westech CEO Salamone Salamone
(e) Independent director (1) Olsen Dura
(e) Independent director (2) Sanditen Vacant
Gorman’s slate garnered the majority of votes with 5,969,288 votes cast in
favor of the Gorman slate and 3,375,000 votes cast in favor of the Management
slate.26 The vote tally was confirmed by an independent inspector, Corporate
Election Services, Inc.
The Management Group claims that Gorman’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, they argued before the Court of Chancery, and
now on appeal, that Gorman was not entitled to nominate his own slate. They
contend that Gorman could only nominate the Pallotta Designee, and then only
after the proxy from Pallotta became effective.27 For the other board seats, they
25
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B10. It is not clear
why Gorman’s September 17 slate did not match his previous designations of the board seats.
26
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B10.
27
The Management Group claims that Gorman backdated Pallotta’s proxy, and there is some
evidence that supports this contention. The parties’ Pre-Trial Stipulation states that, “[a]lthough
the Pallotta Proxy states that it is effective as of August 21, 2013, the Pallotta Proxy was
executed by Mr. Pallotta on or around September 5, 2013.” App. to Appellee’s Answering Br.
and Cross-Appellant’s Opening Br. at B8. The record does not indicate more precisely when the
14
allege Gorman had just one vote, and would have to agree with “the majority of the
[other] holders of the Series A Preferred Stock” to designate the remaining Series
A designee under Section 1.2(b); agree with the other Key Holders on the two Key
Holder Designees under Section 1.2(c); and, as the Pallotta Designee, agree with
the Series A Designees and the Key Holder Designees on the two Independent
Directors under Section 1.2(e).
Gorman disputes this interpretation, and argues instead that the Voting
Agreement provides for a per share scheme. Under Gorman’s reading, because he
held more than 50% of the Series A Preferred Stock entitled to elect the Key
Holder Designees, he could remove and elect those two directors under Section
1.2(c). As the majority holder of the Series A Preferred Stock, he maintains that
the Series A Designees are designated by a majority of the holders of the Series A
Preferred Stock measured on a per share basis. He argues further that Section
1.4(a) allows him to remove any Series A Designee as a holder of the majority of
the shares of the Series A Preferred Stock. Gorman argued that any other reading
of the Voting Agreement would be incompatible with Section 212(a) of the
proxy was executed and delivered. However, as long as the proxy been executed and delivered
before the September 17, 2013, Annual Meeting, Gorman’s election to the board at the Annual
Meeting would be valid under the terms of the Voting Agreement, even if his Written Consent
on August 21, 2013, was not valid.
15
DGCL, 28 which requires any departure from the default “one share/one vote”
principle to appear in the certificate of incorporation. Westech’s Restated
Certificate of Incorporation provides for no such deviation, and instead explicitly
provides for “one vote for each share of Common Stock.” 29
E. The Court of Chancery Proceedings
On August 27, 2013, after Gorman sent his written consents to Westech but
before the Annual Meeting scheduled on September 17, 2013, Gorman and the
Management Group each filed separate § 225 actions in the Court of Chancery.
The Court of Chancery consolidated the two cases, designating Gorman as the
plaintiff. Although both sides filed motions for judgment on the pleadings,
asserting that the Voting Agreement was clear and unambiguous, the Court of
Chancery found on the basis of the pleadings that Sections 1.2(b) and 1.2(c) were
ambiguous. The parties engaged in additional discovery to resolve the ambiguity
through extrinsic evidence. The Court conducted a trial on a stipulated record on
January 24, 2014, and issued its Memorandum Opinion on May 29, 2014, with an
Order and Final Judgment on June 24, 2014. We observe that the trial court was
28
8 Del. C. § 212(a) (“Unless otherwise provided in the certificate of incorporation and subject
to § 213 of this title, each stockholder shall be entitled to 1 vote for each share of capital stock
held by such stockholder. If the certificate of incorporation provides for more or less than 1 vote
for any share, on any matter, every reference in this chapter to a majority or other proportion of
stock, voting stock or shares shall refer to such majority or other proportion of the votes of such
stock, voting stock or shares.”).
29
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1350.
16
left to discern the parties’ intent from a paper record that is devoid of the kind of
context that can often be critical in determining why the parties drafted the
provisions as they did.
Not surprisingly, in view of the record, the Court of Chancery found that the
negotiating history of the Voting Agreement was “not particularly illuminating”30
in determining whose account of these negotiations was more accurate.31 The
Voting Agreement was based on a form agreement found on the website of the
New Venture Capital Association (the “Model Voting Agreement”). Only
minimal changes were made to the Model Voting Agreement by the parties. For
30
Westech, 2014 WL 2211612, at *6.
31
Halder claims in his deposition that one reason for the lack of contemporaneous written
evidence regarding the intent to construct Section 1.2(b) as providing for a per capita scheme is
Gorman’s practice to have few negotiations in writing. Halder testified as follows:
[Gorman’s Counsel] Q: So other than the deal documents, do you have any emails that
reflect that, do you have any documents that reflect that, do you have any letters between you
and Mr. Gorman, do you have any contemporaneous notes, do you have any evidence other
than what you say the intent is to substantiate your claim that that’s what the intent was?
[Management Group’s Counsel] A: Object to form.
[Halder] A: Mr. Gorman, through the twelve years that I’ve known him, has a saying -- I’m
sure he’ll smile through the phone as I say this -- that you’re the master of the spoken word
and you’re a slave to the written word. That was how John approached this -- the entirety of
this negotiation. And what I will tell you is, and you will see for yourselves as you go
through these depositions, the recollection of the parties I believe will end up being far more
consistent, with my interpretation of the documents than it is with your interpretation of the
documents.
App. to Appellant’s Opening Br. at A929-30 (emphasis added). We note that this approach is
not particularly helpful to anyone here -- including the courts, which have had to spend
considerable resources attempting to divine the parties’ intent. Gorman’s view, if sanctioned,
“would permit a sophisticated party to exploit ambiguities in contracts to extract a better bargain
for itself after the fact, knowing that the court would have to remain blind to parol evidence that
would make untenable its view of the contract.” Harrah’s Entm’t, Inc. v. JCC Holding Co., 802
A.2d 294, 313 (Del. Ch. 2002).
17
example, a comparison of Section 1.2(c) of the Model Voting Agreement shows
that “the holders of a majority of the Shares of Common Stock” was changed to
“the majority of the holders of the Series A Preferred Stock” in what is now
Section 1.2(b) of the Voting Agreement. 32 Also, language in what is now Section
1.2(c) of the Voting Agreement describing the Key Holder Designees was altered
from “one individual designated by the holders of a majority of the shares” to “two
persons elected by the Key Holders,”33 who were defined later in the Voting
Agreement. 34
Similarly, the Voting Agreement in Section 1.2(e) replaced the Model
Voting Agreement’s language regarding an independent individual “mutually
acceptable to (i) the holders of a majority of the Shares held by the Key Holders
. . . and (ii) the holders of a majority of the Shares held by the Investors” with
“Independent Directors mutually acceptable to the Series A Designees and the Key
Holder Designees of the Board.” 35 Section 1.4, which addresses removing
directors, and Section 7.17, which addresses aggregating shares for the purposes of
32
Compare App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1322 with
App. to Appellant’s Opening Br. at A540.
33
Compare App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1322 with
App. to Appellant’s Opening Br. at A540.
34
See Voting Agreement Schedule B, App. to Appellant’s Opening Br. at A619.
35
Compare App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1323 with
App. to Appellant’s Opening Br. at A540.
18
determining rights under the agreement, were both lifted verbatim from the Model
Voting Agreement.
The Court of Chancery found no contemporaneous evidence explaining how
the Key Holders were chosen. Pallotta was, at one point, listed as a Key Holder,
not Halder, and the Court of Chancery could not find a satisfactory explanation for
this change. 36 The Model Voting Agreement merely notes in a footnote that “in
most cases investors will want the term ‘Key Holders’ to include major common
stock or option holders in addition to the individuals who actually founded the
Company,” but does not contain a provision detailing how these holders are
designated or removed. 37
The Court of Chancery also found no contemporaneous evidence to support
the Management Group’s triumvirate theory, or their broader claim about the need
to limit Gorman’s control over the board. The word “triumvirate” did not appear
in any document from the 2011 negotiations, despite the assertions by Monaco,
Halder, and Salamone in their respective depositions that the purpose of the Voting
Agreement was to create such a three-headed regime.
After reviewing this evidence and the text of the Voting Agreement as a
whole, against the preference in Delaware for a per share scheme unless the
36
Westech, 2014 WL 2211612, at *6, n.39 (“After-the-fact testimony has been offered to explain
how Halder joined the Board, but, as discussed below, the Court does not find those explanations
to be as credible as contemporaneous documentary evidence.”).
37
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at 1320.
19
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 further
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.” 38
According to the Court of Chancery, the parties did not make “nuanced
arguments” about the right of removal in Section 1.4 during the trial, but instead
referenced Section 1.4 only to support their respective arguments about Section
1.2. Nonetheless, the Court of Chancery had to interpret Section 1.4 to determine
whether Gorman’s attempt to remove Halder was valid. The Court held that
Section 1.4(a) explicitly “permits the holders of more than fifty percent of the then
outstanding shares (which includes the holder’s common shares) entitled under
Section 1.2 to designate a director to remove that director.”39 Because Gorman
was the majority stockholder in August 2013, the Court of Chancery concluded
that he was entitled to remove Halder from the board.
38
Westech, 2014 WL 2211612, at *18.
39
Id. at *19.
20
Accordingly, the Court of Chancery found that Gorman’s removal of Halder
as the Key Holder Designee was valid, but that Gorman’s attempts to elect
Woodby and Williamson were not because Gorman did not have the consent of the
other Key Holders. The Court of Chancery also found that Gorman’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.
According to the Court of Chancery, the Board of Westech consists of:
§1.2(a) §1.2(b) §1.2(c) §1.2(c) §1.2(d) §1.2(e) §1.2(e)
Pallotta Series A Key 1 Key 2 CEO Ind. 1 Ind. 2
Gorman Ford [Vacant] [Vacant] Salamone Dura [Vacant]
On appeal, both parties contend that the Court of Chancery erred. Gorman
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. The Management Group also contends 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. However, we conclude that the Court of
Chancery erred in holding that the directors designated pursuant to Section 1.2(c)
may be removed by the vote of the majority of the shares held by the Key Holders.
21
Instead, under the plain language of Section 1.4(a), the Key Holders, as the
“Person[s]” entitled to nominate the Key Holder Designees, are the only
“Person[s]” entitled to remove the Key Holder Designees. Put more broadly, the
plain language of Section 1.2 and Section 1.4(a) suggests that the designation and
removal provisions were intended to be symmetrical.40 Because of its error
regarding Section 1.4(a), we find that the Court erred in holding the removal of
Halder to be valid.
In reaching these conclusions, we hold that certain of the Court of
Chancery’s factual findings were clearly erroneous. However, these errors were
not of sufficient force to affect the Court of Chancery’s overall conclusions
regarding Sections 1.2(b) and 1.2(c) set forth above. In addition, we affirm the
Court of Chancery’s conclusion that Gorman’s attempt to remove Dura was invalid
and that Ford was validly elected under Section 1.2(b). Accordingly, we AFFIRM
in part and REVERSE in part.
II. DISCUSSION
A. Our Standard of Review
We review questions of contract interpretation de novo. “Delaware law
adheres to the objective theory of contracts, i.e., a contract’s construction should be
40
The parties could have been clearer when referring to “Person” in Section 1.4(a) by appending
“(s)” to “Person.” Instead, it appears that the parties lifted the text from the Model Voting
Agreement.
22
that which would be understood by an objective, reasonable third party.” 41 When
interpreting a contract, this Court “will give priority to the parties’ intentions as
reflected in the four corners of the agreement,” construing the agreement as a
whole and giving effect to all its provisions. 42 “Contract terms themselves will be
controlling when they establish the parties’ common meaning so that a reasonable
person in the position of either party would have no expectations inconsistent with
the contract language.” 43 “Under standard rules of contract interpretation, a court
must determine the intent of the parties from the language of the contract.”44
B. Section 1.2(b) is a Per Share Provision
1. The Management Group’s Contentions
The Management Group argues that Section 1.2(b) of the Voting Agreement
is clear and unambiguous, and thus, there is no need to consider any extrinsic
evidence. They contend that by using the language “majority of the holders,” the
parties purposefully chose to avoid using other language referencing the majority
of the shares or stock as used throughout the DGCL. 45 They further argue that the
41
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010).
42
GMG Capital Inv., LLC. v. Athenium Venture Partners I, L.P., 36 A.3d 776, 779 (Del. 2012).
43
Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997).
44
Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 628 (Del. 2003).
45
See, e.g., 8 Del. C. § 242(b)(1) (“a majority of the outstanding stock”); 8 Del. C. § 251(c) (“a
majority of the outstanding stock”); 8 Del. C. § 275(b) (“a majority of the outstanding stock”); 8
Del. C. § 271(a) (“the holders of a majority of the outstanding stock”); 8 Del. C. § 141(k) (“the
holders of a majority of the shares”).
23
“majority of the holders” language differs from sections of the Voting Agreement
that explicitly use majority of the shares or stock language.46 Additionally, the
Management Group argued to the Court of Chancery that Black’s Law Dictionary
defines “holder” as “[a] person who possesses or uses property.” 47 On appeal, the
Management Group cites to the Court of Chancery’s statement below that “[a]
plain reading by a reasonable third party that inquires no further would support
[Appellants’] per capita voting theory.” 48 Therefore, they argue, the plain
meaning of Section 1.2(b) is unambiguous and provides for a per capita scheme.
2. Gorman’s Contentions
Gorman also argues that Section 1.2(b) is unambiguous. However, he
argues that it is unambiguously a per share provision. He contends that other
provisions in the Voting Agreement reference a per share scheme more directly, 49
46
See Voting Agreement § 1.4(a), App. to Appellant’s Opening Br. at A541 (“the holders of
more than fifty percent (50%) of the then outstanding Shares”); Voting Agreement § 4.1, App. to
Appellant’s Opening Br. at A542 (“shares representing more than fifty percent (50%) of the
outstanding voting power of the Company”); Voting Agreement § 4.2, App. to Appellant’s
Opening Br. at A542-43 (“the holders of at least two-thirds (66 2/3%) of the shares of the Series
A Preferred Stock”); Voting Agreement § 4.4, App. to Appellant’s Opening Br. at A545 (“the
holders of at least two-thirds of the Series A Preferred Stock”); Voting Agreement § 7.8, App. to
Appellant’s Opening Br. at A547 (“the holders of two-thirds of the shares of Series A Preferred
Stock”); Voting Agreement § 7.8(e), App. to Appellant’s Opening Br. at A548 (“the holders of a
majority of shares of Series A Preferred Stock”).
47
Black’s Law Dictionary (9th ed. 2009) (emphasis added).
48
Westech, 2014 WL 2211612, at *15.
49
See footnote 46, supra. Gorman also points to a number of cases that appear to use the phrase
“majority of the holders” to mean a majority of the voting power of the company. See, e.g.,
Klaassen v. Allegro Dev. Corp., 2013 WL 5739680, at *25 (Del. Ch. Oct. 11, 2013); Dawson v.
Pittco Capital Partners, L.P., 2012 WL 1564805, at *11, *19 (Del. Ch. Apr. 30, 2012); Telcom-
24
but the entire scheme of the agreement was intended to be per share, even if
different language was used to describe the designation and voting mechanisms.
For example, Gorman contends that the removal provisions in Section 1.4
require only a majority vote to remove directors designated under Sections 1.2(b)
and 1.2(c). As a result, a majority stockholder could remove any director
designated through a per capita vote under Sections 1.2(b) and 1.2(c). If Section
1.2(b) provides for a per capita scheme, Gorman argues that the combined effect
of the designation and removal provision would lead to an “unreasonable result.” 50
Gorman contends that the Management Group’s position that the provisions were
designed specifically to create a never-ending sequence of election and removal is
irrational and unsupported by the evidence.
Further, Gorman contends that the Voting Agreement’s structure and the
Series A Preferred stock agreements as a whole do not restrict transfers.51 If the
SNI Investors, L.L.C. v. Sorrento Networks, Inc., 2001 WL 1117505, at *6, n.20 (Del. Ch. Sept.
7, 2001); Solomon v. Armstrong, 747 A.2d 1098, 1127 (Del. Ch. 1999); Margolies v. Pope &
Talbot, Inc., 12 Del. J. Corp. L. 1092, 1097 (Del. Ch. 1986); Allied Chem. & Dye Corp. v. Steel
& Tube Co. of Am., 120 A. 486, 490 (Del. Ch. 1923).
50
See Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at 38. The Management
Group counters that the parties intended to create compromise through checks and balances. The
Court of Chancery acknowledged Gorman’s argument that “these provisions do not create a
workable triumvirate structure or scheme of checks and balances and instead produce deadlock.”
Westech, 2014 WL 2211612, at *11.
51
See Voting Agreement, App. to Appellant’s Opening Br. at A539-621; Share Purchase
Agreement, App. to Appellant’s Opening Br. at A79-92; Investor Rights Agreement, App. to
Appellant’s Opening Br. at A221-43; Co-Sale Agreement, App. to Appellant’s Opening Br. at
A301-09.
25
per capita structure had been intended to prevent Gorman from dominating
Westech and the Board, then there would need to be mechanisms designed to
prevent a majority stockholder from transferring his or her shares to other persons
and entities until the per capita votes tipped in the majority stockholder’s favor.52
Absent such mechanisms designed to prevent circumvention of a per capita
scheme, Gorman argues, the Management Group’s interpretation would render
Section 1.2(b) ineffective.
3. Court of Chancery’s Findings
The Court of Chancery concluded that Section 1.2(b) was ambiguous.
Contractual ambiguity exists “‘[w]hen the provisions in controversy are fairly
susceptible of different interpretations or may have two or more different
meanings.’ Where a contract is ambiguous, ‘the interpreting court must look
beyond the language of the contract to ascertain the parties’ intentions.’” 53 While
the Court of Chancery indicated that the plain language of Section 1.2(b) suggested
a per capita construction, it determined that Section 1.2(b) was ambiguous, based
largely on the “broader arguments about the agreement’s structure and intent.”54
52
Appellants argue that Section 7.17 of the voting agreement is such a mechanism and prevents
Gorman from circumventing the per capita voting scheme set forth in Section 1.2(b). See
discussion infra.
53
GMG Capital Inv., LLC. v. Athenium Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012)
(quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)).
54
Westech, 2014 WL 2211612, at *15.
26
In particular, the Court of Chancery found Gorman’s theory regarding
Section 7.17 to be more persuasive. 55 The Court noted that the drafters would
likely have wanted to avoid creating a structure that invited “deadlock.” It
observed that a more effective system of checks and balances could have been
adopted, or that the drafters could have more clearly stated their intent if they
believed that the threat of “deadlock” was the best way to ensure compromise. 56
4. The Plain Language and Structure of the Voting Agreement
As we recently stated in ev3 v. Lesh, “[w]hen parties have ordered their
affairs voluntarily through a binding contract, Delaware law is strongly inclined to
respect their agreement, and will only interfere upon a strong showing that
dishonoring the contract is required to vindicate a public policy interest even
stronger than freedom of contract.”57 Our focus on the actual language agreed to
and used by the parties to a contract best promotes “parties’ ability to negotiate and
shape commercial agreements,” in keeping with the goal of Delaware law to
“ensure freedom of contract and promote clarity in the law [and thus] facilitate
commerce.” 58
55
Id. at *11.
56
Id.
57
ev3 v. Lesh, 2014 WL 4914905, at *2, n. 3 (quoting Libeau v. Fox, 880 A.2d 1049, 1056-57
(Del. Ch. 2005), aff’d in pertinent part, 892 A.2d 1068 (Del. 2006)).
58
Id.
27
However, we have also said that we apply a presumption against
disenfranchising the majority stockholder, absent a clear intent by the parties to a
contract to do so. For example, the Court of Chancery stated in Rohe v. Reliance
Training Network, Inc., “although Delaware law provides stockholders with a great
deal of flexibility to enter into voting agreements, our courts rightly hesitate to
construe a contract as disabling a majority of a corporate electorate from changing
the board of directors unless that reading of the contract is certain and
unambiguous.”59
The Court of Chancery in Rohe relied on an earlier case, Rainbow
Navigation, Inc. v. Yonge, where the Court of Chancery observed, “[i]t is enough
to note that an agreement, if it is to be given such an effect [which deprived a
majority of shareholders of power to elect directors at an annual meeting or
through written consent], must quite clearly intend to have it. A court ought not to
resolve doubts in favor of disenfranchisement.” 60
But the application of that principle depends on the type of contract at issue.
When the contract to be interpreted is something like a certificate of incorporation,
the presumption against disenfranchising majority stockholders will typically apply
if the certificate is not clear on its face, as investors ought to be able to rely on the
59
Rohe v. Reliance Training Network, Inc., 2000 WL 1038190, at *16 (Del. Ch. Jul. 21, 2000).
60
Rainbow Navigation, Inc. v. Yonge, 15 Del. J. Corp. L. 196, 204, 1989 WL 40805 (1989).
28
express terms of the certificate and have doubts resolved in favor of their ability to
act by majority vote. In the case of a contract that was the subject of negotiation,
like the Voting Agreement at issue in this case, the presumption applies
differently. 61 In that case, if the agreement is ambiguous on its face, the trial court
may consider parol evidence to clarify the ambiguity. After doing so, if the trial
court finds by clear and convincing evidence that the contract was intended to
restrict the normal default rule that a majority of the relevant shares can elect a
board member, it can rule for the party arguing for the restriction. When, however,
the parol evidence does not rise to that level and leaves the trial court without the
requisite level of certainty, the presumption against disenfranchisement requires
reading the contract consistent with the default rule.
As the Court of Chancery noted in Harrah’s Entertainment, Inc. v. JCC
Holding Co., another case involving the interpretation of corporate instruments
involving stockholder voting rights:
61
See, e.g., Harrah’s Entm’t, Inc. v. JCC Holding Co., 802 A.2d 294 (Del. Ch. 2002); KFC Nat.
Council and Advertising Co-op., Inc. v. KFC Corp., 2011 WL 350415, at *2 (Del. Ch. Jan. 31,
2011) (“Although I have considered the parol evidence in this case because the NCAC
Certificate was the product of specific, arm’s length bargaining, the interpretative principle
disfavoring disenfranchisement has residual relevance. Unless the parol evidence clearly and
convincingly supports the disenfranchising reading, the court should avoid giving effect to such a
reading. To do otherwise would defeat the reasonable expectations of the corporation’s
electorate, which should not face disenfranchisement in a situation where the certificate can
reasonably be read either way and where the bargaining and performance history do not clearly
and convincingly deny the electorate, or in this case, the electorate’s governing board, the
authority to decide the matter.”).
29
When a sophisticated party like Harrah’s has negotiated the provisions
of corporate instruments for several months, it should fairly expect to
have those provisions interpreted in the traditional manner, which
permits recourse to extrinsic evidence in the event of ambiguity. It
would provide a windfall for a party like Harrah’s, if it could defeat
the reasonable expectations of their negotiating adversaries, simply by
convincing the court that the contract is susceptible to more than one
interpretation. Why should it get to escape the consequences of a
negotiating history that it helped to shape? . . . By permitting the
court to consider the parol evidence regarding a negotiated corporate
instrument, this approach advances the central aim of contract
interpretation, which is to “preserve to the extent feasible the
expectations that form the basis of a contractual relationship.”62
The Court of Chancery acknowledged the risk of disenfranchising
stockholders, but clarified how a presumption against disenfranchisement operates
in situations like these, where sophisticated parties have negotiated a bilateral
agreement:
At the same time, of course, it is important to give substantial weight
to the important public policy interest against disenfranchisement.
But this interest can be sufficiently furthered by requiring any
restriction impinging upon fundamental electoral rights to be
manifested in clear and convincing evidence. So long as this sort of
clarity is required, there is less danger that an erroneous and therefore
inequitable deprivation of core electoral rights will occur. 63
Here, in examining the language of Section 1.2(b) of the Voting Agreement,
several aspects of the structure of the Voting Agreement suggest that a per capita
scheme was intended -- making this aspect of the case particularly close. For
62
Harrah’s Entm’t, Inc., 802 A.2d at 311-313 (quoting Eagle Indus. v. DeVilbiss Health Care,
Inc., 702 A.2d 1228, 1233 (Del. 1997)).
63
Id. at 313.
30
example, the plain language of the contract suggests that the independent director
referenced in Section 1.2(b) is designated by a majority of the individual holders of
the preferred stock. Section 1.2(b) reads: “(b) One person who is an Independent
Director and is designated by the majority of the holders of the Series A Preferred
Stock (together with the Pallotta Designee, the ‘Series A Designees’).” 64 The
Court of Chancery stated that “[a] plain reading by a reasonable third party that
inquires no further would support Defendants’ per capita voting theory.” 65 The
Management Group argues that the analysis should have ended there and that the
Court erred in examining extrinsic evidence.
But because this contract was negotiated by two sophisticated parties, the
Court of Chancery properly considered the expectations of both parties in forming
the contract. Thus, in attempting to discern the meaning of Section 1.2(b), the trial
court properly considered not only the language of the provision itself, but also the
context of this provision within the overall framework of the Voting Agreement.
The trial court considered the purpose of the Voting Agreement, as evidenced by
its text, as well as other provisions relating to the removal of directors and
provisions relating to the aggregation of shares.
64
Voting Agreement § 1.2(b), App. to Appellant’s Opening Br. at A540 (emphasis added).
65
Westech, 2014 WL 2211612, at *15.
31
With respect to the purpose of the Voting Agreement, the “Recitals” to the
Voting Agreement offer at least some insight. For example, the first Recital states:
A. Concurrently with the execution of this Agreement, the
Company and the Investors are entering into a Series A Preferred
Stock Purchase Agreement (the “Purchase Agreement”) providing for
the sale of shares of the Company’s Series A Preferred Stock, and in
connection with that agreement the parties desire to provide the
Investors with the right, among other rights, to designate the election
of certain members of the board of directors of the Company (the
“Board”) in accordance with the terms of this Agreement. 66
Arguably, the explicit purpose of the Voting Agreement -- “provid[ing] the
Investors with the right . . . to designate the election of certain members of the
board of directors of the Company” 67 -- would be frustrated if only one investor,
Gorman, could control the board seat. That is particularly true because the seat
referenced in Section 1.2(b) is the only one that the investors other than Pallotta,
Gorman, Halder, and Fellus can control: Pallotta (and now Gorman as his
successor) has the right to nominate the Pallotta Designee under Section 1.2(a); the
three Key Holders (Gorman, Halder and Fellus) control the Key Holder Designees
under Section 1.2(c); the CEO is designated to sit on the Board under Section
1.2(d); and the two independent director seats under Section 1.2(e) are filled by a
vote of the Series A Designees and the Key Holder Designees. If Gorman’s
66
Voting Agreement Recitals, App. to Appellant’s Opening Br. at A539 (emphasis added).
67
Id. (emphasis added).
32
interpretation were correct, the approximately 25 other signatories to the Voting
Agreement would lack representation on the Board.
Yet the Court of Chancery expressed concern that interpreting Section 1.2(b)
to provide for a per capita scheme could lead to an absurd result: Gorman (or any
other investor) could simply create multiple investment vehicles so that he
controlled multiple “holders” for purposes of reaching a majority per capita vote.
The Management Group responded that Section 7.17 was intended to prevent
precisely that kind of circumvention: by providing for the aggregation of shares,
Section 7.17 requires “all shares held or acquired by an investor and/or its
affiliates” to be “aggregated together for the purposes of determining the
availability of any rights under this agreement.” 68
In response, Gorman argues that shares cannot simultaneously be aggregated
to form one “holder” for the purposes of a per capita scheme, and then have the
rights be separately apportioned.69 Gorman argues further that this provision was
intended to meet threshold requirements for board composition under Section 1.2,
68
Voting Agreement § 7.17, App. to Appellant’s Opening Br. at A550.
69
Section 7.17 also includes a clause stating, “such Affiliated persons may apportion such rights
as among themselves in any manner they deem appropriate.” Id.
33
for drag-along rights under Section 4.2, and for amendment, termination or waiver
under Section 7.8.70
The Court of Chancery rejected the Management Group’s contentions,
apparently because Section 7.17 was unaltered from the provision in the Model
Voting Agreement and there was no contemporaneous evidence supporting the
Management Group’s “new theory in anticipation of trial.”71 Accordingly, the
Court of Chancery’s view that Section 7.17 was not intended to prevent
circumstances of a per capita scheme influenced its conclusion that the parties did
not intend Section 1.2(b) to be a per capita provision.
However, it is certainly plausible that Section 7.17 could have been viewed
as sufficient to prevent circumvention of a per capita scheme, even though it was
derived from a Model Voting Agreement that contemplated a per share scheme.
At least a reasonable reading of Section 7.17 is that it is sufficient to prevent
circumvention of a per capita scheme, although it may not have been clearly
70
See Voting Agreement § 1.2(a), App. to Appellant’s Opening Br. at A540; Voting Agreement
§ 4.2, App. to Appellant’s Opening Br. at A542; Voting Agreement § 7.8, App. to Appellant’s
Opening Br. at A547-48.
71
Westech, 2014 WL 2211612, at *12. The parties agree that the National Venture Capital
Association Model Voting Agreement was the model form used as a template for their Voting
Agreement. See App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at
B1317-42. The Model Voting Agreement does not contemplate per capita voting. Section 7.18
of the Model Voting Agreement is almost exactly the same as Section 7.17 of the Voting
Agreement. Thus, the Court of Chancery reasoned, any unaltered provisions could not have
been intended for use in a per capita scheme. See Westech, 2014 WL 2211612, at *12 (“Thus,
Section 7.17, as drafted in the form agreement, cannot have been written to cause investors’
shares to be treated as a single vote for per capita voting purposes because per capita voting is
not contemplated in the form agreement.”).
34
modified from the Model Voting Agreement for the purpose the Management
Group now contends.
The removal provisions are also relevant in understanding the overall
structure of the Voting Agreement. Reference to Section 1.4(a) may suggest that
Section 1.2(b) was intended to be a per share provision. As discussed further
below, Section 1.4(a) provides that removal is permitted when directed or
approved by the affirmative vote of the “Person” or “holders of more than fifty
percent (50%) of the then outstanding Shares.”72 Because we believe, as more
fully explained below, the removal provisions of Section 1.4(a) were intended to
match the designation provisions of Section 1.2, a reasonable reading of Section
1.2(b) as providing for a per capita scheme would render the “shares” clause as
surplusage.73 In other words, the “Person” clause logically applies to Sections
1.2(a), 1.2(c) and 1.2(e). If it also applied to Section 1.2(b), there would be no
need for the “shares” clause in Section 1.4(a). Thus, the only reasonable way to
interpret the removal of a Section 1.2(b) designee without rendering a clause under
72
Voting Agreement § 1.4(a), App. to Appellant’s Opening Br. at A541.
73
Section 1.2(a) triggers the “Person” clause because the director is appointed by an individual.
Section 1.2(c), as discussed below, also triggers the “Person” clause. Section 1.2(d) has its own
removal mechanism because the seat is reserved for the CEO. Section 1.2(d) provides that “if
for any reason the CEO Director shall cease to serve as the Chief Executive Officer of the
Company, each of the Stockholders shall promptly vote their respective Shares (i) to remove the
former Chief Executive Officer from the Board if such person has not resigned as a member of
the Board and (ii) to elect such person’s replacement as Chief Executive Officer of the Company
as the new CEO Director.” Voting Agreement § 1.2(d), App. to Appellant’s Opening Br. at
A540. Section 1.2(e) also triggers the “Person” clause because the Independent Directors are
designated by the Series A Designees and the Key Holder Designees.
35
Section 1.4(a) surplusage is by interpreting the removal under Section 1.4(a) to be
effected by the approval of the holders of more than 50% of the outstanding shares
of Series A Preferred Stock. This construction suggests that a per share
interpretation of Section 1.2(b) is correct.74
Given that some aspects of the Voting Agreement suggest a per capita view
of Section 1.2(b), and others suggest a per share view, we agree with the trial court
that Section 1.2(b) is ambiguous. Thus, in keeping with the teaching of Harrah’s
the Court of Chancery properly undertook a review of the extrinsic evidence.
5. Extrinsic Evidence
When a contract’s plain meaning, in the context of the overall structure of
the contract, is susceptible to more than one reasonable interpretation, courts may
consider extrinsic evidence to resolve the ambiguity. 75 The standard for
interpreting ambiguous contracts is well settled:
If the contract is ambiguous, a court will apply the parol evidence rule
and consider all admissible evidence relating to the objective
circumstances surrounding the creation of the contract. Such extrinsic
74
At oral argument before this Court, the Management Group contended that the “Person” clause
in Section 1.4(a) applies to Section 1.2(a), 1.2(b), 1.2(c) and 1.2(e). They attempt to avoid the
“surplusage” argument by pointing to the paragraph following Section 1.2(e), which addresses
situations in which clauses (a) through (e) in Section 1.2 are not applicable. We believe that this
is a less logical and compelling interpretation of the interplay between Section 1.2 and Section
1.4. The Management Group’s position at oral argument is also contrary to the position they
took before the Court of Chancery. There they argued that, “[u]nder Section 1.4, removal of a
director designated under Section 1.2(b) may be effected by any person or persons holding fifty
percent or more of the Series A shares.” App. to Appellee’s Answering Br. and Cross-
Appellant’s Opening Br. at B1121.
75
In re IBP, Inc. S’holders Litig., 789 A.2d 14, 55 (Del. Ch. 2001).
36
evidence may include overt statements and acts of the parties, the
business context, prior dealings between the parties, [and] business
custom and usage in the industry. After examining the relevant
extrinsic evidence, a court may conclude that, given the extrinsic
evidence, only one meaning is objectively reasonable in the
circumstances of [the] negotiation.76
The Management Group argues that the Voting Agreement was negotiated
to create a triumvirate structure with checks and balances. 77 The purpose of the
Voting Agreement, they contend, illustrates that a per capita scheme was intended
for both Sections 1.2(b) and 1.2(c). Their position is largely supported through
affidavits and deposition testimony. The Management Group cites no
contemporaneous evidence in their briefs to support their argument.
An examination of the capital infusion may be helpful to understand what
the parties intended. Pallotta, who invested $2 million, obtained the right to
designate a director under Section 1.2(a), and Fellus, who agreed to invest $1.6
million, was entitled to be designated as a director on the Westech Board under
Section 1.2(d) because he was to become the new Westech CEO. Gorman and
Halder, who were already Westech board members, were named in the Voting
Agreement as the initial Key Holder Designees under Section 1.2(c). Gorman
invested $1.8 million. Halder, on behalf of himself and what appears to be his
76
In re Mobilactive Media, LLC, 2013 WL 297950, at *15 (Del. Ch. Jan. 25, 2013) (alternations
in original) (citations omitted) (internal quotation marks omitted).
77
The Key Holders (Halder, Fellus and Gorman) were to constitute the alleged triumvirate. See
Voting Agreement Schedule B, App. to Appellant’s Opening Br. at A619.
37
children, invested the smallest amount of money among the Key Holders, namely,
$225,000. But including all of the other Westech employees who contributed, the
total employee share was identical to Pallotta’s -- namely, approximately
$2 million. The employees, however, were not a “bloc” in the sense that there
might not always be one individual who could speak on their collective behalf.
Thus, the Management Group argues that Section 1.2(b) provided for a per capita
scheme to allow these smaller investors a meaningful opportunity to designate a
director to the Board.
Further, as noted earlier, a comparison of Section 1.2(c) in the Model Voting
Agreement to Section 1.2(b) of the Voting Agreement indicates that “the holders of
a majority of the Shares of Common Stock” was changed to “the majority of the
holders of the Series A Preferred Stock.” 78 This intentional departure from the
Model Voting Agreement is perhaps the most compelling evidence that the parties
may have contemplated a per capita scheme with respect to Section 1.2(b). Thus,
a logical inference to be drawn from this fact may be that the parties intended for
Section 1.2(b) to be per capita, and that any lack of conformity elsewhere in the
Voting Agreement is due to sloppy drafting or scrivener’s errors.
78
Prior drafts of the Voting Agreement indicate that the language in Section 1.2(b) was not
changed significantly after it was initially adopted from the Model Voting Agreement. See App.
to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B48, B225, B416, B653,
B749. In fact, the language in dispute was never modified after its initial adoption from the
Model Voting Agreement. The fact that the language was not heavily negotiated and not
modified meaningfully in the draft agreements is not dispositive.
38
Gorman contends that the smaller investors were never intended to have the
same voting power as the larger investors. The Court of Chancery found
Gorman’s view to be more compelling, because the Management Group could not
point to any contemporaneous evidence that the smaller investors were intended to
have the same voting power as the larger investors. As set forth more fully in the
discussion of Section 1.2(c), we believe the Court of Chancery erred in making
certain factual findings relevant to this point. However, we agree that the extrinsic
evidence is not conclusive either way. Accordingly, while there may be some
evidence that a per capita scheme was intended in Section 1.2(b), the intent to
create such a voting structure does not rise to the level of being sufficiently “clear
and convincing.”79
6. Judicial Presumptions
We agree that given the conclusion that Section 1.2(b) is ambiguous after
considering the plain meaning and the contemporaneous extrinsic evidence, we
apply the judicial presumptions set forth in our case law. As discussed above,
Rohe v. Reliance Training Network, Inc.80 and Rainbow Navigation, Inc. v.
79
Harrah’s Entm’t, Inc. v. JCC Holding Co., 802 A.2d 294, 313 (Del. Ch. 2002). This is despite
the fact that it appears that more of the evidence in the record suggests a per capita scheme -- as
opposed to a per share scheme -- under Section 1.2(b) was intended.
80
2000 WL 1038190 (Del. Ch. Jul. 21, 2000).
39
Yonge81 establish judicial presumptions that assist in interpreting contractual
language in voting agreements.
In Rainbow Navigation, the Court of Chancery stated:
A shareholders agreement that is said to have the effect of depriving a
majority of shareholders of power to elect directors at an annual
meeting, or preventing such shareholders from exercising the power
conferred by Section 228 to act in lieu of a meeting, is an unusual and
potent document. . . . It is enough to note that an agreement, if it is to
be given such an effect, must quite clearly intend to have it. A court
ought not to resolve doubts in favor of disenfranchisement. 82
As noted, these presumptions apply differently depending on the type of
contract at issue. In this case, there is some evidence to suggest that the parties
intended for Section 1.2(b) to create a per capita scheme to designate Board
nominees, but the Court of Chancery did not find that the evidence was sufficiently
“clear and convincing” to overcome the presumption against disenfranchisement.
Although if we were the trial judge in the first instance, we may have interpreted
the contract differently because there was room to find that the parol evidence
reflected the parties’ intention to apply a per capita scheme consistently across the
entire Voting Agreement, we defer to the Court of Chancery’s reasoned
determination that there was evidence supporting a contrary outcome as to Section
1.2(b) and to therefore rule as it did. Accordingly, we affirm the Court of
81
15 Del. J. Corp. L. 196, 1989 WL 40805 (Del. Ch. Apr. 24, 1989).
82
Rainbow Navigation, 15 Del. J. Corp. L. at 204, 1989 WL 40805 (citing Williams v. Sterling
Oil of Oklahoma, 273 A.2d 264 (Del. 1971)).
40
Chancery’s conclusion that Section 1.2(b) provides for a per share scheme. In
consequence, Gorman as the majority stockholder was entitled to designate his
own candidate. Ford was thus validly designated and elected to the seat.
C. Section 1.2(c) is a Per Capita Provision
1. The Management Group’s Contentions
The Management Group argues that Section 1.2(c) is unambiguous in
providing for a per capita scheme to designate Board nominees. They argue that
where the Voting Agreement intended the vote to be based on shares, language
referring to shares was used. 83 Conversely, where language of shares was omitted,
as here, a per capita scheme was intended.
The Management Group also contends that at the time the Voting
Agreement was executed, Gorman “had more shares of capital stock than Halder
and Fellus combined. . . .” 84 Thus, a per share scheme under Section 1.2(c) would
necessarily mean that Gorman, by virtue of his majority stockholder status among
the Key Holders, has unilateral authority to “elect” the Key Holder Designees. As
a result, the Key Holder structure would have been rendered meaningless at the
time the Voting Agreement was signed. If such a result were intended, they argue,
83
See footnote 46, supra.
84
Appellant’s Opening Br. at 29.
41
the Voting Agreement would have provided for a “Gorman Designee,” similar to
one provided for Pallotta in Section 1.2(a).
2. Gorman’s Contentions
Gorman argues that Section 1.2(c) is ambiguous. He argues that where
there is ambiguity, courts must apply gap-fillers in favor of majority voting. 85 He
contends that the Series A Certificate of Designation provides for a per share
scheme, and that the Management Group’s interpretation conflicts with the
Certificate of Designation. 86
Gorman further contends that the Management Group’s “Gorman designee”
argument ignores contemporaneous evidence that the parties intended the Key
Holders to be substantial investors, as was the case in all drafts of the Voting
Agreement “until Halder inexplicably replaced Pallotta as a Key Holder in the
85
See Standard Power & Light Corp. v. Inv. Assocs., Inc., 51 A.2d 572, 576 (Del. 1947)
(“Outstanding among the democratic processes concerning corporate elections is the general rule
that a majority of the votes cast at a stockholders’ meeting, provided a quorum is present, is
sufficient to elect Directors . . . If this rule is not to be observed, then the charter provision must
not be couched in ambiguous language, rather the language employed must be positive, explicit,
clear and readily understandable and susceptable [sic] to but one reasonable interpretation, which
would indicate beyond doubt that the rule was intended to be abrogated.”).
86
Section 5.1 of the Series A Certificate of Designation provides that, “[o]n any matter presented
to the stockholders of the Corporation for their actions or consideration at any meeting of
stockholders of this Corporation (or by written consent of stockholders in lieu of a meeting),
each holder of outstanding shares of Series A Preferred Stock shall be entitled to cast the number
of votes equal to the number of whole shares of Common Stock into which the shares of Series A
Preferred Stock held by such holder are convertible as of the record date for determining
stockholders entitled to vote on such matter.” App. to Appellee’s Answering Br. and Cross-
Appellant’s Opening Br. at B1167.
42
execution version.”87 Had Halder not “inexplicably” replaced the original Key
Holders (who Gorman contends were Pallotta, Fellus, and himself), a per share
reading of Section 1.2(c) would not convert it into a Gorman designee provision, as
the Management Group contends.
Gorman further argues that while he would have controlled the election of
Key Holder Designees when the Voting Agreement was executed, nothing
prevented Halder and/or Fellus from acquiring more shares and utilizing Section
1.2(c) as a protective mechanism for their own investment. Because nothing
prevented Gorman from selling some of his own stock, and the other Key Holders
from purchasing stock, the other Key Holders could eventually choose to dilute
Gorman’s control over the Key Holder Designees. Each Key Holder has the same
opportunity to acquire sufficient voting power to designate a director nominee.
Gorman also argues that the removal provisions under Section 1.4 support
his interpretation of 1.2(c). Gorman argues that Section 1.4 contemplates
removing directors by a per share vote, and therefore, Section 1.2(c) should be
interpreted the same way. 88 Otherwise, directors could be designated by the
87
Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at 34.
88
The Management Group responds that the removal of a director designated under a per capita
voting scheme triggers the “Person” clause, where only the holders who designated the director
may remove that director by a per capita vote. They argue that the “holders of more than fifty
percent” clause is not triggered when a director is designated under a per capita voting scheme.
Instead, the “holders of more than fifty percent” clause is triggered only when there is a per
share voting scheme to designate the director. According to the Management Group, Section
1.2(b) and 1.2(c) require per capita voting. If that is true, none of the subsections (a) through (e)
43
majority of the individual Key Holders, but then removed by the majority of
shares, likely creating the threat of “deadlock.” Gorman claims that promoting
such a potentially never-ending cycle of designations and removals was not
intended.
Finally, Gorman asserts on cross-appeal that the Management Group’s
interpretation of a per capita scheme would run afoul of Section 212(a) of the
DGCL. 89 Under a per share scheme, each Key Holder exercises one vote per
share. Thus, Gorman does not have any greater or any less voting power per share
than any other Key Holder. However, under a per capita scheme, according to
Gorman, Key Holders with fewer shares have greater voting power per share than
Key Holders who own more shares, because each Key Holder may only cast one
vote, regardless of the number of shares he or she owns. But Gorman
acknowledges that the Voting Agreement provides for a two-step election process
-- action by a subset of stockholders to designate a director, followed by a vote of
all stockholders to elect the director90 -- yet argues that the designation step must
under Section 1.2 would require per share voting. Thus, as noted above, the Management Group
argues that the “majority of shares” clause in Section 1.4(a) is relevant only when subsections (a)
through (e) in Section 1.2 do not apply.
89
8 Del. C. § 212(a).
90
The Series A Preferred Stockholders must vote their shares in favor of the director designated
by the subset of stockholders identified in the Voting Agreement. See Voting Agreement
§ 1.2(b), App. to Appellant’s Opening Br. at A540.
44
comply with Section 212(a) of the DGCL, and therefore, must be interpreted as
providing for a per share scheme.
3. Court of Chancery’s Findings
The Court of Chancery concluded, based on the plain language and structure
of the Voting Agreement, that Section 1.2(c) provides for a per capita scheme.
The Court found the Management Group’s arguments persuasive -- that
interpreting Section 1.2(c) to provide for a per share scheme would convert the
Key Holder Designee into a “Gorman Designee” provision and would “read [the
Key Holders] out of existence.”91 The Court also noted that three natural persons
were listed in Schedule B of the Voting Agreement as Key Holders without any
reference to the amount of Westech stock they held. The Court acknowledged that
the removal provision under Section 1.4 -- which the Court interpreted as removal
by a majority of the shares -- would invite “deadlock.” But the Court held that
“[o]ne could conclude that the removal provisions are part of a scheme of checks
and balances.”92
4. The Plain Language and Structure of the Voting Agreement
Section 1.2(c) provides for “two persons elected by the Key Holders, who
shall initially be John J. Gorman IV and Robert W. Halder (the ‘Key Holder
91
Westech, 2014 WL 2211612, at *16.
92
Id. The Court of Chancery also acknowledged the possible conclusion that “the agreement’s
drafters wrote Section 1.2(c) to function as a majority of shares voting provision to mirror the
agreement's removal provisions.” Id.
45
Designees’).”93 Schedule B of the Agreement lists the Key Holders as Gorman,
Halder, and Fellus.94 The plain terms of Section 1.2(c) allow these three holders to
designate two persons for election to the Board.
We agree with the Court of Chancery that reading Section 1.2(c) as
providing for a per share scheme would read the Key Holders specified in
Schedule B out of existence. Because Gorman was the majority stockholder at all
relevant times compared to the other named Key Holders, if the directors under
Section 1.2(c) could be designated by a per share vote, the directors would
automatically be the “Gorman Designees,” much as the “Pallotta Designee” was
specifically named in Section 1.2(a). By contrast, the two designees under Section
1.2(c) are named as “Key Holder Designees,” and Gorman was only one of the
three Key Holders. To give effect to the clear specification of two other Key
Holders, we read Section 1.2(c) to provide for a per capita scheme.
The Removal Provisions of Section 1.4 of the Voting Agreement Were
Intended to Match the Designation Provisions
The relevant removal provision under Section 1.4(a) provides:
(a) no director elected pursuant to Sections 1.2 or 1.3 of this
Agreement may be removed from office unless (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
93
Voting Agreement § 1.2(c), App. to Appellant’s Opening Br. at A540 (emphasis added).
94
Voting Agreement Schedule B, App. to Appellant’s Opening Br. at A619.
46
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. . . . 95
Section 1.4(c) also provides that “upon the request of any party entitled to
designate a director as provided in Section 1.2(a), 1.2(b) or 1.2(c) to remove such
director, such director shall be removed.”96
Unlike Section 1.2(b), the Key Holder Designee provision in Section 1.2(c)
does not refer to “holders of the Series A Preferred Stock.” Rather, like Section
1.2(a), it refers to persons, i.e., the three designated Key Holders. Further, the
Voting Agreement does not require that any of the Key Holders must own stock. 97
In a scenario where all the Key Holders were to sell their shares, interpreting
Section 1.4(a) as providing for a per share removal of directors designated under
Section 1.2(c) may lead to the illogical consequence of a director designated under
Section 1.2(c) who is not removable under Section 1.4. The absence of stock
ownership as a requirement to be a Key Holder suggests that persons voting per
capita, not per share, must be able to remove the director.
95
Voting Agreement § 1.4(a), App. to Appellant’s Opening Br. at A541.
96
Voting Agreement § 1.4(c), App. to Appellant’s Opening Br. at A541.
97
The parties initially included a column where the number of shares held by the Key Holder
would be specified. However, that column was removed in the final draft of the Voting
Agreement. Compare App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at
B255 with App. to Appellant’s Opening Br. at A619.
47
As a result, we believe that the only reasonable reading of the Voting
Agreement is that the designation provisions and removal provisions were intended
to be symmetrical. Thus, we read the first provision of Section 1.4(a), removal by
the “affirmative vote of the Person,” as providing the applicable removal process
for directors designated under Section 1.2(c). Only those persons eligible to
designate the Key Holder Designees can remove them. Although the parties could
have been clearer, particularly by appending “(s)” to “Person” as they did later in
the same sentence, they appear to have lifted the text from the Model Voting
Agreement without making that minor modification.
Accordingly, the parties disputed whether Gorman had the unilateral power
to remove Halder from the Board. The Court of Chancery found that he did under
Section 1.4. However, based on the foregoing, we find the language of Section
1.4(a) is clear and unambiguous, and conclude that Gorman was not entitled to
remove Halder as a Key Holder Designee from the Board.
5. Extrinsic Evidence
Despite finding that Section 1.2(c)’s plain language and the overall structure
of the Voting Agreement indicated that a per capita scheme was intended, the
Court of Chancery undertook an analysis of the extrinsic evidence. The Court
found that the evidence “was generally not supportive of [the Management
48
Group’s] triumvirate theory, although it also does not provide definitive proof that
Gorman’s account of the negotiations is correct.”98
The Court of Chancery focused on an email sent by Westech’s counsel in the
summer of 2011 (the “2011 email”). In the 2011 email, counsel discussed blanks
in the Voting Agreement and indicated, “[w]e are contemplating including Fellus,
Gorman, Pallotta (and perhaps Ira Lampert and any other significant investor from
the Pallotta group as the Key Holders). In Gorman’s group, the next biggest
investor is at $250,000.” 99 Based on its interpretation of the extrinsic evidence,
including the 2011 email, the Court noted that the “the drafters were apparently
concerned with providing representation for significant investors, but demonstrated
no particular consideration for the employee investors.”100 The Court of Chancery
further noted that the 2011 email “appears to focus on two ‘camps’ -- a Gorman
camp and a Pallotta camp” and “Halder was not mentioned.” 101 However, it
appears that the Court of Chancery misinterpreted two aspects regarding the 2011
email. First, the Court misinterpreted the use of the term “group.” Second, the
Court misinterpreted the role of the employees in the overall structure. We review
these factual findings for clear error.
98
Westech, 2014 WL 2211612, at *17.
99
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B411 (emphasis
added).
100
Westech, 2014 WL 2211612, at *13.
101
Id.
49
Misinterpretation of “Groups”
First, the Court of Chancery misinterpreted the use of the term “group,” at
least as it relates to Gorman and Fellus. The 2011 email explicitly refers to groups
of Gorman and Fellus’ family members and affiliates.102 Both Gorman and Fellus
purchased shares through a number of other family members and affiliated
accounts, and the dollar amount of these purchases supports a reading of the term
“group” in the email as referring to these affiliated purchasers. 103
The 2011 email references a “Pallotta group,” but there is no evidence,
contemporaneous or after-the-fact, to explain what the “Pallotta group” means in
that context. The 2011 email suggest that Ira Lampert (“Lampert”) may be a
member of Pallotta’s “group,” but Lampert apparently never purchased any of
Westech’s Series A Preferred Stock, at least not under his own name. 104 There was
no testimony by Pallotta or Monaco that Pallotta was affiliated with or brought in
any other investors. Instead, the parties have repeatedly described Pallotta as
102
For example, the parties also used the term “groups” in the following context: “The
definition of ‘Affiliate’ has been updated to contemplate investors who purchase through a trust,
IRA, 401K, or their immediate family to accommodate many of the actual investors in the
Gorman and Fellus groups.” App. to Appellee’s Answering Br. and Cross-Appellant’s Opening
Br. at B411 (emphasis added).
103
For example, the email mentions that the “next biggest investor” in Gorman’s group “is at
$250,000.” App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B411.
Gorman’s biggest single investments are both of $700,000 as Custodian for his Roth IRA
Rollover #691-90307 and as Custodian for Ryleigh H. Gorman’s Roth IRA Rollover #691-
90308, but his next biggest investment is of $250,000, as Custodian for Roth IRA #2 #691-
90319. See App. to Appellant’s Opening Br. at A612.
104
See App. to Appellant’s Opening Br. at A612-17.
50
investing $2 million, which matches the amount listed under his own name on the
Schedule of Purchasers attached to the Voting Agreement. 105 If Pallotta intended
to attract other investors to the deal, nothing in the record indicates that he actually
did so.
Further, Pallotta’s own deposition testimony undermines the Court of
Chancery’s interpretation that the purpose of the Voting Agreement was to protect
the interests of the two significant investors, Pallotta and Gorman. Pallotta
testified that he never contemplated serving as a Key Holder, nor was he aware if
Monaco, who negotiated the Voting Agreement on his behalf, ever contemplated
having him serve as one. 106 Pallotta’s actions also were not consistent with those
of someone who was sincerely worried about being represented on the Board: he
did not designate Monaco to fill his seat until March 2012, five months after the
Series A Preferred Stock offering closed.107
105
App. to Appellant’s Opening Br. at A612.
106
App. to Appellant’s Opening Br. at A975.
107
According to Monaco’s deposition testimony, the delay was caused by Pallotta’s fear of over-
committing Monaco, and Pallotta’s apparent belief that he did not need immediate representation
on Westech’s board because he trusted Westech’s management. According to Monaco’s
testimony, he (and thereby Pallotta) did not feel the need to control any additional board seats as
a Key Holder: “I believed [Pallotta’s] interests were adequately protected, because he had a
board seat, Rob Halder had a board seat, John Gorman, who was a friends of ours and who we
trusted implicitly, and who I always thought would look after [Pallotta’s] interest, had a board
seat. . . .” App. to Appellant’s Opening Br. at A1073.
51
Misinterpretation Regarding Employee Representation
Second, the Court of Chancery also failed to accurately assess Halder’s role
based upon the overall structure and on what little contemporaneous evidence there
is of the negotiating history. The employees -- including Halder -- and their
families together put up the same amount as Pallotta, and more than Fellus and
Gorman. This suggests that a more reasonable interpretation of the Voting
Agreement is that it was intended to provide each of the four relevant investor
groups with board representation. Pallotta was given board representation under
Section 1.2(a); Gorman, as the majority stockholder obtained meaningful board
representation under Section 1.2(b)’s per share scheme; and the employees,
represented by Halder, obtained meaningful board representation under Section
1.2(c)’s per capita scheme. Thus, Section 1.2(c) equally represented the interests
of Gorman, the majority stockholder; Fellus, the consultant and post-transaction
CEO; and Halder, the representative of the Westech employees. Such a reading is
consistent with the Voting Agreement’s stated purpose, namely, “to provide the
Investors with the right, among other rights, to designate the election of certain
members of the board of directors of the Company.” 108 Thus, the Court of
Chancery erroneously believed that certain extrinsic evidence cut against, or
simply did not speak to, the Management Group’s “triumvirate” structure.
108
Voting Agreement Recitals, App. to Appellant’s Opening Br. at A539 (emphasis added).
52
Further, the Court of Chancery erroneously concluded that Halder did not
appear in the relevant documents until late in the process. The record reflects that
Halder was intimately involved in the Voting Agreement negotiations from the
beginning. He is included on every email contained in the record sent by the
attorneys involved in drafting the Voting Agreement.109 Halder was listed as one
of the two Key Holder Designees for the Westech Board in a draft Voting
Agreement dated March 21, 2011, the earliest version of the Voting Agreement
included in the record. 110 Indeed, this provision of the Voting Agreement
remained unaltered in every version of the draft throughout the parties’
negotiations. 111 The actual list of Key Holders attached to the Voting Agreement
remained blank as late as the “Execution Version” circulated on July 21, 2011.112
But in the April 5 draft of the Co-Sale Agreement that was part of the same
set of documents for the Series A Preferred Stock transaction as the Voting
Agreement -- and consistent with Halder’s inclusion as a Key Holder Designee in
the draft version of Section 1.2(b) of the Voting Agreement itself -- Halder was
109
See, e.g., App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B42, B66,
B198, B410.
110
See, e.g., App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B48.
111
See, e.g., App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B225,
B749.
112
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B764.
53
listed as one of three Key Holders.113 Contrary to the Court of Chancery’s view of
Halder replacing Pallotta late in the game as a Key Holder, Pallotta’s name did not
replace Halder’s until June 28, in a version of the Co-Sale Agreement that clearly
indicates that it is not final.114 Even in that iteration of the documents, Halder is
still listed as one of the two Key Holder Designees in the Voting Agreement,115
and the Voting Agreement’s list of Key Holders in Schedule B is blank. 116 The
Court of Chancery’s perception of Halder as becoming a Key Holder at the last-
minute is therefore not supported by the record.
Further, Monaco’s deposition testimony endorses the Management Group’s
theory about a triumvirate of Gorman, Halder, and Fellus. 117 Monaco asserted that
the Voting Agreement:
was drafted in some respects to protect each of the individuals, to
make sure that no one of the three could become dictatorial with
respect to the other two. . . . I believe the intent, and it certainly was
my intent, [was] that no one person be allowed to control the Board of
Directors. That’s good governance.118
113
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B253, B255.
Accordingly, the final version of Schedule B to the Co-Sale Agreement listing the Key Holders
matches Schedule B of the Voting Agreement. App. to Appellant’s Opening Br. at A369, A452.
114
After Pallotta’s name, there are brackets around “others or other entities through which
investments are being made?” App. to Appellee’s Answering Br. and Cross-Appellant’s
Opening Br. at B470.
115
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B416.
116
App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B431.
117
App. to Appellant’s Opening Br. at A1010.
118
App. to Appellant’s Opening Br. at A1024.
54
Similarly, Fellus recalled during his deposition that the purpose of the Voting
Agreement was to “guarantee that John Gorman no longer had control” 119 by
creating a “partnership” with Halder and Gorman. 120
Thus, the Court of Chancery erred in certain of its factual findings, namely,
the role of Halder in the structure, and its interpretation of the 2011 email. These
errors, however, do not undermine the Court of Chancery’s ultimate conclusion --
which we affirm -- that Section 1.2(c) provides for a per capita designation of the
Key Holder Designees.
6. There is No Violation of Section 212(a)
Gorman argues on cross-appeal that a per capita interpretation of Section
1.2(c) would violate 8 Del. C. § 212(a). 121 Appellants argue that a per capita
designation under the Voting Agreement does not violate Section 212(a) because
the Voting Agreement acts as a contractual overlay pursuant to 8 Del. C. § 218(c).
Although Section 212(a) sets forth the “one share/one vote” default rule,
Section 212(a) does not prohibit stockholders from agreeing upon the manner in
which such shares will be voted. For example, Section 218(c) provides:
119
App. to Appellant’s Opening Br. at A660.
120
App. to Appellant’s Opening Br. at A696. The Court of Chancery discounted these accounts
as “after-the-fact testimony from interested individuals.” Westech, 2014 WL 2211612, at *13.
However, Monaco has no apparent stake in the trial or the company, and Fellus owes over $1
million to Westech under the Voting Agreement.
121
8 Del. C. § 212(a).
55
An agreement between 2 or more stockholders, if in writing and
signed by the parties thereto, may provide that in exercising any
voting rights, the shares held by them shall be voted as provided by
the agreement, or as the parties may agree, or as determined in
accordance with a procedure agreed upon by them. 122
The Voting Agreement established a two-step process in connection with the
nomination and election of directors. The nominees are designated in the first step
according to the Voting Agreement (which is permitted under Section 218(c)).
Then, the nominees are elected in the second step consistent with the “one
share/one vote” default rule under Section 212(a).
Gorman argues that although the election process mandated by the Voting
Agreement comports with Section 212(a), the nomination process violates Section
212(a). Yet, to adopt Gorman’s argument would require us to ignore the
distinction between the nomination process and the election process established in
the Voting Agreement. Gorman vigorously contends that Section 212(a) applies to
the nomination step of the Westech election process “because the Nomination Step
requires a stockholder vote.”123 He contends that Sections 1.2(b) and 1.2(c)
involve three or more stockholders to “elect” or “designate” the director nominee
for whom Westech stockholders must vote. 124 He argues that the process of
122
8 Del. C. § 218(c).
123
Cross-Appellant’s Reply Br. at 4.
124
Gorman points to the language in Section 1.2(c) referring to “two persons elected by the Key
Holders” to suggest that the nomination process is also an “election” of directors. See Voting
Agreement § 1.2(c), App. to Appellant’s Opening Br. at A540 (emphasis added). However, the
56
“electing” or “designating” in the nomination step requires stockholder action
either by voting or by written consent -- either of which is subject to Section
212(a).125
We disagree and conclude that the Voting Agreement does not provide for
per capita voting in connection with the designation of nominees to the Board.
Rather, it provides for a per capita scheme (a majority vote of the Key Holders) for
parenthetical in Section 1.2(c) refers to “(the ‘Key Holder Designees’).” Id. Thus, the “election”
language is better viewed as sloppy drafting.
125
Gorman cites Harrah’s Entm’t Inc. v. JCC Holding Co., 802 A.2d 294 (Del. Ch. 2002), for
the proposition that the nomination process is a critical part of the stockholders’ right to vote.
However, Harrah’s is inapposite. In that case, Harrah’s controlled three of JCC Holding’s board
seats and JCC Holding’s noteholders controlled the other four board seats on JCC Holding’s
seven-member classified initial post-reorganization board. JCC Holding’s certificate of
incorporation stated that Harrah’s and the noteholder directors each had the “right” to nominate
one director at the first annual meeting following JCC Holding’s emergence from bankruptcy
reorganization. Harrah’s nominated two directors and contended that its “right” to nominate one
director did not preclude it from nominating additional directors. The Court of Chancery agreed,
concluding that “the rule of construction in favor of franchise rights is implicated by a purported
limitation on the ability of a stockholder -- particularly one owning 49% of the common stock --
to nominate sufficient candidates to elect a new board majority tilting its way.” Id. at 310. The
Court then observed that “[b]ecause of the obvious importance of the nomination right in our
system of corporate governance, Delaware courts have been reluctant to approve measures that
impede the ability of stockholders to nominate candidates.” Id. It also commented that
“Delaware law recognizes that the ‘right of shareholders to participate in the voting process
includes the right to nominate an opposing slate.’” Id. There the Court was concerned about a
restriction on electoral rights. The issue here is whether the nomination process runs afoul of
Section 212(a)’s “one share/one vote” rule. Harrah’s does not address this issue. If the Voting
Agreement provided for “scaled voting” in connection with the election of nominees without an
authorizing provision in the certificate of incorporation, then that would present a conflict with
Section 212(a). See Providence & Worcester Co. v. Baker, 378 A.2d 121, 123 (Del. 1977)
(“Under [§] 212(a), voting rights of stockholders may be varied from the ‘one share-one vote’
standard by the certificate of incorporation.”). Scaled voting refers to a modification of the “one
share/one vote” rule. For example, in Baker, the certificate of incorporation provided for one
vote per share for the first fifty shares, but only one additional vote for every twenty shares
thereafter. See Baker v. Providence & Worcester Co., 364 A.2d 838, 840 (Del. Ch. 1976). But
the Voting Agreement does not change how votes are counted in elections. Instead, it binds the
signatories to cast the votes they possess in accordance with its terms.
57
the designation of two nominees under Section 1.2(c).126 These nominees are then
elected to the Board by a vote of the stockholders consistent with the “one
share/one vote” default rule and Westech’s Restated Certificate of Incorporation.
Accordingly, we affirm the Court of Chancery’s conclusion that the Voting
Agreement does not violate Section 212(a) of the DGCL.
D. Other Conclusions
Finally, we conclude that after resigning from the Board, Gorman did not
have the authority to remove Dura as an independent director, because Section
1.4(a)’s removal provision corresponds to the designation provision in Section
1.2(e), requiring agreement and joint action by the Series A Designees and the Key
Holder Designees, which did not occur. Further, because of our analysis of
Section 1.2(b), we affirm the Court of Chancery’s conclusions that Ford was
validly elected at the 2013 Annual Meeting as a Series A Designee. Thus, we hold
that the composition of the Westech Board is as follows:
§1.2(a) §1.2(b) §1.2(c) §1.2(c) §1.2(d) §1.2(e) §1.2(e)
Pallotta Series A Key 1 Key 2 CEO Ind. 1 Ind. 2
Gorman Ford Halder [Vacant] Salamone Dura [Vacant]
III. CONCLUSION
Based upon the foregoing, the Judgment of the Court of Chancery is
AFFIRMED in part and REVERSED in part.
126
See, e.g., Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244, at *6 (Del. Ch. Apr. 14, 2008)
(“[N]ominating candidates and voting for preferred candidates are separate steps.”).
58