Supreme Court Partially Reverses Chancery Decision Interpreting Common Voting Agreement Provisions

By Holly Vance and Porter Sesnon

In Salamone, Dura, and Halder v. Gorman, IV, the Supreme Court of Delaware (the “Court”) partially affirmed and partially reversed a Chancery Court decision determining the composition of the board of directors (the “Board”) of Westech Capital Corporation (“Westech”).  The dispute centered on the interpretation of a Voting Agreement entered into by Westech and the purchasers of Westech’s Series A Preferred Stock in 2011.

The Voting Agreement provisions at issue were Sections 1.2(b) and 1.2(c), each of which set forth the process for designating certain individuals to serve on the Board.  Section 1.2(b) provides for one director to be designated “by the majority of the holders of the Series A Preferred Stock . . . .”  Section 1.2(c) provides two individuals to be designated “by the Key Holders . . . .”  The dispute revolved around the removal by John J. Gorman, IV (“Gorman”), Westech’s majority stockholder, of a current director nominated pursuant to Section 1.2(c) and the election of two new directors, one pursuant to Section 1.2(b) and another pursuant to Section 1.2(c).

Gorman contended that both Sections 1.2(b) and 1.2(c) provided for a per share method to designate and remove directors, and therefore all of his actions were proper as the majority stockholder.  In contrast, a group of employees, former employees and current directors of Westech (the “Management Group”), contended that Sections 1.2(b) and 1.2(c) provided for a per capita method to designate and remove directors, and therefore none of Gorman’s actions were proper.

The Court first examined Section 1.2(b).  The Court, on de novo review, upheld the Chancery Court’s decision that Section 1.2(b) provided a per share scheme.  The Court first determined that the section was ambiguous.  Next, after examining the plain meaning and the extrinsic evidence to try and clarify the ambiguity, it determined that the extrinsic evidence was not conclusive as to either Gorman’s or the Management Group’s position.  Since there was no conclusive evidence either way, the Court then applied the Delaware presumption against disenfranchising a majority stockholder’s ability to elect directors unless there is a clear intent to do so via contract.  And, since there was no such clear intent, the Court held that Section 1.2(b) provided a per share scheme and upheld Gorman’s designation under this section.

Next, the Court looked at Section 1.2(c).  The Court also agreed with the Chancery Court and affirmed that Section 1.2(c) provided a per capita scheme for two main reasons.  First, a per capita scheme was intended because applying a per share scheme would convert Section 1.2(c) into the Gorman designees, as he was the majority stockholder of Westech, and would read the Key Holders out of existence in the Voting Agreement.  Second, Schedule B to the Voting Agreement lists three individuals as Key Holders, one of whom was not even a current stockholder.  Therefore, the Court held that “[t]he plain terms of Section 1.2(c) allow these three holders to designate two persons for election to the Board.”

Finally, the Court reversed the Chancery Court’s decision upholding Gorman’s removal of the director elected pursuant to Section 1.2(c).  In reversing the Chancery Court, the Court held that the removal provisions contained in Section 1.4 of the Voting Agreement were intended to be symmetrical with the designation provisions in Section 1.2, so that “[o]nly those persons eligible to designate the [Section 1.2(c) directors] can remove him. ”  Since Section 1.2(c) contemplates a per capita scheme, Gorman, as the majority stockholder, cannot remove a director, only a majority of the Key Holders can remove a director designated under this Section.

Supr Court on Per Capita

Copyright © 2024, K&L Gates LLP. All Rights Reserved.