Chancery Court Holds Bylaw Permitting Stockholder Removal of Officers Invalid in Continuing Fight over the Composition of the Board of Directors of Westech Capital Corp.

By Annette Becker and Porter Sesnon

In Gorman, IV v. Salamone, Halder and Westech Capital Corp. (“Westech”), the Delaware Chancery Court, in ruling on a motion to dismiss, issued another status quo order to temporarily fix the composition of the board of Westech while the ongoing dispute over control of Westech played out.

Plaintiff John Gorman (“Gorman”) a Westech stockholder and board member brought the Section 225 action based on two developments while a prior Section 225 temporarily designating three directors and keeping the CEO was on appeal before the Delaware Supreme Court.

First, on July 2, 2014 Robert Halder (“Halder”) purported to tender his resignation from “all positions at Westech” and stated in an affidavit that his only relationship with Westech was as a minority stockholder. Second, Gorman purported to act by a stockholder written consent to remove Gary Salamone (“Salamone”) as CEO and a board member following his amendment of Westech’s bylaws to permit stockholders to remove any officer and fill any vacancy created by such removal (the “Amended Bylaw”).  Following these actions and the Delaware Supreme Court’s decision in December 2014, which appointed Halder to the board, the board met in February 2014 and made two purported motions, each of which was proposed by Salamone and seconded by Halder and Michael Dura (“Dura”), while Gorman and Thomas Ford (“Ford”) each voted against both motions. Defendants Halder and Salamone contend that they continue to be board members and with respect to Salamone an officer of Westech.

The Chancery Court first determined that the Amended Bylaw was not valid and dismissed the first claim because it did more than “simply dictate how officers are appointed and removed,” and encroached on the powers solely vested in the board to manage the substantive business decisions of the company, which includes the appointment and removal of officers to manage the day-to-day operations.  Therefore, Gorman’s actions pursuant to the Amended Bylaw—removing Salamone as CEO and as a board member and electing a new board member—were of no effect.

The Chancery Court refused to dismiss Gorman’s second claim that Halder had in fact resigned his position as a board member and his later actions as a board member voting in favor of the motions in February 2014 were therefore invalid.  In Halder’s resignation letter to Westech, he did not carve out an exception for his purported board seat, the determination of which was then currently on appeal before the Delaware Supreme Court.  He further stated in an affidavit that his only remaining connection with Westech was as a 2.7% minority stockholder. Therefore the Chancery Court reasoned that it was “reasonably conceivable” that Halder had in fact resigned as a board member and therefore the actions taken by him following the Delaware Supreme Court decision at the February 2014 board meeting were of no force and effect, resulting in invalidly approved motions.

To permit Westech to act in the intervening period, the Chancery Court entered a status quo order fixing the board at four members: Gorman, Salamone, Dura and Ford. Gorman, requested a three-person board with himself, Dura and Ford serving, while Salamone argued for a five-person board consisting of the board members requested by Gorman plus Halder. The Chancery Court held there was no plausible argument Salamone should not be serving as a board member, but agreed that Halder should not be included because the Delaware Supreme Court was unaware of his purported resignation and questions remained as to the interplay and timing of those respective events. To preserve the functional status quo until the control issue is resolved, the Chancery Court settled on a four-person board, which likely will result in a deadlock with Salamone and Michael Dura on one side and Gorman and Thomas Ford on the other.

The Chancery Court also held that Gorman’s motion for sanctions against Salamone for payment of amounts to himself and other board members without proper board approval was premature pending resolution of the factual matters presented by Halder’s purported resignation and the board’s subsequent actions in February 2014.

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