In re: Westech Capital Corp.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE: WESTECH CAPITAL CORP. : Consol. C.A. No. 8845-VCN
MEMORANDUM OPINION
Date Submitted: January 24, 2014
Date Decided: May 29, 2014
Neil B. Glassman, Esquire, Stephen B. Brauerman, Esquire, Vanessa R.
Tiradentes, Esquire, and Sara E. Bussiere, Esquire of Bayard, P.A., Wilmington,
Delaware; Michael J.W. Rennock, Esquire of Steptoe & Johnson LLP, New York,
New York; and Daniel H. Byrne, Esquire and Dale Roberts, Esquire of Fritz,
Byrne, Head & Harrison, PLLC, Austin, Texas, Attorneys for Plaintiff John J.
Gorman, IV.
Michael J. Maimone, Esquire, Gregory E. Stuhlman, Esquire, and E. Chaney Hall,
Esquire of Greenberg Traurig, LLP, Wilmington, Delaware, Attorneys for
Defendants Gary Salamone, Mike Dura, and Robert W. Halder.
NOBLE, Vice Chancellor
I. INTRODUCTION
This post-trial Section 225 opinion resolves a dispute about the meaning of
two subsections of a voting agreement which determine how its signatories
designate directors. Either subsection at issue could be interpreted as a majority of
shares or per capita voting provision. Perhaps unsurprisingly, the difference in
interpretation could grant control of the board to either the plaintiff or the
incumbent defendants.1
The Court denied the parties’ cross motions for judgment on the pleadings
because the two provisions were ambiguous.2 The parties engaged in additional
discovery to resolve the ambiguity and provided extrinsic evidence through a
stipulated record. After considering the evidence and the arguments offered by the
parties, the Court concludes that one ambiguous provision provides for majority of
shares voting and the other, which uses the term “elect” without defining it,
provides for per capita voting.
The Court was also asked to evaluate the validity of several different acts
which sought to restructure the board’s composition. After considering those acts,
1
Both sides filed complaints on the same day and requested that the Court determine the proper
composition of the board. Defendants filed their complaint under C.A. No. VCN-8844. The
Court consolidated the two actions under plaintiff’s action, C.A. No. VCN-8845, which caused
the incumbent board members to appear as defendants.
2
Pretrial Teleconference and Rulings of the Court on Cross Motions for Judgment on the
Pleadings, C.A. No. 8845-VCN (Del. Ch. Dec. 12, 2013).
1
the Court finds that the company’s current directors are Salamone, Gorman, Ford,
and Dura (all defined below).
II. BACKGROUND
Plaintiff John J. Gorman, IV (“Gorman”) and six others founded Nominal
Defendant Westech Capital Corp. (“Westech” or the “Company”), a Delaware
corporation, in 1994.3 Westech, which went public in 2001, wholly owns Tejas
Securities, Inc. (“Tejas”), its primary operating subsidiary and a broker dealer
regulated under the Exchange Act of 1934 and by the Financial Industry
Regulatory Authority (“FINRA”).4
Before the execution of the disputed voting agreement, Gorman owned a
majority of Westech’s common stock and purportedly controlled the board, which
consisted of Gorman; Charles Mayer, his uncle; and Robert W. Halder (“Halder”).5
Gorman’s father-in-law purportedly also served on the board at an earlier time, but
later resigned due to illness. On September 23, 2011, the Company issued Series
A Preferred stock to investors for $25,000 per share.6 Gorman’s friend James J.
Pallotta (“Pallotta”) invested $2 million in the Company to acquire eighty shares of
Series A Preferred (the “Pallotta Shares”).7 Gorman invested $1.8 million in Series
3
Pre-trial Stipulation (“Stip.”) ¶ II.A.1.
4
Id. ¶¶ II.A.4, .6-.7.
5
Defs.’ Pretrial Br. at 5.
6
Stip. ¶ II.B.23.
7
Id. ¶ II.A.20.
2
A Preferred and convertible notes.8 The family members of former Westech CEO,
and nonparty, James Fellus (“Fellus”) purchased twenty-four shares of Series A
Preferred.9 Fellus also acquired forty shares in exchange for a promissory note
upon which he did not make payments and on which he defaulted.10 Halder,
directly and indirectly, purchased nine shares of Series A Preferred and convertible
notes.11 A number of other investors purchased smaller holdings, although these
investors are not generally discussed in the parties’ arguments.12 The parties
dispute the impetus for this transaction, which is described in greater detail below.
When issuing the Series A Preferred, the Company and its preferred
investors executed a voting agreement (the “Voting Agreement”).13 The Voting
Agreement contained director designation provisions for a seven-member board
which assured certain significant investors that they would have board
representation. From the time when the Voting Agreement was executed until
Gorman initiated his attempts to regain control of the Company, its board of
directors had five of seven seats filled and was composed of directors Gorman,
Mike Dura (“Dura”), A. Peter Monaco (“Monaco”), Gary Salamone (“Salamone”),
8
JX 4, Schedule A & A-1 (listing sixty-eight shares owned across various Gorman affiliates and
four shares of Series A convertible notes).
9
Stip. ¶ II.B.18.
10
Id. ¶ II.B.19. Fellus’s default is the subject of a lawsuit filed by the Company against him in a
federal district court in Texas.
11
Id. ¶ II.B.16; JX 4, Schedule A & A-1.
12
See JX 4, Schedule A & A-1 (the next largest investor appears to have purchased twenty
shares and it is not mentioned by the parties in their briefing).
13
JX 4 (the Voting Agreement).
3
and Halder.14 Gorman and Halder served pursuant to Section 1.2(c) of the Voting
Agreement as “Key Holder Designees.” Monaco served pursuant to
Section 1.2(a), as the “Pallotta Designee.” Salamone was and is the CEO, and is
the holder of the only board seat which has not been contested at some point during
this action; he holds that seat pursuant to Section 1.2(d), as the “CEO Director.”
Dura served pursuant to Section 1.2(e), as one of the two industry directors (the
“Industry Directors”). Dura, Halder, and Salamone (the “Incumbents”) are the
directors of the Company pursuant to this Court’s status quo order.15
After the Series A Preferred round of financing, Westech had two classes of
stock: 4,031,722 shares of common stock and 338 shares of Series A Preferred
stock. Westech’s governing documents grant the Series A Preferred stock the right
to vote together with the common on an as-converted basis, such that each share of
Series A Preferred receives 25,000 votes.16 Westech’s certificate of incorporation
provides that each share of common stock is entitled to one vote per share.17
In late summer 2013, Gorman bought out Pallotta’s interest. Thus, as of the
time of this action, Gorman owned approximately 2.4 million shares of common
(approximately 59.5% of the common) and 173 shares of the Series A Preferred
14
See Stip. ¶¶ II.C.28-.29. No particularly helpful evidence was submitted concerning the
parties’ course of conduct in relation to the election process, presumably because the
composition of the board did not change until the events leading to this action.
15
Order Maintaining Status Quo, C.A. No. 8845-VCN (Del. Ch. Sept. 4, 2013). The Incumbents
and Westech are sometimes referred to collectively as the Defendants.
16
Stip. ¶¶ II.A.8-.9; JX 20 § 5.1.
17
JX 3, Ex. A §§ 4.1-4.2.
4
(approximately 51.2% of the preferred).18 Halder’s nine shares of Series A
Preferred represent approximately 2.66% of the preferred.19 Fellus’s forty shares
of Series A Preferred represent approximately 11.8% of the preferred, and his
family’s twenty-four shares of preferred stock represent approximately 7.1% of the
outstanding preferred.20 Neither Salamone nor Dura owned any Westech stock
during the relevant time period.21
Thus, in the absence of the Voting Agreement, Gorman’s majority
ownership of the Company, even if no other shareholders supported him, would
decide the outcome of a board election. As described below, both Gorman and the
Incumbents have nominated their preferred slates of directors which were voted
upon at a recent annual meeting. Because Gorman’s voting power is bound by the
director designation provisions in the Voting Agreement, the interpretation of the
contested provisions of that agreement will determine whether Gorman’s nominees
or the Incumbent’s nominees were properly elected.
A. The Voting Agreement
Although the parties to the 2011 Series A Preferred round executed other
agreements,22 the most significant document for the purposes of this control
18
Stip. ¶¶ II.A.2-.3.
19
Id. ¶ II.A.16.
20
Id. ¶¶ II.A.17-.19.
21
Id. ¶¶ II.A.11-.14.
22
Certain ancillary provisions within the Voting Agreement and other related documents are
considered in the analysis that follows.
5
dispute is the Voting Agreement. The provisions designating the board members
read:
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 . . . 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 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”23);
(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
23
Throughout the opinion, the “Series A Designees” shall indicate the collective of the two
directors, the Pallotta Designee and the second director designated under Section 1.2(b). The
term the “Series A Designee” (without an “s”) shall indicate the single director designated under
Section 1.2(b) and shall not include the Pallotta Designee.
6
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 . . . .24
The introductory paragraph to Section 1.2 thus binds each Voting Agreement
signatory to vote in accordance with the more specific designation provisions of
Sections 1.2(a)-(e). For convenience, the Court, at times, refers to Sections 1.2(a)-
(e) as voting mechanisms; however, the vote under those sections is not the formal
election vote of all of the Company’s shareholders.25 These sections define a
specific process for designating the directors whom the Series A investors have
committed to elect by the introductory paragraph to Section 1.2. Similarly, under
the Voting Agreement’s removal or amendment provisions, Series A Preferred
holders vote their respective shares to determine a course of action which then
binds the agreement’s signatories.
The “Key Holders” are listed in Schedule B to the Voting Agreement as
Gorman, Halder, and Fellus.26 The Voting Agreement does not define the
procedures by which Key Holders are added or removed, and the parties do not
24
Voting Agreement § 1.2 (emphasis in original).
25
Thus, common shareholders who are not signatories to the Voting Agreement could vote their
shares in a director election in any manner they please, even when the Voting Agreement’s
signatories will be bound by the designation provisions of Section 1.2.
26
Voting Agreement, Schedule B.
7
argue that such provisions (or their absence) should be considered when
interpreting the agreement.27
The Voting Agreement also provides for removal:
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 . . . 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.28
The Voting Agreement also contemplates the termination, amendment, or
waiver of the agreement in whole or in part under certain circumstances:
7.8 Consent Required to Amend, Terminate or Waive. This
Agreement may be amended or terminated and the observance of any
term hereof may be waived . . . only by a written instrument executed
27
The Adoption Agreement attached to the Voting Agreement contemplates that Key Holders
may transfer shares to transferees, such that the transferee will thereafter be considered a Key
Holder. Voting Agreement, Ex. A § 1.1. The Court was not directed to and was otherwise
unable to locate removal provisions discussing Key Holders in the Voting Agreement or its
related documents.
28
Voting Agreement § 1.4.
8
by (a) the Company; (b) the holders of a majority of the Shares held
by the Key Holders and (c) the holders of two-thirds of the shares of
Series A Preferred Stock issued as of the Initial Closing . . . held by
the Investors (voting as a single class and on an as-converted basis).
Notwithstanding the foregoing:
(a) this Agreement may not be amended or terminated and
the observance of any term of this Agreement may not be
waived with respect to any Investor or Key Holder without the
written consent of such Investor or Key Holder unless such
amendment, termination or waiver applies to all Investors or
Key Holders, as the case may be, in the same fashion;
. . .; and
(e) Section 1.2(a) of this Agreement shall not be amended or
waived without the written consent of Pallotta; Section 1.2(b)
of this Agreement shall not be amended or waived without the
written consent of the holders of a majority of shares of Series
A Preferred Stock; and Section 1.2(c) of this Agreement shall
not be amended or waived without the written consent of the
holders of a majority of Shares held by the Key Holders.29
Both of these provisions (Sections 1.4 and 7.8) contain more precisely articulated
majority voting standards which read: “holders of more than fifty percent (50%) of
the then outstanding Shares” or “the holders of a majority [or of two-thirds] of the
Shares . . . .”
B. The Motivation for the Series A Preferred Financing
The parties offer competing explanations for the Series A Preferred round of
financing. Defendants claim that Gorman’s acts drove the Company to seek
29
Id. § 7.8.
9
additional capital to survive.30 Gorman contends that the Series A Preferred round
was pursued to facilitate growth and to permit the acquisition of other broker
dealers. The parties argue that the motivation for the round is helpful in
understanding the intent of the Voting Agreement.
Gorman asserts that he and Pallotta were the two primary negotiators in
determining the board structure under the Voting Agreement because they were the
major preferred investors, although he appears to acknowledge that other
signatories to the agreement had some involvement in the negotiations. Gorman
contends that he approached Pallotta to “lead” the investment.31 In Pallotta’s
words, he invested because he was “[t]rying to help [Gorman] out.”32 According
to Gorman, the board structure was meant to satisfy his major co-investor:
Mr. Pallotta’s requirements were that if I was going to own less than
50 percent of the company that he wanted to make certain between the
two of us that we owned more than 50 percent and that he would have
his representative have a seat. And that between me and him we
would own a majority of the fully diluted shares.33
Gorman further contends that the Key Holder Designee provision was structured to
provide additional representation and control to other investors who made
significant commitments to the financing round. He argues that the history of
30
The parties have made a variety of colorful accusations about one another’s behavior, none of
which is particularly relevant to determining the meaning of two imprecisely worded subsections
of a voting agreement. These accusations, and the parties resort to them, are perhaps most useful
in understanding that the parties have a “history” with one another and share mutual animosity.
31
Pl.’s Pre-Trial Br. at 7.
32
Pallotta Dep. 9.
33
Gorman Dep. 87-88.
10
negotiations, as evidenced through different drafts of the Voting Agreement and
certain emails, supports his description of the negotiators’ intent.
Defendants argue that the Voting Agreement was specifically designed to
limit Gorman’s control over the Company and grant board representation to four
investor contingents. The board designation provisions were designed so that the
employee investors would have a representative (Halder), the CEO would
represent management (Fellus and later Salamone), and Gorman and Pallotta
would also have representation as major investors. Pallotta’s designated director,
Monaco, who negotiated on Pallotta’s behalf, indicated that he would have advised
against an investment if it were possible for Gorman to purchase additional shares
to control the Westech board.34 Other witnesses on behalf of the Incumbents stated
that they also would not have invested had they understood that Gorman could gain
control over the Company by becoming a majority shareholder.35
Defendants repeatedly refer to a “triumvirate” of parties who represented
Westech with the intent to function as a partnership. According to Defendants,
Section 1.2(c), the Key Holders provision, created a “triumvirate” of investors and
ensured that Halder, Fellus, and Gorman had to compromise on director designees
which provided all of Westech’s constituents some representation. They also
34
Monaco Dep. 56-57.
35
Clark Aff. ¶ 13; Halder Aff. ¶ 15; Zimmerman Aff. ¶ 15.
11
contend that the majority of shares voting provisions found elsewhere in the
agreement, for example in the removal and transfer provisions, were set up to
function as a set of checks and balances and were consciously designed to create
tension with the per capita voting established in Sections 1.2(b) and (c). They
argue that the possibility of deadlock would encourage compromise.
C. The History of Negotiations
The negotiating history of the provisions at issue is not particularly
illuminating. The Voting Agreement appears to be based on a form agreement
which may be found online, although its drafters made alterations to Section 1.2,
such that the form agreement’s phraseology of “holders of a majority of the shares”
was revised.36 Thereafter, only minor alterations were made to Sections 1.2(b) and
(c) throughout different drafts of the documents and those changes are
immaterial.37 One email is somewhat helpful in explaining the Key Holders
language in Section 1.2(c). That email, authored by Westech’s counsel, indicates
36
An August 2013 draft of this form agreement was hand delivered to the Court at trial. This
draft version no longer appears on the New Venture Capital Association’s website, although the
director designation provisions of the updated model voting agreement contained therein appear
to be identical to the version provided by counsel. The newer draft of the Voting Agreement
may be downloaded from http://www.nvca.org/index.php?option=com_content&view=
article&id=108&Itemid=136. The parties do not argue that the drafters’ decision to alter these
provisions supported their interpretation of Sections 1.2(b) and (c). However, this argument is
closely related to the arguments that were made concerning the drafters’ decision to write
Sections 1.2(b) and (c) using phraseology different from the majority of shares provisions found
elsewhere in the agreement.
37
See JX 4; 6; 9-10 (demonstrating that language of Sections 1.2(b) and (c) were virtually
unchanged over three draft versions of the agreement and the execution version spanning the
time period of March 2011 to September 2011).
12
that the negotiators understood the Key Holders to be “significant” investors and
Pallotta, and not Halder, was initially listed as a Key Holder.38 Furthermore, the
email seems to contemplate two “groups”—the Pallotta group and the Gorman
group. The parties provide no contemporaneous evidence explaining why Halder
was added to the list of Key Holders or why Pallotta was removed.39
Defendants argue that the Company was severely lacking in capital at this
time and the investors would not have agreed to invest if Gorman could regain
control of the board in the future. Though they present some evidence that the
Company’s financial position had declined, they offer no contemporaneous
evidence indicating that the parties negotiating the agreements were concerned
with preventing Gorman from regaining control of the Company or that the
preferred investors participated based on this understanding.
D. Gorman’s Attempts to Gain Control of the Board
Gorman resigned as a Key Holder Designee director on August 7, 2013.
Defendants assert that he resigned because he was unhappy he could no longer use
the Company as a personal piggy-bank due to his loss of control under the Voting
38
JX 10 (“We 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.”).
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.
13
Agreement. Gorman claims he resigned because of the Company’s bloated
operations and Halder’s and Salamone’s failure to maximize stockholder value.
Soon thereafter, Gorman engaged in a campaign to regain control of the
Company. He first acted pursuant to a letter sent to Westech on August 14, 2013
and attempted to remove Halder and replace him with Greg Woodby (“Woodby”)
as a Key Holder Designee.40 He also attempted to elect Barry Williamson
(“Williamson”) to fill the vacant second Key Holder Designee seat.
On August 21, 2013, Gorman, a trust controlled by Gorman’s wife, and
Pallotta entered into a Stock Purchase Agreement by which Gorman obtained
ownership and control of the Pallotta Shares.41 Contemporaneously with this
transaction, Monaco, the Pallotta Designee, resigned from the Company’s board.42
Pallotta issued Gorman a proxy on September 5, 2013 (the “Pallotta Proxy”)
pending the Company’s recognition of the sale of the Pallotta Shares.43
On that same date, shareholders Gorman, Arch Aplin (“Aplin”), Williamson,
Woodby, and T.J. Ford (“Ford”), by written consent (the “First Consent”), again
sought to designate and elect Gorman to the Pallotta Designee board seat.44 Those
same shareholders also attempted to designate and elect Barry A. Sanditen
40
JX 24.
41
JX 5.
42
Stip. ¶ II.C.33.
43
Id. ¶¶ II.C.32.
44
JX 27.
14
(“Sanditen”) to the Series A Designee board seat by written consent (the “Second
Consent”).45
On August 23, 2013, Gorman, Sanditen, Woodby, and Williamson, as the
purported majority of the board, directed Westech’s secretary, Craig Biddle
(“Biddle”), to call a meeting of the board to be held on August 26, 2013 at
Westech’s offices. Gorman alleges that Salamone directed the Westech offices to
be locked and the disputed directors appointed by Gorman to be denied access to
the premises. As a result, the purported directors Gorman had recently nominated
(which excluded Salamone and Dura) conducted the meeting at a nearby location
after providing notice to Salamone and Dura. They then voted to remove Dura and
elect Daniel Olsen (“Olsen”) and Ford to serve as Industry Directors.46
On September 17, 2013, the Company held its annual meeting (the “Annual
Meeting”). Gorman and the Incumbents nominated opposing slates. Gorman
nominated Salamone as CEO Director, Ford and Gorman as the Series A
Designees, Woodby and Williams as Key Holder Designees, and Olsen and
Sanditen as the Industry Directors. Defendants nominated Salamone, Halder,
Dura, Michael Wolf, and Mark McMurray. At the Annual Meeting, the majority
of the stockholders voted to elect Gorman’s slate. The Preliminary Tabulation
Report prepared by an independent inspector of elections, found that Gorman’s
45
JX 26.
46
Stip. ¶ II.C.42.
15
slate received 5,969,288 votes in its favor and that management’s slate received
3,375,000 votes in its favor.47 A review and challenge session conducted by
Gorman and Defendants, resulted in the inspector’s reaffirmation of the
Preliminary Tabulation Report.48 The question thus remains whether the election
vote complied with the terms of the Voting Agreement or whether the preferred
investors voted their shares in violation of it.
III. CONTENTIONS
Gorman argues that the provisions at issue are unambiguous majority of
shares voting provisions which permit him to vote his majority stock to designate
directors to the Series A Designee and Key Holder Designee seats. If the
provisions are ambiguous, however, he argues that the contemporaneous evidence
from the negotiations shows that the Voting Agreement’s negotiators were
unconcerned with per capita voting and made no attempt to prevent Gorman from
regaining control of the Company if he purchased shares from other investors.
Defendants argue that the plain language of the Voting Agreement favors a
per capita voting scheme, in which each holder of shares or each Key Holder is
entitled to a single vote when designating directors regardless of how many shares
he or she owns. They argue that if ambiguity exists, the intent of the agreement is
evidenced by the tension created by the interplay of the majority of shares
47
Id. ¶ II.D.49.
48
Id. II.D.50-.51.
16
designation mechanisms of the removal and amendment provisions and the per
capita designation provisions in Sections 1.2(b) and (c). They argue that the
negotiators designed a triumvirate scheme, whereby Halder represented the
employee investors, Fellus represented management as the CEO, and Gorman
represented his own interests as a significant investor. The various constituents of
this triumvirate needed to agree with one another to designate their nominees, and
the agreement favored deadlock to prevent one group from acting opportunistically
and to limit Gorman’s control.
The parties also generally contend that their respective slate of nominees
was validly elected at the Annual Meeting. The Court resolves these general
contentions at the end of its analysis.
IV. ANALYSIS49
The parties have requested that the Court resolve the meaning of two
director designation provisions of the Voting Agreement, Sections 1.2(b) and (c).50
49
The litigants include several arguments from their earlier cross motions for judgment on the
pleadings. The Court responds to those arguments within this analysis, but also draws forward
some arguments from those earlier motions which were not as heavily discussed at trial where it
would be helpful to explain how the Court concluded the provisions at issue were ambiguous.
50
Although the parties ask that the Court declare their respective slate as validly elected, the bulk
of the parties’ argument and briefing focused on only Sections 1.2(b) and (c) of the agreement.
They did not seek to establish the meaning of Section 1.2(e), the Industry Directors provision, or
make nuanced arguments based on Section 1.4, the director removal provision. Thus, most of
the analysis which follows is primarily concerned with resolving the parties’ arguments
addressing Sections 1.2(b) and (c). Nonetheless, the Court responds to the parties’ general
request to determine the validity of the parties’ acts to elect their preferred directors after
resolving the meaning of Sections 1.2(b) and (c).
17
The Court determined that both provisions were ambiguous when considering the
parties’ cross-motions for judgment on the pleadings. After trial on a stipulated
record and with the benefit of engaging in fact-finding, it concludes that the Voting
Agreement’s signatories did not make clear in Section 1.2(b) their intent to
designate by per capita vote and thus our law’s preference for majority of shares
voting applies. However, Section 1.2(c), because it appears to be a provision
negotiated to empower certain individuals, without reference to their relative status
as shareholders, is more likely than not a per capita designation provision.
The votes cast at the Annual Meeting which elected Gorman’s candidate to
the Series A Designee seat were therefore in accordance with the Voting
Agreement and that director was duly elected to the board. However, the record
does not demonstrate that the directors on either slate were designated in
accordance with Section 1.2(c) and thus neither set of these directors was validly
elected.
A. The Legal Standards
Matters of contractual interpretation may often be resolved before trial, as a
matter of law. When a contract’s language is clear and unambiguous, the Court
will give the language its ordinary and usual meaning.51 The Court will consider
the intent of the parties to an agreement, looking at the contract as a whole, to
51
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006).
18
divine that intent. It also attempts to reconcile all of the contract’s provisions when
read as a whole, giving effect to each and every term to avoid rendering any
particular term illusory or meaningless.52 When a contract is susceptible to more
than one reasonable interpretation, as is the case here, the Court may consult
extrinsic evidence.53 The Court may consider the history of negotiations, earlier
drafts of the contract, trade custom, or course of performance. The Court may also
consider certain presumptions underlying our law when considering ambiguous
provisions.
The Court reviews the parties’ arguments concerning Section 1.2(b) and then
Section 1.2(c). To do so, it considers the language found within the agreement, the
overall structure and intent of the agreement, the extrinsic evidence forwarded by
the parties, and certain default presumptions and gap-filling provisions of
Delaware law.
B. The Meaning of Section 1.2(b)
The Court must first determine the meaning of the language found in
Section 1.2(b) of the Voting Agreement, which reads as follows:
(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”);
52
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *7 (Del. Ch. Dec. 22,
2010).
53
Jana Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 339 (Del. Ch. 2008).
19
Interestingly, despite the Court’s earlier ruling that the provision is ambiguous,
both Gorman and the Incumbents argue that the provision is unambiguous. They
do, however, also make additional arguments based on the limited extrinsic
evidence available.
The Court first considers Gorman’s most compelling arguments which
explain that Section 1.2(b) supports a majority of shares voting mechanism based
on the intent and overall scheme of the agreement. It next considers the extrinsic
evidence and concludes that it slightly favors Gorman and undermines Defendants’
theory. It then considers a default presumption surrounding majority of shares and
per capita voting. Finally, the Court explains why it rejects Defendants’ theory
that Section 1.2(b) embodies a per capita voting mechanism.
1. The Language of Section 1.2(b) and the Overall Structure of the
Voting Agreement
Gorman contends that the signatories to the Voting Agreement intended for
Section 1.2(b), like the other voting mechanisms in the agreement, to provide for
majority of shares voting. Specifically, he argues that Delaware courts or statutory
enactments have used the phrases “majority of the holders” and “holders of the
majority” interchangeably. He also argues that because Section 1.2(b) is at odds
with all other voting provisions within the agreement, the provision was intended
to mean the same thing. Because the provision can be bypassed by transferring the
Series A Preferred into a multitude of subsidiaries or affiliates to manufacture a
20
majority, he contends that it fails to function effectively as a per capita designation
mechanism and demonstrates that the agreement’s negotiators did not write a per
capita provision. To evaluate this argument, the Court considers the transfer
restrictions of the Voting Agreement and its related agreements to determine
whether they were intended to reinforce a per capita vote and prevent Gorman’s
domination of the board as Defendants assert.54
Gorman argues that the principle of contract interpretation which requires a
contract to be interpreted as a whole and given reasonable effect compels the Court
to reject Defendants’ interpretation which creates an unreasonable result. Stated
more strongly, “Delaware courts will not allow sloppy grammatical arrangement of
the clauses or mistakes in punctuation to vitiate the manifest intent of the parties as
gathered from the language of the contract.”55
Gorman first directs the Court to an array of examples of Delaware courts
using the phrase “majority of the holders” to describe a majority vote.56 These
54
Gorman also argues that Defendants’ per capita voting theory would be invalid as a matter of
law because the Delaware General Corporation Law (“DGCL”) requires all per capita voting
provisions to be set forth in the corporation’s charter. The Court considers this argument when
evaluating Section 1.2(c).
55
MicroStrategy Inc. v. Acacia Research Corp., 2010 WL 5550455, at *7 n.62 (Del. Ch.
Dec. 30, 2010).
56
See, e.g., Klaassen v. Allegro Dev. Corp., 2013 WL 5739680, at *25 (Del. Ch. Oct. 11, 2013)
(“The first exception permits a party to the Stockholders’ Agreement to act to remove a director
without cause if ‘such removal is directed or approved by the affirmative vote of the Person, or
of the holders of a majority of the shares of Capital Stock, entitled under Section 9.2 to designate
that director.’ Thus if a majority of the holders of the Series A Preferred directed or approved the
removal of one or more Series A Directors, or if the holder of a majority of the common stock
directed or approved the removal of the Common Director, then any party to the Stockholders’
21
cases and the colloquial or imprecise articulations of a majority voting provision
found within them do not compel a conclusion that Gorman’s interpretation of
Section 1.2(b) is the correct one. However, they permit the Court to determine that
the language of Section 1.2(b) could encapsulate majority of shares voting despite
its literal interpretation. This less precise use of language could be likened to the
commonly used phrase “shareholder vote.” Although it could be construed as a
measure of how each shareholder voted, it is usually understood to mean a
tabulation of how shares were voted and not as a count of how each individual
shareholder voted.
Agreement could exercise the right it otherwise held under the Charter and Bylaws to seek to
remove the director without cause.”); Dawson v. Pittco Capital P’rs, L.P., 2012 WL 1564805, at
*11 & *19 (Del. Ch. Apr. 30, 2012) (using “majority of the holders” and “holders of a majority”
interchangeably); Telcom-SNI Investors, L.L.C. v. Sorrento Networks, Inc., 2001 WL 1117505, at
*6 & n.20 (Del. Ch. Sept. 7, 2001) (describing “right to waive upon approval by holders of more
than 50% of the Series A Preferred” as “a majority vote of the holders”), aff’d, 790 A.2d 477
(Del. 2002); Solomon v. Armstrong, 747 A.2d 1098, 1127 (Del. Ch. 1999) (“The consummation
of the split-off of EDS was contingent upon obtaining the approval of a majority of the holders
of each of (1) GM 1–2/3 stock, voting separately as a class, (2) GM Class E common stock,
voting separately as a class, and (3) all classes of common stock, voting together.”), aff’d, 746
A.2d 277 (Del. 2000); Margolies v. Pope & Talbot, Inc., 12 Del. J. Corp. L. 1092, 1097 (1986)
(“The Board of Directors of Pope & Talbot conditioned the implementation of the Plan of
Distribution upon the approval of a majority of the holders of the company’s outstanding shares
of common stock. If, however, directors, officers or affiliates voted in favor of the Plan of
Distribution, it was required that up to an additional 27.1% of the outstanding shares be voted in
favor of the Plan, in order to counter the effect of votes by the directors, etc.”); Allied Chem. &
Dye Corp. v. Steel & Tube Co. of Am., 14 Del. Ch. 1, 120 A. 486, 490 (1923) (citing a former
DGCL section which apparently used “holders of the majority of the stock issued”
synonymously with “majority of the holders of the voting stock issued”).
22
Gorman also argues the other voting provisions within the agreement utilize
majority (or supermajority) of shares voting mechanisms57 and therefore the
Voting Agreement’s drafters intended this provision to function similarly. He
contends that the drafters’ use of majority voting provisions elsewhere throughout
the agreement is stronger evidence of intent than Defendants’ triumvirate theory
and theory of checks and balances. Again, Gorman’s contention is inconclusive.58
However, he supports these arguments with additional persuasive reasoning.
Gorman asserts that the amendment and removal provisions of the Voting
Agreement apply majority or supermajority voting and are therefore inconsistent
with per capita elections. A majority holder could remove any director elected
through a per capita vote or amend or waive Sections 1.2(b) or (c).59 Gorman
57
See Voting Agreement §§ 1.4(a) (“the holders of more than fifty percent (50%) of the then
outstanding Shares”); 4.1 (“shares representing more than fifty percent (50%) of the outstanding
voting power of the Company”); 4.2 (“the holders of at least two-thirds (66 2/3%) of the shares
of the Series A Preferred Stock”); 4.4 (“the holders of at least two-thirds of the Series A
Preferred Stock”); 7.8 (“the holders of two-thirds of the shares of Series A Preferred Stock”);
7.8(e) (“the holders of a majority of shares of Series A Preferred Stock”). Although one phrase
within Section 4.4 uses the more general term “holders,” that portion of the provision is not a
voting provision.
58
The language could permit the Court to ascertain a separate meaning and intent in this
provision, because other provisions within the agreement use different terms elsewhere to
describe a similar phenomenon. However, the language could also support a conclusion that the
parties to the Voting Agreement used a multitude of terms, perhaps to improve readability,
perhaps out of loss of focus, but they all are intended to be enactments of a majority or
supermajority voting scheme and where only one per capita provision is present, perhaps it was
simply an outlier.
59
Perhaps Gorman overstates his ability to amend or waive the provisions of Section 1.2(b) (or
Section 1.2(c)) because the introductory paragraph to Section 7.8 could be interpreted to require
a supermajority vote or Company consent. However, Gorman appears to describe his powers to
remove directors more accurately because he controls a majority of the voting power under those
provisions.
23
argues these provisions do not create a workable triumvirate structure or scheme of
checks and balances and instead produce deadlock. Defendants’ argument that the
drafters could have intended to create compromise through checks and balances is
plausible, but the Court concludes that Gorman’s theory is more credible. The
drafters likely would have wished to avoid creating a structure which invites
deadlock. Alternatively, they could have adopted a more effective system of
checks and balances or better explained their intent if they thought that deadlock
was the best way to ensure compromise.
Gorman’s most convincing argument, based on the agreement’s structure,
may be that the transfer restrictions contained within the Series A Preferred
agreements are permissive and therefore at odds with Defendants’ interpretation of
Section 1.2(b). If a per capita requirement were designed to prevent Gorman from
dominating Westech, reflected a considered set of checks and balances, or sought
to empower members of the triumvirate who held fewer shares than Gorman, then
the Voting Agreement would also need to prevent him from transferring shares to
bypass the per capita vote mechanism. Gorman argues that he, or any other
preferred shareholder, could engage in transactional arbitrage by creating a series
of affiliates, transferring shares into them, and then voting the shares controlled by
each separate affiliate to convert the per capita vote into a majority of shares voting
24
mechanism. This would make Defendants’ preferred reading ineffective and thus
could not have been the drafters’ intent.
The Voting Agreement and its related documents do not have transfer
restrictions which would allow a per capita voting mechanism to function
effectively. The Voting Agreement60 and its related documents such as the Co-
Sale Agreement61 and the Investors’ Rights Agreement62 do not meaningfully
attempt to limit transfers to affiliates or assignees.
Defendants offered a new theory in anticipation of trial when they argued
that Section 7.17, found within the “Miscellaneous” article of the Voting
Agreement and entitled “Aggregation of Stock,” would cause any transfers to be
treated as a single vote for per capita voting purposes. The provision reads: “All
60
Sections 7.2 and 4.4 of the Voting Agreement appear to be primarily concerned with transfers.
Section 7.2 requires transferees or assignees of shares subject to the agreement to agree to the
terms of the Voting Agreement and to sign an Adoption Agreement. Section 4.4 allows
participation by the minority if over 50% of the Company’s voting power is sold. Additional
provisions providing for drag-along rights are also present to facilitate a sale of Westech upon
certain conditions, but such provisions do not include additional transfer restrictions and seek to
ensure minority investors will be forced along in such a stock sale transaction. See Voting
Agreement §§ 4.1-.3.
61
JX 21. Defendants argued during an earlier hearing and in their pretrial brief that Section 2.1
of the Co-Sale Agreement prohibits transfers to affiliates. Although the Co-Sale Agreement
arguably may be implicated by such a transfer, it appears to be primarily concerned with
allowing other investors to participate pro rata in a transfer of shares to the affiliates or assigns of
Gorman, which would not prevent Gorman from converting the per capita provision into a
majority voting provision. See id. § 2.1. The Co-Sale Agreement does not appear to be
concerned with affiliate transactions or assignments and instead is seemingly intended to allow
other investors to participate in a sale if a Key Holder sought to exit her investment.
62
JX 22. The Investors’ Rights Agreement appears to be intended to ensure compliance with
securities law and has no particular restrictions on transfers or assignments of stock, so long as
they are not in violation of such laws. Furthermore, it explicitly contemplates transfers and
assignments to affiliates. See id. §§ 2.12(c), 6.1.
25
Shares held or acquired by an Investor and/or its Affiliates shall be aggregated
together for the purposes 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.”63 The first clause of the
provision is expansive and aggregates “all” shares for the purposes of “any” rights
in the agreement. However, the second clause grants affiliated persons the ability
to apportion “such” rights (those expansively stated in the first clause) among
themselves in any manner they please. Thus, to the extent some aggregation of
rights, such as voting rights, occurs, affiliated persons appear to be able to
apportion them in a similarly expansive manner.
Furthermore, this clause appears in nearly the exact same format in the form
agreement which the Voting Agreement’s drafters appear to have used as the
model for this agreement.64 The equivalent of Section 1.2 in the form agreement
does not use the term “majority of the holders” and instead uses the more precise
“holders of a majority of the shares” in its designation provisions. Thus,
Section 7.17, as drafted in the form agreement, cannot have been written to cause
63
Voting Agreement § 7.17.
64
See supra note 36. The only difference between the two provisions is that the form agreement
uses the term “Stockholder” where Section 7.17 of the Voting Agreement uses the term
“Investor.”
26
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.65
Thus, the transfer and assignment provisions which function in the
background of Section 1.2(b) do not appear to be part of a scheme to ensure the
successful operation of a per capita voting mechanism. A per capita vote could be
converted into a majority of shares vote if a preferred holder created a series of
affiliates and moved each of his individual shares into those entities to be
designated as a “holder” under Section 1.2(b). Moreover, several terms of the
related agreements contemplate affiliate transfers or assignments. The overall
scheme of the contracts therefore supports Gorman’s view that Section 1.2(b) is a
majority voting provision.
Section 1.2(b), therefore, is more likely than not a majority voting provision.
However, because it is not unambiguous, the Court proceeds to consider the
extrinsic evidence offered by the parties and our law’s presumption favoring
majority voting.
2. The Extrinsic Evidence Concerning Section 1.2(b)
Both sides offer conflicting accounts of the intent of the signatories to the
Voting Agreement through depositions and affidavits. Some of these accounts
65
Of course, the drafters of the Voting Agreement could have reviewed the provision and
determined it met the need of reinforcing their per capita voting provision. However,
Defendants’ interpretation of Section 7.17 does not appear to reflect its most obvious meaning
and the drafting history reinforces the conclusion that this section likely serves another purpose.
27
may be motivated by their mutual dislike or by the opportunity to gain financially.
Some accounts are less overtly self-interested, but, nonetheless, the testimony and
affidavits from litigation are less persuasive than contemporaneous evidence from
negotiations or the drafting history of the agreements. This subsection discusses
certain evidence concerning the Key Holder Designees section, which will be
referred to when evaluating Section 1.2(c), because it is pertinent to understanding
Defendants’ broader arguments, applicable to Section 1.2(b), about the drafters’
intent.
Defendants explain that the Voting Agreement was carefully negotiated to
create a triumvirate structure and was finely wrought to create a system of checks
and balances. They support their position solely through depositions and
affidavits. There is nothing inherently wrong with Defendants’ theory; however,
their inability to support their conclusions with any contemporaneous negotiating
history undermines their account.66 They argue that Halder’s addition to the Key
Holder list was heavily negotiated and evidence that he was added to grant the
employees board representation. Again, they direct the Court to no
contemporaneous evidence to support this claim.
66
Defendants’ inability to provide any contemporaneous supporting documentation that favors
their position is curious.
28
Conversely, Gorman presents evidence that Section 1.2 changed little during
the drafting effort.67 This undermines Defendants’ theory of the case: there is no
evidence of heavy negotiations, of a decision to use per capita voting, or of the
drafters’ intent to prevent Gorman from later re-acquiring majority control over the
Company.
Moreover, the drafters were apparently concerned with providing
representation for significant investors, but demonstrated no particular
consideration for the employee investors. At least one email, which Defendants do
not counter with contemporaneous evidence, indicates that the Key Holder
Designees were intended to grant “significant” investors additional board
representation.68 Pallotta and a few other major investors were contemplated as
possible key investors, although Halder was not mentioned. Additionally, the
email appears to focus on two “camps”—a Gorman camp and a Pallotta camp.
This email is again at odds with Defendants’ version of the negotiators’ intent, and
again, despite extensive discovery, they have not countered it except through after-
the-fact testimony from interested individuals.
67
Gorman introduces various drafts of the Voting Agreement which did not materially change
throughout negotiations. See JX 4; 6; 9-10 (demonstrating that language of Sections 1.2(b) and
(c) were virtually unchanged over three draft versions of the agreement and the execution version
spanning the time period of March, 2011 to September 2011).
68
JX 10 (“We 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.”).
29
In weighing the parties’ competing accounts, the Court finds the
contemporaneous evidence Gorman sponsors to be more credible than the ex post
explanations Defendants offer. The documentary evidence from the drafters’
negotiations does not support Defendants’ triumvirate theory or their checks and
balances theory. Rather, they are undermined by the negotiators’ focus on
providing representation for major investors.
Thus, in the absence of compelling evidence from the Defendants
demonstrating the drafters’ intent and because the extrinsic evidence slightly
favors Gorman, the Court reaffirms its conclusion that Section 1.2(b) is more likely
than not a majority voting provision. At a minimum, it does not clearly evidence
its intent to function as a per capita voting mechanism as our law would require.
3. The Presumption Against Disenfranchising a Majority
Gorman also argues that voting agreements which disenfranchise the
majority of the corporate electorate must clearly state their intent to do so. He cites
Rohe v. Reliance Training Network, Inc., which explains that “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.”69 Rohe also invokes Rainbow
69
Rohe v. Reliance Training Network, Inc., 2000 WL 1038190, at *16 (Del. Ch. July 21, 2000).
30
Navigation, Inc. v. Yonge, in which the Court 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.”70
Gorman argues that under Defendants’ interpretation of the Voting
Agreement, holders of less than three percent of the outstanding capital stock could
control Westech at the expense of Gorman who is a majority holder. He contends
that Section 1.2(b) does not clearly support per capita voting and thus Rohe and its
predecessor Rainbow Navigation apply.
Gorman persuasively advances our law’s presumption in this area. To the
extent any ambiguity remains based on the structure of the agreement and the
extrinsic evidence, Section 1.2(b) does not make clear that it is a per capita voting
mechanism and our law’s presumption will therefore resolve any remaining
ambiguity to interpret the provision as requiring a majority of shares vote. Though
the Defendants point out that the drafters could have more clearly articulated their
desire for a majority voting provision if that was their intent, the opposite is also
true: the drafters of the agreement, had they intended Section 1.2(b) to require a
per capita vote, could have used the phrase “per capita” or comparable wording
70
Rainbow Navigation, Inc. v. Yonge, 15 Del. J. Corp. L. 196, 204 (1989).
31
somewhere within the provision (or elsewhere in the agreement) to guarantee that
its interpreters would reach the desired conclusion.71
4. Defendants’ Unpersuasive Arguments that Section 1.2(b) Is a
Per Capita Voting Provision
Defendants argue that under the plain meaning of Section 1.2(b) the Series A
Designee is to be designated on a per capita basis, without regard to the percentage
of Series A stock owned by those holders. They earlier contended that the
language “the majority of the holders of the Series A Preferred” is different from
certain language the parties should have been aware of because of its use within
the DGCL, such as “a majority of the outstanding stock,”72 or “the holders of a
majority of the outstanding stock,”73 or “the holders of a majority of the shares”74
of such stock. Thus, the parties to the Voting Agreement must have consciously
declined to use the language relied upon by the DGCL which describes a majority
vote and instead agreed upon the language used in Section 1.2(b) to memorialize
their choice of per capita voting.
Similarly, Defendants argue that the agreement’s negotiators used language
in Section 1.2(b) which differs from terminology used elsewhere in the agreement
71
Even the language of Section 1.2(b) as written could have evidenced the drafters’ intent to
function as a per capita provision, assuming other provisions in the agreement or some other
shred of extrinsic evidence supported Defendants’ theory.
72
See 8 Del. C. §§ 242(b)(1), 251(c), 275(b).
73
See 8 Del. C. § 271(a).
74
See 8 Del. C. § 141(k).
32
to describe votes of the majority of the shares.75 Because the drafters knew how to
write a majority or supermajority voting provision, their decision to write
“holders” in Section 1.2(b) is proof that its meaning cannot be the same as a
majority voting provision.76
Next, the Defendants point to the definition of “holder” in Black’s Law
Dictionary. Defendants direct the Court to the third definition of “Holder” as
“[a] person who possesses or uses property.”77 Thus, the proper interpretation of
“the majority of the holders of the Series A Preferred,” is that of the vote of a
majority of the persons who possess or use property, i.e., a per capita vote of the
Series A Preferred holders.
A plain reading by a reasonable third party that inquires no further would
support Defendants’ per capita voting theory. However, their theory ignores the
broader arguments about the agreement’s structure and intent discussed above.
Thus, the more likely conclusion is that Section 1.2(b) was simply poorly drafted
in such a way as to invite the present litigation, but reflective, when considered as a
whole, of a majority vote provision.
75
See supra note 57 & accompanying text.
76
This is the opposite of Gorman’s earlier argument that the agreement’s drafters meant the
same thing, but inadequately expressed their intent.
77
Black’s Law Dictionary (9th ed. 2009) (emphasis added).
33
Finally, as mentioned above, Section 1.2(b) fails to comply with our law’s
requirement that per capita provisions be written clearly and unambiguously. For
the reasons set forth above, Section 1.2(b) is a majority of shares voting provision.
C. The Meaning of Section 1.2(c)
The parties next dispute the meaning of Section 1.2(c) of the Voting
Agreement which calls for the selection of the Key Holder Designees through the
following terse mechanism: “[t]wo persons elected by the Key Holders . . . .”78
The provision turns on the appropriate definition to be applied to the term
“elected,” which the drafters of the agreement did not define or contextualize.
Again, the analysis proceeds by first looking at the language and structure of
Section 1.2(c) and the Voting Agreement and then considering the extrinsic
evidence offered by the parties. Finally, the Court explains why it rejects
Gorman’s less persuasive arguments concerning this provision.
1. The Language of Section 1.2(c) and the Overall Structure of the
Voting Agreement
Here, the plain meaning of “elect” does little to resolve the specific
application of the word in this context as the term is a general one which
encompasses several means of election: unanimous election, majority of shares
78
Voting Agreement § 1.2(c).
34
election, or per capita election.79 The Court thus seeks the plain meaning by
interpreting the contract as a whole and searching for its drafters’ intent.
Defendants again point out that certain clauses within the Voting Agreement more
precisely state that the voting mechanism is based upon the number of shares held
by the Key Holders.80 Again, the Court finds this to be inconclusive as applied to
this agreement as it could be consistent with the drafters’ intent to apply a per
capita voting mechanism in Section 1.2(c) or be consistent with overly hasty
drafting (which unfortunately appears elsewhere in the agreement).
Here, the problem in which a party to the agreement can simply engage in
transactional arbitrage to avoid the provision is lessened, although perhaps not
entirely removed, because the Key Holders are three natural persons whose names
are set forth in a schedule to the Voting Agreement.81 The application of the
transfer restrictions to the Key Holders and the processes for adding or removing
Key Holders are also unclear which makes determining the drafters’ intent by
reference to the agreement as a whole more challenging than was the case with
Section 1.2(b).82
79
The term is particularly inapposite because Sections 1.2(a)-(e) are designation provisions,
while the introductory paragraph binds the Voting Agreement’s signatories to act to elect
directors in accordance with the agreement’s designation provisions.
80
See Voting Agreement §§ 4.3(e) (“the Key Holder Shares”); 7.8 & 7.8(e) (“the holders of a
majority of the Shares held by the Key Holders”).
81
Id., Schedule B (naming Gorman, Halder, and Fellus as Key Holders).
82
The Court was not directed to any particular terms in the Voting Agreement or in related
agreements contemplating the addition or removal of Key Holders. There do not appear to be
35
The removal provisions which permit a majority holder of the shares to
remove a director elected by a per capita vote, as with Section 1.2(b), appear to
invite deadlock. Thus, Gorman appears to have been granted unilateral power to
remove the Key Holder Designees, whether Section 1.2(c) is a majority of shares
or per capita provision. One could conclude that the removal provisions are part of
a scheme of checks and balances or 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.
Defendants argue that the drafters could not have intended a majority of
shares vote because Gorman owned a majority of the Key Holder shares when the
Voting Agreement was executed. His majority ownership would have guaranteed
that Gorman’s candidates would win any election under this provision and it would
function instead as a “Gorman Designee” provision. Defendants contend that the
provision would therefore create a meaningless structure of Key Holders, since the
votes of Halder and Fellus would be irrelevant when cast alongside Gorman’s
majority, and should not be read to create such a result.
Based upon the plain language of the provision and the scheme of the
agreement as a whole, the Court agrees with the Defendants. The Key Holder
any limitations preventing affiliates from becoming Key Holders and the Adoption Agreement
appears to contemplate the possibility of Key Holders transferring shares. See supra note 27.
The amendment and waiver provisions are also unhelpful for the same reasons discussed when
considering Section 1.2(b). See supra note 59.
36
Designee section should be construed to avoid the illogical interpretation which
turns it into a “Gorman Designee” provision. This conclusion is supported by the
fact that the list of Key Holders in Schedule B consists of three natural persons and
no reference is made to their relative ownership. Gorman is correct that the
unilateral veto he appears to have over these directors because of the removal
provision is in tension with Defendants’ per capita theory. Nonetheless, the Court
concludes that it is better to read Section 1.2(c) to give some effect to the drafters’
choice to list the names of the three Key Holders, than to read them out of
existence by interpreting the provision as a Gorman Designee provision. The
Court prefers a reading which avoids producing an absurd result or which no
reasonable person would have accepted when entering the contract.83
Furthermore, the logical import of an election provision which names three
natural persons seems to be that the three of them will be able to name candidates
and command equal voting power when designating them. The result is different
here from the result under Section 1.2(b) because of the specificity with which the
three Key Holders are identified. The Court is satisfied that this provision
represents an attempt to assure an important constituency representation on the
board and thus differs from a more general provision such as that found in
Section 1.2(b), which is aimed at Series A holders generally.
83
See Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010).
37
Nonetheless, the Court proceeds to consider the extrinsic evidence and
Gorman’s less compelling arguments.
2. The Extrinsic Evidence Concerning Section 1.2(c)
The same general observations made above concerning the extrinsic
evidence that the parties presented are equally applicable to Section 1.2(c). Thus,
here, as there, the extrinsic evidence is generally not supportive of Defendants’
triumvirate theory, although it also does not provide definitive proof that Gorman’s
account of the negotiations is correct.
However, as mentioned above, Gorman brought to the Court’s attention one
email from the drafters’ negotiations which states: “We 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.” Again, the email appears to
contemplate two main factions, a Gorman faction and a Pallotta faction and is
focused on granting representation to significant investors.
Thus, the negotiating history could be read as evidence that the signatories
intended Section 1.2(c) to function as a tie-breaking mechanism between the
Gorman and Pallotta camps or simply as a means of granting representation to
significant investors. Both of these theories appear to undermine Defendants’
triumvirate theory and the email does not suggest an escalated concern with
38
providing employees board representation or limiting Gorman’s future power over
the Company. However, as negotiations proceeded, Pallotta’s name was ultimately
removed and Halder’s was added in its place. These changes could represent a
rejection of whatever thinking the email evidences or could reflect a differing view
of who should be considered a significant investor over time.
This single email provides some limited insight into the thinking of the
drafters of the Voting Agreement. However, the Court concludes that whatever
insights may be drawn from it do not dislodge the conclusion reached above
regarding the drafters’ intent based upon the plain text and structure of the
agreement.
3. Gorman’s Unpersuasive Arguments that Section 1.2(c) Is a
Majority Voting Provision
Gorman makes several additional arguments to the effect that Section 1.2(c)
is a majority of shares voting provision. First, Gorman asserts that a general
principle of Delaware law, which was applied to resolve an ambiguous charter
provision, functions as a gap-filler to explain how the Court should interpret
“elect.” He argues that the principle that “[o]utstanding 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
39
elect Directors”84 is directly applicable here to resolve the meaning of the word
“elect” as used by the signatories to the Voting Agreement.
The Court is not persuaded that a gap-filler applied to resolve an ambiguous
charter provisions is equally applicable to the contract provision at issue.85 A
contract must be reviewed for its plain meaning to arrive at the drafters’ intent, as
Delaware law typically requires. Where a better reading of the parties’ intent
exists, that reading is applied. That analysis was performed above and the
application of this gap-filling provision used to resolve a corporate charter will not
trump it.86
Gorman next contends that Defendants’ per capita voting theory would be
invalid as a matter of law because the DGCL requires corporations to specify their
election to use per capita voting in their charters. He argues the plain language of
8 Del. C. § 212(a) requires such a result,87 as does the pertinent case law on point.88
However, Gorman’s argument is inconsistent with the broad provisions found in
84
Standard Power & Light Corp. v. Inv. Assocs., Inc., 51 A.2d 572, 576 (Del. 1947).
85
This does not preclude the possibility that charter or bylaw gap-fillers may apply. However,
the arguments as to the applicability of Standard Power to the facts at issue were not as fully
developed as perhaps they could have been.
86
Gorman does not argue that Rohe or Rainbow Navigation apply to resolve any ambiguity
found here where three named individuals were empowered by the signatories to determine the
Key Holder Designees.
87
“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.” 8 Del. C. § 212(a).
88
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.”).
40
8 Del. C. § 218, allowing stockholders to “vote shares as provided by [their]
agreement.”89 As recent case law has articulated, “the Charter and Bylaws allocate
various rights to the different classes of stockholders, then the Stockholders’
Agreement adds a contractual overlay that constrains the manner in which parties
to that agreement can exercise their rights.”90
Thus, under 8 Del. C. § 212, a company must announce its intent to diverge
from the typical one-share one-vote scheme within its charter for the purposes of
altering the general mechanism by which shareholders act. However, shareholders
are permitted to construct a contractual overlay on top of that mechanism to agree
to vote their shares in accordance with that more specific scheme. So it is here.
Gorman has not argued that Westech’s charter does not support a one-share one-
vote scheme as he cannot. Rather, he attempts to use Section 212 to abrogate the
broad contractual powers shareholders are granted under Section 218 to create an
additional overlay on top of the corporation’s voting scheme for the purposes of
general shareholder votes. The Court rejects his argument. The signatories to the
Voting Agreement are permitted to agree to vote their shares (each of which has a
one vote per share feature articulated in the Company’s foundational documents)
according to whatever terms they choose assuming they do not otherwise violate
the terms of Section 218 or other Delaware law.
89
8 Del. C. § 218(c).
90
Klaassen v. Allegro Dev. Corp., 2013 WL 5739680, at *22 (Del. Ch. Oct. 11, 2013).
41
Gorman forwards a related argument, that the voting rights of the Voting
Agreement’s signatories are stated in the Company’s Certificate of Designation,
which provides for majority voting and thus the Court cannot find in Defendants’
favor.91 Gorman correctly states the law, but the general statements he quotes only
go so far. The Certificate of Designation describes the mechanism for the election
and permits each shareholder one vote per share. The Voting Agreement does not
inhibit its signatories from casting one vote per share; it simply binds them to cast
each of those votes in accordance with the provisions found in the agreement.
Finally, Gorman asserts that the Court could not conclude that Gorman
would consent to the terms of the Voting Agreement because it grants Fellus and
Halder, who contributed less than three percent of the capital raised under the
Series A round, a veto power over two board seats. Similarly, he argues that he
would not have invested in the Series A round to lose control over the Company.
The Court disagrees. Gorman could certainly have decided it was in his best
interest to raise additional capital for the Company and agreed in exchange to some
dilution of his control. Thus, the Court defers to its earlier conclusions that
91
Pl.’s Pre-Trial Br. at 32-33 (citing In re Appraisal of Metromedia Int’l Gp., Inc., 971 A.2d 893,
899 (Del. Ch. 2009) (“A preferred shareholder’s rights are defined in either the corporation’s
certificate of incorporation or in the certificate of designation, which acts as an amendment to a
certificate of incorporation.”)); Matulich v. Aegis Commc’ns Gp., Inc., 2007 WL 1662667, at *5
(Del. Ch. 2007) (“If a certificate of designation is silent as to voting rights, then preferred
shareholders have the same rights as common stock, and such rights may only be derogated by a
clear and express statement.”), aff’d, 942 A.2d 596 (Del. 2008).
42
Section 1.2(b) is a majority voting provision and Section 1.2(c) is a per capita vote
between the Key Holders.
D. The Consequences of the Annual Meeting and Gorman’s Other
Attempts to Control the Board
Because Gorman commanded a majority of the vote and thus was entitled to
designate directors under Section 1.2(b), the Court finds that Ford was duly elected
as the Series A Designee at the Annual Meeting.92 Additionally, although the
parties gave only limited focus to the Pallotta Designee seat, Gorman’s undisputed
authority over the Pallotta Proxy permitted him to vote the Pallotta Shares at the
Annual Meeting. Thus, whether Gorman voted the Pallotta Proxy pursuant to
Section 1.2(a) or under the general terms of Section 1.2, if Section 1.2(a) became
ineffective upon the sale of the Pallotta Shares,93 he had the authority or the voting
majority to validly designate himself to the Pallotta Designee seat. However, there
is no evidence that either Gorman’s slate or the Incumbents’ slate designated Key
Holder Designees in accordance with Section 1.2(c). Thus, those positions were
not filled at the Annual Meeting.
92
Gorman’s earlier acts by written consent to elect the Series A Designees are mooted by the
results of the Annual Meeting; however, the fact that the Pallotta Proxy was not executed at this
time would appear to cause Gorman and the other parties to the written consents to lack the
requisite majority under Section 1.2(b). The additional 22 preferred shares owned collectively
by Aplin, Williamson, Woodby, and Ford, the other signatories to the written consents, when
added to Gorman’s 72 preferred shares, do not grant them a majority of the Series A Preferred.
93
The Court need not decide the issue because Gorman’s control over the Pallotta Proxy would
have granted him the Pallotta Designee seat whether Section 1.2(a) was, or was not, still
effective.
43
The parties also request that the Court decide whether or not Gorman’s
actions in August were valid, although they offered limited guidance at trial and in
their pre-trial briefing. The Court’s evaluation of Gorman’s acts depends on the
interpretation of the Voting Agreement’s removal provision (Section 1.4) and also
the interpretation of the Industry Director designation provision (Section 1.2(e)).
The parties’ arguments concerning Section 1.4 were limited to explanations of how
the provision should influence the Court’s assessment of how Sections 1.2(b) and
(c) function, and they did not engage in a textual analysis of the provision or make
arguments concerning how it operated within the agreement as a whole. The
parties did not make arguments concerning the appointment or removal of the
Industry Directors.
The Court thus finds, based on the stipulated record, that Gorman removed
Halder on August 14. Section 1.4(a) 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. 94
94
Section 1.4(a) uses the defined term “Shares,” which is defined as “any securities of the
Company the holders of which are entitled to vote for members of the Board, including without
limitation, all shares of Common Stock . . . and Series A Preferred Stock.” Voting Agreement
§ 1.1. Thus, Section 1.4(a) permits inclusion of the Key Holder’s common stock for the
purposes of removing the Key Holder Designee, because no specific limitation appears in
Section 1.2(c). This result differs from the interpretation of Section 1.4(a) in reference to the
removal of the Series A Designee. There, only the preferred shares may be considered in
removing that designee because Section 1.4(a) limits the shares considered for the purposes of
establishing a majority for removal purposes to those “entitled under Section 1.2 to designate
that director.” Section 1.2(b) only permits preferred shares to be considered when designating
44
According to the stipulated record, Fellus and Halder controlled, directly or
indirectly 73 Series A units and Gorman controlled 72 such units or convertible
notes before he purchased the Pallotta Shares.95 Gorman also controlled 2.4
million shares of common stock, by Defendants’ concession, the majority of the
common before the preferred shares were issued.96 Thus, although Fellus’s and
Halder’s combined preferred holdings appear to have outweighed Gorman’s
holdings, when Gorman’s common shares are also included he acted as the holder
of more than fifty percent of the outstanding shares entitled to elect the Key Holder
Designee to remove that director. Nonetheless, Gorman’s attempt to elect Woodby
and Williamson through that same letter was invalid because he has not
demonstrated that he had the consent of either Fellus or Halder, which he needed to
make valid designations under Section 1.2(c).
The Court also concludes that Gorman’s acts on August 26 to remove Dura
and to elect Olsen and Ford as Industry Directors were invalid. Section 1.2(e)
requires that the Industry Directors be mutually acceptable to the Series A
Designees and the Key Holder Designees. The Court concludes, in the absence of
argument by the parties, that this provision was designed to protect the disparate
the Series A Designee and thus Section 1.4(a) is constrained by the requirement set forth in
Section 1.2(b).
95
This may be a generous accounting of the combined holdings of Fellus and Halder given that
Fellus apparently never made payment upon the promissory note granting him 40 preferred
shares.
96
See supra note 5.
45
constituencies under the Voting Agreement and the absence of any Key Holder
Designee would mean that a unilateral act of the Company’s Series A Designees
cannot satisfy the terms of Section 1.2(e). For the same reason, neither side
successfully elected Industry Directors at the Annual Meeting.
Similarly, Section 1.4(a)’s requirement that a removal of the directors
elected under Section 1.2(e) be directed or approved by the affirmative vote of the
“Person” entitled under Section 1.2 to designate that director were not satisfied for
the same reason. The absence of any “Person” representing the Key Holder
Designees made the removal of Dura invalid. Moreover, the Series A Designees’
seats were vacant at this time, as Monaco resigned on August 21, 2013 and the
Pallotta Proxy had not yet been executed which would permit Gorman to vote the
majority of the Series A Preferred and allow him to elect new directors under
Sections 1.2(a) or (b). In sum, the board is comprised of Salamone, Gorman, Ford,
and Dura. The seats of the Key Holder Designees and one of the Industry
Directors are vacant.
V. CONCLUSION
The Court concludes that Section 1.2(b) of the Voting Agreement is not
clearly and unambiguously a per capita voting mechanism and thus our law’s
presumption in favor of majority voting applies. It also concludes that
Section 1.2(c) is a per capita voting provision based on the plain meaning of
46
“elect,” when decided by three natural persons, and the conclusion that a majority
of shares interpretation would render Schedule B meaningless. Because
Section 1.2(b) is a majority voting provision, Gorman duly elected Ford as the
Series A Designee at the Annual Meeting; the Key Holder Designees were not duly
elected at the Annual Meeting because neither proposed slate appears to have
complied with the Voting Agreement. Gorman also elected himself to the Pallotta
Designee seat at the Annual Meeting. Gorman has not demonstrated that his
actions before the Annual Meeting complied with the Voting Agreement, except
that he successfully removed Halder as a Key Holder Designee on August 14,
2013.
Counsel are requested to confer and to submit an implementing form of
order.
47