Lexis Nexis - Case Brief

Not a Lexis Advance subscriber? Try it out for free.

Law School Case Brief

Salamone v. Gorman - 106 A.3d 354 (Del. 2014)

Rule:

A voting agreement, if it is to be given the effect that deprives 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. But the application of that principle depends on the type of contract at issue.

Facts:

The case involved dispute between two competing sets of stockholders and directors about the composition of the board of Westech Capital Corporation.  Both parties brought actions in the Court of Chancery pursuant to 8 Del. C. § 225, each contending that their respective slates of directors constituted the valid board. The crux of the case for both sides was the interpretation of a Voting Agreement signed by the purchasers of Westech Series A Preferred stock. According to John J. Gorman, the founder and its majority stockholder, the Voting Agreement provided for a per share scheme and entitled him to remove and designate new directors. On the other hand, 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 preferred stock (as opposed to the holders of a majority of shares), they argued that Gorman's attempts to change the board composition were invalid. 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 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. Gorman claimed 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 contended the trial court erred, but that Salamone, Halder, Dura, Wolf and McMurray were all validly elected as members of the Westech Board.

Issue:

1. Was the Court of Chancery in error 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?

2. Was the per capita interpretation of Section 1.2(c) would violate the Delaware General Corporation Law?

Answer:

1. Yes. 2. No.

Conclusion:

1. The Court held that the court of chancery erred in finding that the directors designated pursuant to § 1.2(c) of the Voting Agreement could be removed by the vote of the majority of the shares held by the Key Holders and in holding the removal of one director was valid. Instead, the Court ruled that 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) suggested that the designation and removal provisions were intended to be symmetrical.

2. The Voting Agreement did not violate the Delaware General Corporation Law, Del. Code Ann. tit. 8, § 212(a), because the Agreement provided for a per capita scheme for the designation of two nominees, who were then elected by a vote of the stockholders consistent with the "one share/one vote" default rule and the Certificate of Incorporation. Accordingly, the Court affirmed the Court of Chancery’s conclusion that the Voting Agreement did not violate the DGCL.

The Court affirmed in part and reversed in part the judgement of the Court of Chancery.

Access the full text case Not a Lexis Advance subscriber? Try it out for free.
Be Sure You're Prepared for Class