Gorman v. Salamone
Not Reported (2015)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A corporate bylaw adopted by stockholders that purports to grant stockholders the power to remove corporate officers is invalid under Delaware law because it impermissibly interferes with the board of directors' fundamental statutory authority to manage the business and affairs of the corporation under DGCL § 141(a).
Facts:
- John J. Gorman held voting control over a majority of Westech Capital Corp.'s common and preferred stock.
- Gary Salamone served as Westech's Chief Executive Officer (CEO), a position that also granted him a seat on the company's board of directors.
- Robert W. Halder was an individual whose status as a Westech director was the subject of an ongoing legal dispute.
- On July 2, 2014, Halder tendered his "formal resignation from all positions at Westech Capital Corp."
- In a subsequent affidavit, Halder affirmed that his only remaining relationship with Westech was as a minority shareholder, and he began working for a competitor.
- On July 7, 2014, Gorman, acting by stockholder written consent, amended Westech's bylaws to authorize stockholders to remove and replace corporate officers.
- Immediately after amending the bylaw, Gorman purported to act again by stockholder written consent to remove Salamone as CEO and elect himself to the position.
Procedural Posture:
- In a prior, separate lawsuit (the "Initial 225 Action"), the Delaware Court of Chancery was asked to determine the composition of Westech's board.
- The Court of Chancery issued a decision in that case designating a four-member board that excluded Robert W. Halder.
- Both parties appealed that decision to the Delaware Supreme Court.
- The Delaware Supreme Court affirmed in part and reversed in part, ruling that Westech's board properly consisted of five members, including Halder.
- John J. Gorman then filed this new Section 225 action in the Delaware Court of Chancery against Gary Salamone and Robert W. Halder, based on events that occurred during the appeal of the prior case.
- Defendants Salamone and Halder filed motions to dismiss Gorman's complaint for failure to state a claim upon which relief could be granted.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a corporate bylaw, enacted by stockholders, that allows stockholders to remove corporate officers with or without cause, conflict with Section 141(a) of the Delaware General Corporation Law by impermissibly interfering with the board of directors' authority to manage the corporation?
Opinions:
Majority - Noble, Vice Chancellor
Yes, a corporate bylaw enacted by stockholders that allows them to remove corporate officers conflicts with DGCL § 141(a) and is therefore invalid. The court reasoned that DGCL § 141(a) establishes the bedrock principle of director primacy, granting the board the authority to manage the corporation's business and affairs. The selection, monitoring, and removal of corporate officers is a core, substantive managerial function, not merely a procedural matter. A bylaw that allows stockholders to directly remove an officer, potentially over the board's objection, usurps this fundamental board prerogative. Such a bylaw would allow stockholders to make substantive business decisions and could impermissibly compel directors to take actions that might conflict with their fiduciary duties. The proper way for a majority stockholder to effect a change in management is to use their voting power to elect directors who will then exercise their managerial authority to replace the officer.
Analysis:
This opinion strongly reaffirms the board-centric model of corporate governance under Delaware law, emphasizing the principle of director primacy codified in DGCL § 141(a). The decision clarifies the distinction between permissible, process-oriented bylaws that stockholders may adopt under § 109, and impermissible bylaws that intrude upon the board's substantive authority to manage the corporation. It establishes that the hiring and firing of officers is a fundamental aspect of management reserved for the board. The ruling serves as a crucial guidepost for stockholder activism, signaling that shareholders seeking to change corporate management cannot bypass the board through bylaw amendments but must instead utilize their electoral power to change the composition of the board itself.
