Salamone v. Gorman
2014 WL 2211612 (2014)
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Rule of Law:
When a provision in a stockholder voting agreement is ambiguous as to whether it establishes a per share or per capita voting scheme, courts will resolve the ambiguity in favor of the default per share rule unless there is clear and convincing extrinsic evidence of the parties' intent to deviate from it. However, where the plain language of a provision is unambiguous, that language will control, even if it creates a per capita scheme for one set of director designations and a per share scheme for another within the same agreement.
Facts:
- Westech Capital Corporation, founded and controlled by John J. Gorman, experienced financial distress, prompting a capital raise in 2011 through the issuance of Series A Preferred Stock.
- The stock was purchased by four main groups: an investor named James J. Pallotta, a consultant named James B. Fellus, a group of employees including Robert W. Haider, and Gorman himself.
- On September 23, 2011, all purchasers signed a Voting Agreement to govern the composition of Westech's new seven-member board of directors.
- The Voting Agreement specified that one director would be designated by the 'majority of the holders of the Series A Preferred Stock' (Section 1.2(b)), and two directors would be 'elected by the Key Holders' (Section 1.2(c)), who were defined as Gorman, Haider, and Fellus.
- Gorman remained the majority stockholder of Westech in terms of total voting power after the transaction.
- In August 2013, after a dispute with management, Gorman resigned from the board and sent a letter attempting to remove Haider and elect new directors, asserting his power as the majority stockholder.
- Shortly thereafter, Gorman acquired control over Pallotta’s shares and, citing his majority ownership of Series A Preferred Stock, attempted to designate additional directors by written consent.
Procedural Posture:
- On August 27, 2013, John J. Gorman and the Management Group each filed separate § 225 actions in the Delaware Court of Chancery to determine the valid composition of Westech's board of directors.
- The Court of Chancery consolidated the two cases, designating Gorman as the plaintiff.
- After finding key provisions of the governing Voting Agreement ambiguous, the trial court denied cross-motions for judgment on the pleadings.
- The Court of Chancery conducted a trial on a stipulated record and issued a Memorandum Opinion on May 29, 2014.
- The trial court's ruling was a partial victory for both sides, holding that one disputed provision established a per share voting scheme and another established a per capita scheme, resulting in a divided board with several vacancies.
- The Management Group appealed, and Gorman cross-appealed the Court of Chancery's decision to the Delaware Supreme Court.
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Issue:
Under Delaware law, does an ambiguous stockholder voting agreement provision referring to a 'majority of the holders' overcome the strong judicial presumption in favor of per share voting, and can another provision in the same agreement referring to an election 'by the Key Holders' be interpreted as an unambiguous per capita scheme?
Opinions:
Majority - Valihura, Justice
Yes and No. When a provision like 'majority of the holders' is ambiguous and extrinsic evidence is not dispositive, Delaware's default presumption of per share voting controls; however, where a provision like 'elected by the Key Holders' is textually unambiguous, it can create a per capita scheme that rebuts the default rule for that specific provision. The court held that under Delaware law, stockholder voting agreements are interpreted with a strong presumption against disenfranchising the majority stockholder unless the contractual language is clear and unambiguous. For Section 1.2(b), the phrase 'majority of the holders' was deemed ambiguous because while the plain text suggests a per capita scheme, the overall structure of the agreement (including removal provisions) and the lack of extrinsic evidence to the contrary failed to meet the 'clear and convincing' standard required to overcome the default per share rule. Therefore, this section was interpreted as a per share provision. Conversely, Section 1.2(c) ('elected by the Key Holders') was found to be unambiguous. A per share interpretation would render the designation of multiple 'Key Holders' meaningless, as Gorman's majority stake would make him the sole decision-maker. To give effect to the clear intent of having a group of individuals make the decision, this section was interpreted as a per capita provision. Finally, the court held that a voting agreement establishing a per capita designation process does not violate DGCL § 212(a)'s 'one share, one vote' rule because DGCL § 218(c) explicitly permits stockholders to enter into contracts governing how they vote their shares, creating a valid two-step process of contractual designation followed by a corporate election.
Analysis:
This case provides a critical framework for interpreting stockholder voting agreements under Delaware law, reinforcing the strong default presumption of per share voting while acknowledging that it can be contractually overcome. The decision's significance lies in its nuanced, clause-by-clause analysis, which permits a 'hybrid' agreement with both per share and per capita provisions. This holding instructs corporate attorneys that to successfully displace the powerful default rule of majority share control, the contractual language must be 'certain and unambiguous.' It also clarifies the relationship between DGCL § 212(a) and § 218(c), affirming that stockholders have broad contractual freedom to structure director nomination rights, so long as the ultimate election adheres to the corporation's charter.
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