Salamone v. Gorman

Defendants-Appellants Gary Salamone, Mike Dura and Robert Halder (collectively, the “Management Group”) appealed a Court of Chancery Memorandum Opinion and Order and Final Judgment. This case involved a dispute between two competing sets of stockholders and directors about the composition of the board of Westech Capital Corporation, a financial services holding company headquartered in Austin, Texas. Both parties brought actions in the Court of Chancery pursuant to 8 Del. C. section 225, each contending that their respective slates of directors were the valid board. The heart of the case for both sides was the interpretation of a Voting Agreement signed by the purchasers of Westech Series A Preferred stock in September 2011. According to John Gorman, IV, the founder of the company and its majority stockholder, the Voting Agreement provided for a per share scheme and entitled him to remove and designate new directors, as he attempted to do in 2013. According to the Management Group, the Voting Agreement provided for a per capita 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 section 225 actions. The two cases were consolidated, with Gorman as plaintiff and the Management Group as defendants. The Court of Chancery’s Memorandum Opinion held that one clause of the Voting Agreement set forth a per capita scheme to designate directors, but another contested provision set forth a per share scheme to designate directors. Thus, 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 to the Delaware Supreme Court, arguing that the Court of Chancery’s decision was partially incorrect. The Court did not agree with either side's arguments on appeal and affirmed the Court of Chancery’s ruling that Section 1.2(b) of the Voting Agreement set forth a per share scheme and Section 1.2(c) set forth a per capita scheme. However, the Court concluded that the Court of Chancery erred in holding that the directors designated pursuant to Section 1.2(c) could be removed by the vote of the majority of the shares held by the Key Holders. Instead, 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) suggests that the designation and removal provisions were intended to be symmetrical. In reaching its conclusions, the Supreme Court held that certain of the Court of Chancery’s factual findings were clearly erroneous. However, these errors were not of sufficient force to affect the Court of Chancery’s overall conclusions regarding Sections 1.2(b) and 1.2(c). Accordingly, the Supreme Court affirmed in part and reversed in part. View "Salamone v. Gorman" on Justia Law