Salamone v. Gorman
106 A.3d 354
Del.2014Background
- Westech issued Series A Preferred Stock in 2011 and the purchasers signed a Voting Agreement that allocates board-designation rights among investors (Sections 1.2, 1.4, 7.17). Westech’s certificate preserves one-share/one-vote for elections.
- The Voting Agreement created a seven‑member board with seats: Pallotta designee (1.2(a)), an Independent Director designated by the Series A investors (1.2(b)), two Key Holder designees (1.2(c)) initially Gorman and Halder, the CEO (1.2(d)), and two independent industry directors mutually acceptable to Series A and Key Holders (1.2(e)).
- Gorman was the majority holder of Series A voting power (by shares) and majority of common stock; other Series A holders were many small investors and three named Key Holders (Schedule B: Gorman, Halder, Fellus).
- In 2013 Gorman attempted to remove and replace certain directors based on his claim of majority share control under the Voting Agreement; competing slates were presented at the September 17, 2013 annual meeting. Both sides filed consolidated 8 Del. C. § 225 actions.
- Court of Chancery found Section 1.2(b) ambiguous but construed it as a per‑share provision and Section 1.2(c) as per‑capita; it also held removal under Section 1.4(a) could be effected by the holders of a majority of shares; trial court thus validated some of Gorman’s actions and invalidated others.
- On appeal the Delaware Supreme Court affirmed that 1.2(b) is per‑share and 1.2(c) is per‑capita, but reversed the trial court’s interpretation of Section 1.4(a) as permitting removal of Key Holder designees by a per‑share vote; it held only the Person(s) who designated under 1.2(c) (the Key Holders) may remove those designees.
Issues
| Issue | Gorman's Argument | Management Group's Argument | Held |
|---|---|---|---|
| Whether §1.2(b) (Series A designee) is per‑share or per‑capita | §1.2(b) is per‑share; majority‑shareholder control should govern; §1.4 removal language supports per‑share | Plain text “majority of the holders” indicates per‑capita; framers intended to protect small investors from domination | §1.2(b) ambiguous; after extrinsic evidence and presumption against disenfranchisement, court affirmed §1.2(b) is a per‑share provision (Gorman wins) |
| Whether §1.2(c) (Key Holder designees) is per‑share or per‑capita | §1.2(c) ambiguous but should be per‑share (to conform with §1.4 and DGCL §212) | §1.2(c) refers to persons (Key Holders) and Schedule B lists individuals; a per‑capita scheme implements the Key Holders’ role | §1.2(c) is per‑capita; reading it per‑share would nullify the Key Holders’ role (Management wins) |
| Whether §1.4(a) permits removal of Key Holder designees by majority of shares | §1.4(a) permits removal by holders of a majority of shares entitled under §1.2; so majority‑shareholder may remove Key designees | Removal should mirror designation: Key Holders (Person(s)) who designate under §1.2(c) are the only ones who may remove Key designees | Reversed: §1.4(a) must be read symmetrically with §1.2; Key Holder designees are removable only by the Person(s) (Key Holders) who designated them, not by a per‑share majority |
| Whether Voting Agreement violates DGCL §212(a) / whether §7.17 aggregates holdings to prevent circumvention | Per‑capita designation step would violate one‑share/one‑vote unless in charter; §218(c) contractual overlay permits nomination step | §218(c) allows parties to agree how to cast votes; §7.17 aggregates affiliates to prevent circumvention of per‑capita schemes | No DGCL §212(a) violation: Voting Agreement’s two‑step nomination/election process is consistent with §218(c); court found §7.17 ambiguous as to aggregation but did not rely on it to convert §1.2(b) to per‑capita |
Key Cases Cited
- Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) (applies objective theory of contract interpretation)
- GMG Capital Inv., LLC v. Athenium Venture Partners I, L.P., 36 A.3d 776 (Del. 2012) (contract interpretation principles and deference to four corners when unambiguous)
- Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228 (Del. 1997) (contract terms control when parties’ common meaning is clear)
- Harrah’s Entm’t, Inc. v. JCC Holding Co., 802 A.2d 294 (Del. Ch. 2002) (parol evidence may be considered in negotiated corporate instruments; require clear and convincing evidence to disenfranchise majority)
- Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977) (certificate of incorporation controls any departure from one‑share/one‑vote rule)