Defendants Below, Appellants/Cross-Appellees Gary Salamone ("Salamone"), Mike Dura ("Dura") and Robert W. Halder ("Halder," and together with Salamone and Dura, the "Management Group") appeal from a Court of Chancery Memorandum Opinion dated May 29, 2014, and Order and Final Judgment dated June 24, 2014.
This case involves a dispute between two competing sets of stockholders and directors about the composition of the board of Westech Capital Corporation ("Westech"), a financial services holding company headquartered in Austin, Texas. Both parties brought actions in the Court of Chancery pursuant to 8 Del. C. § 225 (the "§ 225 actions"), each contending that their respective slates of directors constitute the valid board. The crux of the case for both sides is the interpretation of a Voting Agreement signed by the purchasers of Westech Series A Preferred stock (the "Series A Preferred Stock") in September 2011. According to John J. Gorman, IV ("Gorman"), the founder of the company and its majority stockholder, the Voting Agreement provides for a per share scheme and entitles him to remove and designate new directors, as he purported to do in 2013.
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 argue that Gorman's attempts to change the board composition were invalid.
On August 27, 2013, 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's Memorandum Opinion, issued on May 29, 2014, 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 this Court, arguing that the Court of Chancery's decision was partially incorrect.
The Management Group raises three issues on appeal relating to the interpretation of the Voting Agreement. They assert that: (1) the trial court erred in holding that the director candidates are designated under Section 1.2(b) by the vote of a majority of "shares" rather than the individual "holders" of Series A Preferred Stock; (2) the trial court correctly held that the director candidates are designated under Section 1.2(c) by a majority vote of the individual Key Holders, but erred in holding that the directors who are Key Holder Designees may be removed by a majority vote of the Series A Preferred Stock controlled by the Key Holders; and (3) the trial court erred in holding that Section 7.17 did not mandate the aggregation of stock transferred by a Series A Preferred stockholder to "Affiliates" for purposes of the per capita scheme.
In his cross-appeal, Gorman contends that the Court of Chancery erred in holding that the Key Holder Designees are designated on a per capita basis. He further contends that the Court of Chancery erred in holding that a per capita scheme
We affirm in part and reverse in part.
I. FACTUAL AND PROCEDURAL HISTORY
A. The Company and the Parties
Westech, which was founded in 1994 and became a public company in 2001, is a holding company with one primary operating subsidy, a broker-dealer named Tejas Securities Group, Inc. ("Tejas"). Gorman was one of seven founding members of Westech, and served as the chairman of Westech's Board from 1999 through August 2013. He was also the majority stockholder of Westech common stock and of the total voting shares at all relevant times. Westech has two classes of stock authorized and outstanding: 4,031,722 shares of common stock, and 338 shares of Series A Preferred Stock. The Series A Preferred Stock votes together with the common stock on an as-converted basis, and each share of Series A Preferred Stock is entitled to cast 25,000 votes. According to the parties' pre-trial stipulation, Gorman owns, directly or indirectly, approximately 2.4 million shares of common stock (or nearly 60% of Westech's common stock outstanding), and approximately 173 shares of Series A Preferred Stock (or 51% of the 338 shares outstanding).
Neither Dura nor Salamone has ever owned Westech stock. Dura, who served as interim Chief Executive Officer ("CEO") before Salamone, was elected to the board in late 2012.
B. The Series A Preferred Stock Transaction
According to the Management Group, Gorman's mismanagement and profligate spending caused Westech to experience severe financial distress from 2005 to 2011, particularly a rapid decline in net capital in 2011. Because of the nature of Westech's business, the crisis could have been fatal: the company was required to maintain minimum capital levels by its counterparties, clearing houses, and its regulator, the Financial Industry Regulatory Authority ("FINRA"). As a result, the company needed an infusion of capital.
Investor Investment SharesPallotta $2M 80 (preferred only) Fellus $600,000 cash + $1M note 664 (preferred and notes) Employees $2M 81 (preferred and notes) 7Gorman $1.8M 72 (preferred and notes) [ Editor's Note:The preceding image contains the references for footnote 6and 7
C. The Voting Agreement
As part of the Series A Preferred Stock transaction, the parties executed a Voting Agreement on September 23, 2011.
Before the Series A Preferred Stock issuance, Westech's board consisted of Gorman, Gorman's uncle (Charles Mayer), and Halder. Under Section 1.2 of the Voting Agreement, the Board expanded to seven members with the members to be determined as follows:
The parties also based their arguments on other provisions of the Voting Agreement, including Section 1.4 which addresses the removal of Board members as follows:
The meaning and importance of Section 7.17 was also disputed during the trial. That provision provides:
The parties presented sharply different versions of the negotiating history that led
D. Gorman's Attempt to Regain Board Control
By 2013, when the events leading to this case occurred, Salamone had replaced Fellus as the CEO, and therefore as the designated CEO Board member.
Gorman resigned from the board effective August 7, 2013.
On August 21, 2013, Gorman entered into a Stock Purchase Agreement with Pallotta in which Gorman obtained control over Pallotta's 80 shares of Series A Preferred stock.
Two days later, the purported new directors (Gorman, Sanditen, Woodby, and Williamson) attempted to call a board meeting for August 26, 2013. Dura and Salamone, the remaining undisputed directors, were given notice of the meeting, but did not attend. At that meeting, the purported Board voted to remove Dura and elect Daniel Olsen and T.J. Ford to serve as the Section 1.2(e) independent directors.
Westech's Annual Meeting took place as scheduled on September 17, 2013. The two competing sets of directors presented different slates for election by the stockholders:
Board seat Gorman Slate
25Management Slate (a) Pallotta designee Gorman Vacant (b) Other Series A designee Ford Mark McMurrey (c) Key Holder designee (1) Woodby Halder (c) Key Holder designee (2) Williamson Michael Wolf (d) Westech CEO Salamone Salamone (e) Independent director (1) Olsen Dura (e) Independent director (2) Sanditen Vacant [ Editor's Note:The preceding image contains the reference for footnote 25]
Gorman's slate garnered the majority of votes with 5,969,288 votes cast in favor of the Gorman slate and 3,375,000 votes cast in favor of the Management slate.
The Management Group claims that Gorman's nomination of a separate slate of directors violated the terms that he had agreed to under the Voting Agreement. Because they read the Voting Agreement as providing for a per capita, not a per share, scheme, they argued before the Court of Chancery, and now on appeal, that Gorman was not entitled to nominate his own slate. They contend that Gorman could only nominate the Pallotta Designee, and then only after the proxy from Pallotta became effective.
Gorman disputes this interpretation, and argues instead that the Voting Agreement provides for a per share scheme. Under Gorman's reading, because he held more than 50% of the Series A Preferred Stock entitled to elect the Key Holder Designees, he could remove and elect those two directors under Section 1.2(c). As the majority holder of the Series A Preferred Stock, he maintains that the Series A Designees are designated by a majority of the holders of the Series A Preferred Stock measured on a per share basis. He argues further that Section 1.4(a) allows him to remove any Series A Designee as a holder of the majority of the shares of the Series A Preferred Stock. Gorman argued that any other reading of the Voting Agreement would be incompatible with Section 212(a) of the DGCL,
E. The Court of Chancery Proceedings
On August 27, 2013, after Gorman sent his written consents to Westech but before the Annual Meeting scheduled on September 17, 2013, Gorman and the Management Group each filed separate § 225 actions in
Not surprisingly, in view of the record, the Court of Chancery found that the negotiating history of the Voting Agreement was "not particularly illuminating"
Similarly, the Voting Agreement in Section 1.2(e) replaced the Model Voting Agreement's language regarding an independent individual "mutually acceptable to (i) the holders of a majority of the Shares held by the Key Holders ... and (ii) the holders of a majority of the Shares held by the Investors" with "Independent Directors mutually acceptable to the Series A Designees and the Key Holder Designees of the Board."
The Court of Chancery found no contemporaneous evidence explaining how the Key Holders were chosen. Pallotta was, at one point, listed as a Key Holder, not Halder, and the Court of Chancery could not find a satisfactory explanation for this change.
The Court of Chancery also found no contemporaneous evidence to support the Management Group's triumvirate theory, or their broader claim about the need to limit Gorman's control over the board. The word "triumvirate" did not appear in any document from the 2011 negotiations, despite the assertions by Monaco, Halder, and Salamone in their respective depositions that the purpose of the Voting Agreement was to create such a three-headed regime.
After reviewing this evidence and the text of the Voting Agreement as a whole, against the preference in Delaware for a per share scheme unless the relevant governing documents clearly specify otherwise, the Court of Chancery ultimately held that Section 1.2(b) of the Voting Agreement provides for a per share scheme, but that Section 1.2(c) provides for a per capita scheme. It further held that the Voting Agreement did not violate 8 Del. C. § 212(a) because Section 218 of the DGCL explicitly permits stockholders "to construct a contractual overlay on top of that mechanism to agree to vote their shares in accordance with [a] more specific scheme."
According to the Court of Chancery, the parties did not make "nuanced arguments" about the right of removal in Section 1.4 during the trial, but instead referenced Section 1.4 only to support their respective arguments about Section 1.2. Nonetheless, the Court of Chancery had to interpret Section 1.4 to determine whether Gorman's attempt to remove Halder was valid. The Court held that Section 1.4(a) explicitly "permits the holders of more than fifty percent of the then outstanding shares (which includes the holder's common shares) entitled under Section 1.2 to designate
Accordingly, the Court of Chancery found that Gorman's removal of Halder as the Key Holder Designee was valid, but that Gorman's attempts to elect Woodby and Williamson were not because Gorman did not have the consent of the other Key Holders. The Court of Chancery also found that Gorman's attempts to remove Dura and elect Olsen and Ford as independent directors under Section 1.2(e) were invalid because the other Key Holders did not approve. It concluded that the remaining three seats (including the two Key Holder seats) were vacant. According to the Court of Chancery, the Board of Westech consists of:
§1.2(a) §1.2(b) §1.2(c) §1.2(c) §1.2(d) §1.2(e) §1.2(e) Pallotta Series A Key 1 Key 2 CEO Ind. 1 Ind. 2 Gorman Ford [Vacant] [Vacant] Salamone Dura [Vacant]
On appeal, both parties contend that the Court of Chancery erred. Gorman claims 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 contends the trial court erred, but that Salamone, Halder, Dura, Wolf and McMurray were all validly elected as members of the Westech Board. We do not agree with either side and affirm the Court of Chancery's ruling that Section 1.2(b) sets forth a per share scheme and Section 1.2(c) sets forth a per capita scheme. However, we conclude that the Court of Chancery erred 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. 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 these conclusions, we hold 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) set forth above. In addition, we affirm the Court of Chancery's conclusion that Gorman's attempt to remove Dura was invalid and that Ford was validly elected under Section 1.2(b). Accordingly, we AFFIRM in part and REVERSE in part.
A. Our Standard of Review
We review questions of contract interpretation de novo. "Delaware law adheres to the objective theory of contracts, i.e., a contract's construction should be that which would be understood by an
B. Section 1.2(b) is a Per Share Provision
1. The Management Group's Contentions
The Management Group argues that Section 1.2(b) of the Voting Agreement is clear and unambiguous, and thus, there is no need to consider any extrinsic evidence. They contend that by using the language "majority of the holders," the parties purposefully chose to avoid using other language referencing the majority of the shares or stock as used throughout the DGCL.
2. Gorman's Contentions
Gorman also argues that Section 1.2(b) is unambiguous. However, he argues that it is unambiguously a per share provision.
For example, Gorman contends that the removal provisions in Section 1.4 require only a majority vote to remove directors designated under Sections 1.2(b) and 1.2(c). As a result, a majority stockholder could remove any director designated through a per capita vote under Sections 1.2(b) and 1.2(c). If Section 1.2(b) provides for a per capita scheme, Gorman argues that the combined effect of the designation and removal provision would lead to an "unreasonable result."
Further, Gorman contends that the Voting Agreement's structure and the Series A Preferred stock agreements as a whole do not restrict transfers.
3. Court of Chancery's Findings
The Court of Chancery concluded that Section 1.2(b) was ambiguous. Contractual ambiguity exists "`[w]hen the provisions in controversy are fairly susceptible of different interpretations or may have two or more different meanings.' Where a contract is ambiguous, `the interpreting court must look beyond the language of the contract to ascertain the parties' intentions.'"
In particular, the Court of Chancery found Gorman's theory regarding Section 7.17 to be more persuasive.
4. The Plain Language and Structure of the Voting Agreement
As we recently stated in ev3 v. Lesh, "[w]hen parties have ordered their affairs voluntarily through a binding contract, Delaware law is strongly inclined to respect their agreement, and will only interfere upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract."
However, we have also said that we apply a presumption against disenfranchising the majority stockholder, absent a clear intent by the parties to a contract to do so. For example, the Court of Chancery stated in Rohe v. Reliance Training Network, Inc., "although Delaware law provides stockholders with a great deal of flexibility to enter into voting agreements, our courts rightly hesitate to construe a contract as disabling a majority of a corporate electorate from changing the board of directors unless that reading of the contract is certain and unambiguous."
The Court of Chancery in Rohe relied on an earlier case, Rainbow Navigation, Inc. v. Yonge, where the Court of Chancery observed, "[i]t is enough to note that an agreement, if it is to be given such an effect [which deprived 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. When the contract to be interpreted is something like a certificate of incorporation, the presumption against disenfranchising majority stockholders will typically apply if the certificate is not clear on its face, as investors ought to be able to rely on the express terms of the certificate and have doubts resolved in favor of their ability to act by majority vote. In the case of a contract that was the subject of negotiation,
As the Court of Chancery noted in Harrah's Entertainment, Inc. v. JCC Holding Co., another case involving the interpretation of corporate instruments involving stockholder voting rights:
The Court of Chancery acknowledged the risk of disenfranchising stockholders, but clarified how a presumption against disenfranchisement operates in situations like these, where sophisticated parties have negotiated a bilateral agreement:
Here, in examining the language of Section 1.2(b) of the Voting Agreement, several aspects of the structure of the Voting
But because this contract was negotiated by two sophisticated parties, the Court of Chancery properly considered the expectations of both parties in forming the contract. Thus, in attempting to discern the meaning of Section 1.2(b), the trial court properly considered not only the language of the provision itself, but also the context of this provision within the overall framework of the Voting Agreement. The trial court considered the purpose of the Voting Agreement, as evidenced by its text, as well as other provisions relating to the removal of directors and provisions relating to the aggregation of shares.
With respect to the purpose of the Voting Agreement, the "Recitals" to the Voting Agreement offer at least some insight. For example, the first Recital states:
Arguably, the explicit purpose of the Voting Agreement — "provid[ing] the Investors with the right ... to designate the election of certain members of the board of directors of the Company"
Yet the Court of Chancery expressed concern that interpreting Section 1.2(b) to provide for a per capita scheme could lead to an absurd result: Gorman (or any other
In response, Gorman argues that shares cannot simultaneously be aggregated to form one "holder" for the purposes of a per capita scheme, and then have the rights be separately apportioned.
The Court of Chancery rejected the Management Group's contentions, apparently because Section 7.17 was unaltered from the provision in the Model Voting Agreement and there was no contemporaneous evidence supporting the Management Group's "new theory in anticipation of trial."
However, it is certainly plausible that Section 7.17 could have been viewed as sufficient to prevent circumvention of a per capita scheme, even though it was derived from a Model Voting Agreement that contemplated a per share scheme. At least a reasonable reading of Section 7.17 is that it is sufficient to prevent circumvention of a per capita scheme, although it may not have been clearly modified from the Model Voting Agreement for the purpose the Management Group now contends.
The removal provisions are also relevant in understanding the overall structure of the Voting Agreement. Reference to Section 1.4(a) may suggest that Section 1.2(b) was intended to be a per share provision. As discussed further below, Section 1.4(a) provides that removal is permitted when directed or approved by the affirmative vote of the "Person" or "holders of more than fifty percent (50%) of the then out-standing Shares."
Given that some aspects of the Voting Agreement suggest a per capita view of Section 1.2(b), and others suggest a per share view, we agree with the trial court that Section 1.2(b) is ambiguous. Thus, in keeping with the teaching of Harrah's the Court of Chancery properly undertook a review of the extrinsic evidence.
5. Extrinsic Evidence
When a contract's plain meaning, in the context of the overall structure of the contract, is susceptible to more than one reasonable interpretation, courts may consider extrinsic evidence to resolve the ambiguity.
The Management Group argues that the Voting Agreement was negotiated to create a triumvirate structure with checks and balances.
An examination of the capital infusion may be helpful to understand what the parties intended. Pallotta, who invested $2 million, obtained the right to designate a director under Section 1.2(a), and Fellus, who agreed to invest $1.6 million, was entitled to be designated as a director on the Westech Board under Section 1.2(d) because he was to become the new Westech CEO. Gorman and Halder, who were already Westech board members, were named in the Voting Agreement as the initial Key Holder Designees under Section 1.2(c). Gorman invested $1.8 million. Halder, on behalf of himself and what appears to be his children, invested the smallest amount of money among the Key Holders, namely, $225,000. But including all of the other Westech employees who contributed, the total employee share was identical to Pallotta's — namely, approximately $2 million. The employees, however, were not a "bloc" in the sense that there might not always be one individual who could speak on their collective behalf. Thus, the Management Group argues that Section 1.2(b) provided for a per capita scheme to allow these smaller investors a meaningful opportunity to designate a director to the Board.
Further, as noted earlier, a comparison of Section 1.2(c) in the Model Voting Agreement to Section 1.2(b) of the Voting Agreement indicates that "the holders of a majority of the Shares of Common Stock" was changed to "the majority of the holders of the Series A Preferred Stock."
Gorman contends that the smaller investors were never intended to have the same voting power as the larger investors. The Court of Chancery found Gorman's view to be more compelling, because the Management Group could not point to any contemporaneous evidence that the smaller investors were intended to have the same voting power as the larger investors. As set forth more fully in the discussion of Section 1.2(c), we believe the Court of Chancery
6. Judicial Presumptions
We agree that given the conclusion that Section 1.2(b) is ambiguous after considering the plain meaning and the contemporaneous extrinsic evidence, we apply the judicial presumptions set forth in our case law. As discussed above, Rohe v. Reliance Training Network, Inc.
In Rainbow Navigation, the Court of Chancery stated:
As noted, these presumptions apply differently depending on the type of contract at issue. In this case, there is some evidence to suggest that the parties intended for Section 1.2(b) to create a per capita scheme to designate Board nominees, but the Court of Chancery did not find that the evidence was sufficiently "clear and convincing" to overcome the presumption against disenfranchisement. Although if we were the trial judge in the first instance, we may have interpreted the contract differently because there was room to find that the parol evidence reflected the parties' intention to apply a per capita scheme consistently across the entire Voting Agreement, we defer to the Court of Chancery's reasoned determination that there was evidence supporting a contrary outcome as to Section 1.2(b) and to therefore rule as it did. Accordingly, we affirm the Court of Chancery's conclusion that Section 1.2(b) provides for a per share scheme. In consequence, Gorman as the majority stockholder was entitled to designate his own candidate. Ford was thus validly designated and elected to the seat.
C. Section 1.2(c) is a Per Capita Provision
1. The Management Group's Contentions
The Management Group argues that Section 1.2(c) is unambiguous in providing for a per capita scheme to designate Board nominees. They argue that where the Voting Agreement intended the vote to be based on shares, language referring to
The Management Group also contends that at the time the Voting Agreement was executed, Gorman "had more shares of capital stock than Halder and Fellus combined...."
2. Gorman's Contentions
Gorman argues that Section 1.2(c) is ambiguous. He argues that where there is ambiguity, courts must apply gap-fillers in favor of majority voting.
Gorman further contends that the Management Group's "Gorman designee" argument ignores contemporaneous evidence that the parties intended the Key Holders to be substantial investors, as was the case in all drafts of the Voting Agreement "until Halder inexplicably replaced Pallotta as a Key Holder in the execution version."
Gorman further argues that while he would have controlled the election of Key Holder Designees when the Voting Agreement was executed, nothing prevented Halder and/or Fellus from acquiring more shares and utilizing Section 1.2(c) as a protective mechanism for their own investment. Because nothing prevented Gorman from selling some of his own stock, and the other Key Holders from purchasing stock, the other Key Holders could eventually choose to dilute Gorman's control over the Key Holder Designees.
Gorman also argues that the removal provisions under Section 1.4 support his interpretation of 1.2(c). Gorman argues that Section 1.4 contemplates removing directors by a per share vote, and therefore, Section 1.2(c) should be interpreted the same way.
Finally, Gorman asserts on cross-appeal that the Management Group's interpretation of a per capita scheme would run afoul of Section 212(a) of the DGCL.
3. Court of Chancery's Findings
The Court of Chancery concluded, based on the plain language and structure of the Voting Agreement, that Section 1.2(c) provides for a per capita scheme. The Court found the Management Group's arguments persuasive — that interpreting Section 1.2(c) to provide for a per share scheme would convert the Key Holder Designee into a "Gorman Designee" provision and would "read [the Key Holders] out of existence."
4. The Plain Language and Structure of the Voting Agreement
Section 1.2(c) provides for "two persons elected by the Key Holders, who shall initially be John J. Gorman IV and Robert W. Halder (the `Key Holder Designees')."
We agree with the Court of Chancery that reading Section 1.2(c) as providing for a per share scheme would read the Key Holders specified in Schedule B out of existence. Because Gorman was the majority stockholder at all relevant times compared to the other named Key Holders, if the directors under Section 1.2(c) could be designated by a per share vote, the directors would automatically be the "Gorman Designees," much as the "Pallotta Designee" was specifically named in Section 1.2(a). By contrast, the two designees under Section 1.2(c) are named as "Key Holder Designees," and Gorman was only one of the three Key Holders. To give effect to the clear specification of two other Key Holders, we read Section 1.2(c) to provide for a per capita scheme.
The Removal Provisions of Section 1.4 of the Voting Agreement Were Intended to Match the Designation Provisions
The relevant removal provision under Section 1.4(a) provides:
Section 1.4(c) also provides that "upon the request of any party entitled to designate a director as provided in Section 1.2(a), 1.2(b) or 1.2(c) to remove such director, such director shall be removed."
Unlike Section 1.2(b), the Key Holder Designee provision in Section 1.2(c) does not refer to "holders of the Series A Preferred Stock." Rather, like Section 1.2(a), it refers to persons, i.e., the three designated Key Holders. Further, the Voting Agreement does not require that any of the Key Holders must own stock.
As a result, we believe that the only reasonable reading of the Voting Agreement is that the designation provisions and removal provisions were intended to be symmetrical. Thus, we read the first provision of Section 1.4(a), removal by the "affirmative vote of the Person," as providing the applicable removal process for directors designated under Section 1.2(c). Only those persons eligible to designate the Key Holder Designees can remove them. Although the parties could have been clearer, particularly by appending "(s)" to "Person" as they did later in the same sentence, they appear to have lifted the text from the Model Voting Agreement without making that minor modification.
Accordingly, the parties disputed whether Gorman had the unilateral power to remove Halder from the Board. The Court of Chancery found that he did under Section 1.4. However, based on the foregoing, we find the language of Section 1.4(a) is clear and unambiguous, and conclude that Gorman was not entitled to remove Halder as a Key Holder Designee from the Board.
5. Extrinsic Evidence
Despite finding that Section 1.2(c)'s plain language and the overall structure of the Voting Agreement indicated that a per capita scheme was intended, the Court of Chancery undertook an analysis of the extrinsic evidence. The Court found that the evidence "was generally not supportive of [the Management Group's] triumvirate theory, although it also does not provide definitive proof that Gorman's account of the negotiations is correct."
The Court of Chancery focused on an email sent by Westech's counsel in the summer of 2011 (the "2011 email"). In the 2011 email, counsel discussed blanks in the Voting Agreement and indicated, "[w]e are contemplating including Fellus, Gorman, Pallotta (and perhaps Ira Lampert and any other significant investor from the Pallotta group as the Key Holders). In Gorman's group, the next biggest investor is at $250,000."
Misinterpretation of "Groups"
First, the Court of Chancery misinterpreted the use of the term "group," at
The 2011 email references a "Pallotta group," but there is no evidence, contemporaneous or after-the-fact, to explain what the "Pallotta group" means in that context. The 2011 email suggest that Ira Lampert ("Lampert") may be a member of Pallotta's "group," but Lampert apparently never purchased any of Westech's Series A Preferred Stock, at least not under his own name.
Further, Pallotta's own deposition testimony undermines the Court of Chancery's interpretation that the purpose of the Voting Agreement was to protect the interests of the two significant investors, Pallotta and Gorman. Pallotta testified that he never contemplated serving as a Key Holder, nor was he aware if Monaco, who negotiated the Voting Agreement on his behalf, ever contemplated having him serve as one.
Misinterpretation Regarding Employee Representation
Second, the Court of Chancery also failed to accurately assess Halder's role
Further, the Court of Chancery erroneously concluded that Halder did not appear in the relevant documents until late in the process. The record reflects that Halder was intimately involved in the Voting Agreement negotiations from the beginning. He is included on every email contained in the record sent by the attorneys involved in drafting the Voting Agreement.
But in the April 5 draft of the Co-Sale Agreement that was part of the same set of documents for the Series A Preferred Stock transaction as the Voting Agreement — and consistent with Halder's inclusion as a Key Holder Designee in the draft version of Section 1.2(b) of the Voting Agreement itself — Halder was listed as one of three Key Holders.
Further, Monaco's deposition testimony endorses the Management Group's theory about a triumvirate of Gorman, Halder, and Fellus.
Similarly, Fellus recalled during his deposition that the purpose of the Voting Agreement was to "guarantee that John Gorman no longer had control"
Thus, the Court of Chancery erred in certain of its factual findings, namely, the role of Halder in the structure, and its interpretation of the 2011 email. These errors, however, do not undermine the Court of Chancery's ultimate conclusion — which we affirm — that Section 1.2(c) provides for a per capita designation of the Key Holder Designees.
6. There is No Violation of Section 212(a)
Gorman argues on cross-appeal that a per capita interpretation of Section 1.2(c) would violate 8 Del. C. § 212(a).
Although Section 212(a) sets forth the "one share/one vote" default rule, Section 212(a) does not prohibit stockholders from agreeing upon the manner in which such shares will be voted. For example, Section 218(c) provides:
The Voting Agreement established a two-step process in connection with the nomination and election of directors. The nominees are designated in the first step
Gorman argues that although the election process mandated by the Voting Agreement comports with Section 212(a), the nomination process violates Section 212(a). Yet, to adopt Gorman's argument would require us to ignore the distinction between the nomination process and the election process established in the Voting Agreement. Gorman vigorously contends that Section 212(a) applies to the nomination step of the Westech election process "because the Nomination Step requires a stockholder vote."
We disagree and conclude that the Voting Agreement does not provide for per capita voting in connection with the designation
D. Other Conclusions
Finally, we conclude that after resigning from the Board, Gorman did not have the authority to remove Dura as an independent director, because Section 1.4(a)'s removal provision corresponds to the designation provision in Section 1.2(e), requiring agreement and joint action by the Series A Designees and the Key Holder Designees, which did not occur. Further, because of our analysis of Section 1.2(b), we affirm the Court of Chancery's conclusions that Ford was validly elected at the 2013 Annual Meeting as a Series A Designee. Thus, we hold that the composition of the Westech Board is as follows:
§1.2(a) §1.2(b) §1.2(c) §1.2(c) §1.2(d) §1.2(e) §1.2(e) Pallotta Series A Key 1 Key 2 CEO Ind. 1 Ind. 2 Gorman Ford Halder [Vacant] Salamone Dura [Vacant]
Based upon the foregoing, the Judgment of the Court of Chancery is
App. to Appellant's Opening Br. at A929-30 (emphasis added). We note that this approach is not particularly helpful to anyone here — including the courts, which have had to spend considerable resources attempting to divine the parties' intent. Gorman's view, if sanctioned, "would permit a sophisticated party to exploit ambiguities in contracts to extract a better bargain for itself after the fact, knowing that the court would have to remain blind to parol evidence that would make untenable its view of the contract." Harrah's Entm't, Inc. v. JCC Holding Co., 802 A.2d 294, 313 (Del. Ch.2002).