Submitted: January 24, 2014
Neil B. Glassman, Esquire, Stephen B. Brauerman, Esquire, Vanessa R. Tiradentes, Esquire, and Sara E. Bussiere, Esquire of Bayard, P.A., Wilmington, Delaware; Michael J.W. Rennock, Esquire of Steptoe & Johnson LLP, New York, New York; and Daniel H. Byrne, Esquire and Dale Roberts, Esquire of Fritz, Byrne, Head & Harrison, PLLC, Austin, Texas, Attorneys for Plaintiff John J. Gorman, IV.
Michael J. Maimone, Esquire, Gregory E. Stuhlman, Esquire, and E. Chaney Hall, Esquire of Greenberg Traurig, LLP, Wilmington, Delaware, Attorneys for Defendants Gary Salamone, Mike Dura, and Robert W. Halder.
NOBLE, Vice Chancellor
This post-trial Section 225 opinion resolves a dispute about the meaning of two subsections of a voting agreement which determine how its signatories designate directors. Either subsection at issue could be interpreted as a majority of shares or per capita voting provision. Perhaps unsurprisingly, the difference in interpretation could grant control of the board to either the plaintiff or the incumbent defendants.
The Court denied the parties' cross motions for judgment on the pleadings because the two provisions were ambiguous. The parties engaged in additional discovery to resolve the ambiguity and provided extrinsic evidence through a stipulated record. After considering the evidence and the arguments offered by the parties, the Court concludes that one ambiguous provision provides for majority of shares voting and the other, which uses the term "elect" without defining it, provides for per capita voting.
The Court was also asked to evaluate the validity of several different acts which sought to restructure the board's composition. After considering those acts, the Court finds that the company's current directors are Salamone, Gorman, Ford, and Dura (all defined below).
Plaintiff John J. Gorman, IV ("Gorman") and six others founded Nominal Defendant Westech Capital Corp. ("Westech" or the "Company"), a Delaware corporation, in 1994. Westech, which went public in 2001, wholly owns Tejas Securities, Inc. ("Tejas"), its primary operating subsidiary and a broker dealer regulated under the Exchange Act of 1934 and by the Financial Industry Regulatory Authority ("FINRA").
Before the execution of the disputed voting agreement, Gorman owned a majority of Westech's common stock and purportedly controlled the board, which consisted of Gorman; Charles Mayer, his uncle; and Robert W. Halder ("Halder").Gorman's father-in-law purportedly also served on the board at an earlier time, but later resigned due to illness. On September 23, 2011, the Company issued Series A Preferred stock to investors for $25, 000 per share. Gorman's friend James J. Pallotta ("Pallotta") invested $2 million in the Company to acquire eighty shares of Series A Preferred (the "Pallotta Shares"). Gorman invested $1.8 million in Series A Preferred and convertible notes. The family members of former Westech CEO, and nonparty, James Fellus ("Fellus") purchased twenty-four shares of Series A Preferred. Fellus also acquired forty shares in exchange for a promissory note upon which he did not make payments and on which he defaulted. Halder, directly and indirectly, purchased nine shares of Series A Preferred and convertible notes. A number of other investors purchased smaller holdings, although these investors are not generally discussed in the parties' arguments. The parties dispute the impetus for this transaction, which is described in greater detail below.
When issuing the Series A Preferred, the Company and its preferred investors executed a voting agreement (the "Voting Agreement"). The Voting Agreement contained director designation provisions for a seven-member board which assured certain significant investors that they would have board representation. From the time when the Voting Agreement was executed until Gorman initiated his attempts to regain control of the Company, its board of directors had five of seven seats filled and was composed of directors Gorman, Mike Dura ("Dura"), A. Peter Monaco ("Monaco"), Gary Salamone ("Salamone"), and Halder. Gorman and Halder served pursuant to Section 1.2(c) of the Voting Agreement as "Key Holder Designees." Monaco served pursuant to Section 1.2(a), as the "Pallotta Designee." Salamone was and is the CEO, and is the holder of the only board seat which has not been contested at some point during this action; he holds that seat pursuant to Section 1.2(d), as the "CEO Director." Dura served pursuant to Section 1.2(e), as one of the two industry directors (the "Industry Directors"). Dura, Halder, and Salamone (the "Incumbents") are the directors of the Company pursuant to this Court's status quo order.
After the Series A Preferred round of financing, Westech had two classes of stock: 4, 031, 722 shares of common stock and 338 shares of Series A Preferred stock. Westech's governing documents grant the Series A Preferred stock the right to vote together with the common on an as-converted basis, such that each share of Series A Preferred receives 25, 000 votes. Westech's certificate of incorporation provides that each share of common stock is entitled to one vote per share.
In late summer 2013, Gorman bought out Pallotta's interest. Thus, as of the time of this action, Gorman owned approximately 2.4 million shares of common (approximately 59.5% of the common) and 173 shares of the Series A Preferred (approximately 51.2% of the preferred). Halder's nine shares of Series A Preferred represent approximately 2.66% of the preferred. Fellus's forty shares of Series A Preferred represent approximately 11.8% of the preferred, and his family's twenty-four shares of preferred stock represent approximately 7.1% of the outstanding preferred. Neither Salamone nor Dura owned any Westech stock during the relevant time period.
Thus, in the absence of the Voting Agreement, Gorman's majority ownership of the Company, even if no other shareholders supported him, would decide the outcome of a board election. As described below, both Gorman and the Incumbents have nominated their preferred slates of directors which were voted upon at a recent annual meeting. Because Gorman's voting power is bound by the director designation provisions in the Voting Agreement, the interpretation of the contested provisions of that agreement will determine whether Gorman's nominees or the Incumbent's nominees were properly elected.
A. The Voting Agreement
Although the parties to the 2011 Series A Preferred round executed other agreements,  the most significant document for the purposes of this control dispute is the Voting Agreement. The provisions designating the board members read:
1.2 Board Composition. Each Stockholder agrees to vote, or cause to be voted, all Shares owned by such Stockholder, or over which such Stockholder has voting control . . . to ensure that at each annual or special meeting of stockholders at which an election of directors is held or pursuant to any written consent of the stockholders, the following persons shall be elected to the Board:
(a) One person designated by Mr. James J. Pallotta ("Pallotta") (the "Pallota [sic.] Designee"), for so long as Pallotta or his Affiliates continue to own beneficially at least ten percent (10%) of the shares of Series A Preferred Stock issued as of the Initial Closing (as defined in the Purchase Agreement);
(b) One person who is an Independent Director and is designated by the majority of the holders of the Series A Preferred Stock (together with the Pallotta Designee, the "Series A Designees");
(c) Two persons elected by the Key Holders, who shall initially be John J. Gorman IV and Robert W. Halder (the "Key Holder Designees");
(d) The Company's Chief Executive Officer, who shall initially be James Benjamin Fellus (the "CEO Director"), provided that if for any reason the CEO Director shall cease to serve as the Chief Executive Officer of the Company, each of the Stockholders shall promptly vote their respective Shares (i) to remove the former Chief Executive Officer from the Board if such person has not resigned as a member of the Board and (ii) to elect such person's replacement as Chief Executive Officer of the Company as the new CEO Director; and
(e) Two individuals with applicable industry experience not otherwise an Affiliate (defined below) of the Company or of any Investor and who are Independent Directors mutually acceptable to the Series A Designees and the Key Holder Designees of the Board.
To the extent that any of clauses (a) through (e) above shall not be applicable, any member of the Board who would otherwise have been designated in accordance with the terms thereof shall instead be voted upon by all of the stockholders of the Company entitled to vote thereon . . . .
The introductory paragraph to Section 1.2 thus binds each Voting Agreement signatory to vote in accordance with the more specific designation provisions of Sections 1.2(a)-(e). For convenience, the Court, at times, refers to Sections 1.2(a)-(e) as voting mechanisms; however, the vote under those sections is not the formal election vote of all of the Company's shareholders. These sections define a specific process for designating the directors whom the Series A investors have committed to elect by the introductory paragraph to Section 1.2. Similarly, under the Voting Agreement's removal or amendment provisions, Series A Preferred holders vote their respective shares to determine a course of action which then binds the agreement's signatories.
The "Key Holders" are listed in Schedule B to the Voting Agreement as Gorman, Halder, and Fellus. The Voting Agreement does not define the procedures by which Key Holders are added or removed, and the parties do not argue that such provisions (or their absence) should be considered when interpreting the agreement.
The Voting Agreement also provides for removal:
1.4 Removal of Board Members. Each Stockholder also agrees to vote, or cause to be voted, all Shares owned by such Stockholder, or over which such Stockholder has voting control . . . in whatever manner as shall be necessary to ensure that:
(a) no director elected pursuant to Sections 1.2 or 1.3 of this Agreement may be removed from office unless (i) such removal is directed or approved by the affirmative vote of the Person, or of the holders of more than fifty percent (50%) of the then outstanding Shares entitled under Section 1.2 to designate that director or (ii) the Person(s) originally entitled to designate or approve such director or occupy such Board seat pursuant to Section 1.2 is no longer entitled to designate or approve such director or occupy such Board seat;
(b) any vacancies created by the resignation, removal or death of a director elected pursuant to Sections 1.2 or 1.3 shall be filled pursuant to the provisions of this Section 1; and
(c) 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.
The Voting Agreement also contemplates the termination, amendment, or waiver of the agreement in whole or in part under certain circumstances:
7.8 Consent Required to Amend, Terminate or Waive. This Agreement may be amended or terminated and the observance of any term hereof may be waived . . . only by a written instrument executed by (a) the Company; (b) the holders of a majority of the Shares held by the Key Holders and (c) the holders of two-thirds of the shares of Series A Preferred Stock issued as of the Initial Closing . . . held by the Investors (voting as a single class and on an as-converted basis). Notwithstanding the foregoing:
(a) this Agreement may not be amended or terminated and the observance of any term of this Agreement may not be waived with respect to any Investor or Key Holder without the written consent of such Investor or Key Holder unless such amendment, termination or waiver applies to all Investors or Key Holders, as the case may be, in the same fashion; . . .; and
(e) Section 1.2(a) of this Agreement shall not be amended or waived without the written consent of Pallotta; Section 1.2(b) of this Agreement shall not be amended or waived without the written consent of the holders of a majority of shares of Series A Preferred Stock; and Section 1.2(c) of this Agreement shall not be amended or waived without the written consent of the holders of a majority of Shares held by the Key Holders.
Both of these provisions (Sections 1.4 and 7.8) contain more precisely articulated majority voting standards which read: "holders of more than fifty percent (50%) of the then outstanding Shares" or "the holders of a majority [or of two-thirds] of the Shares . . . ."
B. The Motivation for the Series A Preferred Financing
The parties offer competing explanations for the Series A Preferred round of financing. Defendants claim that Gorman's acts drove the Company to seek additional capital to survive. Gorman contends that the Series A Preferred round was pursued to facilitate growth and to permit the acquisition of other broker dealers. The parties argue that ...