Opinion ID: 2758887
Heading Depth: 2
Heading Rank: 3

Heading: The Voting Agreement

Text: As part of the Series A Preferred Stock transaction, the parties executed a Voting Agreement on September 23, 2011.8 The Voting Agreement was signed by Halder, Gorman (including as custodian for other accounts), Pallotta, Fellus, and approximately 25 other investors, most of whom were employees who purchased 6 Fellus never made any of the payments owed on the note, and eventually defaulted. Westech filed a lawsuit against him in the United States District Court for the Western District of Texas for his default on the promissory note. Westech, 2014 WL 2211612, at , n.10. They also engaged in arbitration proceedings through FINRA Dispute Resolution, in which Fellus was ordered to pay Westech and Tejas approximately $1 million. App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B35-41. Fellus claimed in his deposition that he believed Westech (particularly Gorman) was engaging in “fraudulent activity” and did not want to “put more good money behind bad money.” App. to Appellant’s Opening Br. at A708, A729. 7 See App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1111; Voting Agreement Schedule A, App. to Appellant’s Opening Br. at A612-18. 8 The parties also executed other documents, including indemnification agreements, an investor rights agreement, and a co-sale agreement, as part of the same transaction. 6 only one or two shares. 9 There are only a few independent holders of Westech common stock who are not bound by the Voting Agreement. According to the Voting Agreement itself, its purpose was to ensure that the new investors would be represented on the board: “in connection with [the Series A Preferred Stock Purchase Agreement] the parties desire to provide the Investors with the right, among other rights, to designate the election of certain members of the board of directors of the Company. . . .” 10 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: 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, from time to time and at all times, in whatever manner as shall be necessary 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 9 Voting Agreement, Schedule A, App. to Appellant’s Opening Br. at A612. The Management Group contends in their brief that although Schedule A to the Voting Agreement lists 48 holders, pursuant to Section 7.17, shares held by affiliated persons and entities are aggregated, and that after aggregating the holdings listed, there are 26 holders. Appellant’s Opening Br. at 15, n. 2. 10 Voting Agreement Recitals, App. to Appellant’s Opening Br. at A539. 7 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 in accordance with, and pursuant to, the Company’s Restated Certificate of Incorporation, including the Series A Preferred Stock Certificate of Designation. For purposes of this Agreement, an individual, firm, corporation, partnership, association, limited liability company, trust or any other entity (collectively, a “Person”) shall be deemed an “Affiliate” of another Person who directly or indirectly, controls, is controlled by or is under common control with such Person, including, without limitation, any spouse or child of such Person, or trust or similar entity which controls, is controlled by or is under common control with such Person or any general partner, managing member, officer or director 8 of such Person or any venture capital fund now or hereafter existing that is controlled by one or more general partners or managing members of, or shares in the same management company with, such Person. For purposes of this Agreement, “Independent Director” has the meaning set forth in Nasdaq Rule 5605(a)(2).11 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: 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, from time to time and at all times, 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. If permitted by applicable law, the Board shall execute any written consents required to remove a director or to fill a vacancy created by resignation, removal or death pursuant this Agreement, and, if required by applicable law, all Stockholders agree to execute any 11 Voting Agreement § 1.2, App. to Appellant’s Opening Br. at A540 (emphasis added). 9 written consents required to remove a director or to fill a vacancy created by resignation, removal or death pursuant this Agreement, and the Company agrees at the request of any party entitled to designate directors to call a special meeting of stockholders for the purpose of electing directors if such a special meeting of stockholders is required by applicable law.12 The meaning and importance of Section 7.17 was also disputed during the trial. That provision provides: 7.17 Aggregation of Stock. All Shares held or acquired by an Investor and/or its Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement, and such Affiliated persons may apportion such rights as among themselves in any manner they deem appropriate. 13 The parties presented sharply different versions of the negotiating history that led to the Voting Agreement. Gorman claimed that the new board structure was meant to appease his friend, Pallotta, by providing him with a designated board seat and to ensure that together, they would “own a majority of the fully diluted shares.”14 By contrast, the Management Group contended that the Voting Agreement was intended to limit Gorman’s control over the board by bringing in other constituents, namely: Westech employees, represented by Halder; management, represented by the CEO; and the other major investor, Pallotta. Before the Series A Preferred Stock issuance, Gorman owned the majority of 12 Voting Agreement § 1.4, App. to Appellant’s Opening Br. at A541 (emphasis added). 13 Voting Agreement § 7.17, App. to Appellant’s Opening Br. at A550. 14 Westech, 2014 WL 2211612, at . 10 common shares, and by all accounts dominated Westech’s board. Various members of the Management Group testified that the purpose of the Agreement was to replace Gorman’s one-man rule with a “triumvirate” of Halder, Fellus, and Gorman, which would reportedly encourage compromise. 15