Opinion ID: 2758887
Heading Depth: 2
Heading Rank: 5

Heading: The Court of Chancery Proceedings

Text: 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 the Court of Chancery. The Court of Chancery consolidated the two cases, designating Gorman as the plaintiff. Although both sides filed motions for judgment on the pleadings, asserting that the Voting Agreement was clear and unambiguous, the Court of Chancery found on the basis of the pleadings that Sections 1.2(b) and 1.2(c) were ambiguous. The parties engaged in additional discovery to resolve the ambiguity through extrinsic evidence. The Court conducted a trial on a stipulated record on January 24, 2014, and issued its Memorandum Opinion on May 29, 2014, with an Order and Final Judgment on June 24, 2014. We observe that the trial court was 28 8 Del. C. § 212(a) (“Unless otherwise provided in the certificate of incorporation and subject to § 213 of this title, each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder. If the certificate of incorporation provides for more or less than 1 vote for any share, on any matter, every reference in this chapter to a majority or other proportion of stock, voting stock or shares shall refer to such majority or other proportion of the votes of such stock, voting stock or shares.”). 29 App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1350. 16 left to discern the parties’ intent from a paper record that is devoid of the kind of context that can often be critical in determining why the parties drafted the provisions as they did. Not surprisingly, in view of the record, the Court of Chancery found that the negotiating history of the Voting Agreement was “not particularly illuminating”30 in determining whose account of these negotiations was more accurate.31 The Voting Agreement was based on a form agreement found on the website of the New Venture Capital Association (the “Model Voting Agreement”). Only minimal changes were made to the Model Voting Agreement by the parties. For 30 Westech, 2014 WL 2211612, at . 31 Halder claims in his deposition that one reason for the lack of contemporaneous written evidence regarding the intent to construct Section 1.2(b) as providing for a per capita scheme is Gorman’s practice to have few negotiations in writing. Halder testified as follows: [Gorman’s Counsel] Q: So other than the deal documents, do you have any emails that reflect that, do you have any documents that reflect that, do you have any letters between you and Mr. Gorman, do you have any contemporaneous notes, do you have any evidence other than what you say the intent is to substantiate your claim that that’s what the intent was? [Management Group’s Counsel] A: Object to form. [Halder] A: Mr. Gorman, through the twelve years that I’ve known him, has a saying -- I’m sure he’ll smile through the phone as I say this -- that you’re the master of the spoken word and you’re a slave to the written word. That was how John approached this -- the entirety of this negotiation. And what I will tell you is, and you will see for yourselves as you go through these depositions, the recollection of the parties I believe will end up being far more consistent, with my interpretation of the documents than it is with your interpretation of the documents. 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). 17 example, a comparison of Section 1.2(c) of the Model Voting Agreement shows 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” in what is now Section 1.2(b) of the Voting Agreement. 32 Also, language in what is now Section 1.2(c) of the Voting Agreement describing the Key Holder Designees was altered from “one individual designated by the holders of a majority of the shares” to “two persons elected by the Key Holders,”33 who were defined later in the Voting Agreement. 34 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.” 35 Section 1.4, which addresses removing directors, and Section 7.17, which addresses aggregating shares for the purposes of 32 Compare App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1322 with App. to Appellant’s Opening Br. at A540. 33 Compare App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1322 with App. to Appellant’s Opening Br. at A540. 34 See Voting Agreement Schedule B, App. to Appellant’s Opening Br. at A619. 35 Compare App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B1323 with App. to Appellant’s Opening Br. at A540. 18 determining rights under the agreement, were both lifted verbatim from the Model Voting Agreement. 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. 36 The Model Voting Agreement merely notes in a footnote that “in most cases investors will want the term ‘Key Holders’ to include major common stock or option holders in addition to the individuals who actually founded the Company,” but does not contain a provision detailing how these holders are designated or removed. 37 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 36 Westech, 2014 WL 2211612, at , n.39 (“After-the-fact testimony has been offered to explain how Halder joined the Board, but, as discussed below, the Court does not find those explanations to be as credible as contemporaneous documentary evidence.”). 37 App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at 1320. 19 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.” 38 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 a director to remove that director.”39 Because Gorman was the majority stockholder in August 2013, the Court of Chancery concluded that he was entitled to remove Halder from the board. 38 Westech, 2014 WL 2211612, at . 39 Id. at . 20 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. 21 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.40 Because of its error regarding Section 1.4(a), we find that the Court erred in holding the removal of Halder to be valid. 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.