Opinion ID: 2758887
Heading Depth: 2
Heading Rank: 4

Heading: Gorman’s Attempt to Regain Board Control

Text: 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. 16 Pallotta eventually designated his employee, Anthony Peter Monaco, Jr. (“Monaco”), to fill the Pallotta Designee seat under Section 1.2(a) of the Voting Agreement. Pallotta did not designate Monaco, who had negotiated the Voting Agreement with Westech on Pallotta’s behalf, until March 2012, five months after the Series A Preferred Stock offering closed. According to Monaco’s deposition testimony, the delay was caused by Pallotta’s fear of over-committing Monaco, and Pallotta’s apparent belief that he did not need immediate representation on Westech’s board because he trusted Westech’s management. Only after Pallotta’s attorney resigned and “there was no one to advise him against it” did Pallotta designate his preferred director. 17 As specified in Section 1.2(c) of the Voting 15 See App. to Appellant’s Opening Br. at A879, A695-96, A1010, A1074-75. See also Westech, 2014 WL 2211612, at  (“[The Management Group] argue[s] that the possibility of deadlock would encourage compromise.”). 16 As noted, Dura replaced Fellus as interim CEO, and was then replaced by Salamone. 17 App. to Appellant’s Opening Br. at A1026-28. 11 Agreement, Gorman and Halder held the two Key Holder director seats. Finally, Dura held a Board seat as one of the independent directors referenced in Section 1.2(e). The remaining two seats (i.e., the other Series A designee under Section 1.2(b) and the other Independent Director under Section 1.2(e)) were vacant. 18 Gorman resigned from the board effective August 7, 2013. 19 Both sides engaged in finger-pointing. The Management Group asserted at trial that Gorman was unhappy as he could no longer use Westech as his “personal piggy-bank.”20 Gorman testified that he left because he disagreed with Halder and Salamone’s leadership. One week after resigning, Gorman sent a letter to Westech attempting to remove Halder from the Board and elect Greg Woodby in his place. The letter stated that Gorman was acting as the holder of more than fifty percent of the issued and outstanding Westech voting stock held by the Key Holders. He also purported to elect Barry Williamson to fill the Key Holder seat vacancy. 21 Gorman’s letter cited Sections 1.2 and 1.4 of the Voting Agreement as his authority to elect or remove Key Holder Designees as the majority stockholder. 18 According to Fellus’ deposition, immediately after the Agreement was signed, the board consisted of Halder, Monaco, Gorman and Fellus; Dura was only added “just prior to [Fellus’] leaving.” App. to Appellant’s Opening Br. at A660. 19 Thus, as of August 7, 2013, the Board consisted of Messrs. Dura, Halder, Monaco and Salamone, with three vacancies. 20 Westech, 2014 WL 2211612, at . 21 App. to Appellant’s Opening Br. at A635. 12 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. 22 Pallotta’s designee, Monaco, later resigned from the Board. While the sale was pending,23 Pallotta issued to Gorman a proxy to vote his shares. At the same time, Gorman attempted to elect himself to the Board as the Pallotta Designee, and to designate Barry A. Sanditen to the other Series A Designee seat, by written consents signed by Gorman and four other stockholders. 24 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: 22 App. to Appellant’s Opening Br. at A636-37. A trust in Gorman’s wife’s name purchased Pallotta’s shares along with Gorman under the Purchase Agreement. 23 According to Section 2.12(c) of the Investor Rights Agreement, no preferred stock could be sold without first notifying the company. App. to Appellant’s Opening Br. at A235. Gorman’s attorney was apparently concerned about receiving “some pushback from certain people at the Company as to the validity of the sale.” App. to Appellant’s Opening Br. at A647. 24 App. to Appellant’s Opening Br. at A623-34. The other stockholders were Arch Aplin, Williamson, Woodby, and Ford. 13 Board seat Gorman Slate25 Management 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 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.26 The vote tally was confirmed by an independent inspector, Corporate Election Services, Inc. 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.27 For the other board seats, they 25 App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B10. It is not clear why Gorman’s September 17 slate did not match his previous designations of the board seats. 26 App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B10. 27 The Management Group claims that Gorman backdated Pallotta’s proxy, and there is some evidence that supports this contention. The parties’ Pre-Trial Stipulation states that, “[a]lthough the Pallotta Proxy states that it is effective as of August 21, 2013, the Pallotta Proxy was executed by Mr. Pallotta on or around September 5, 2013.” App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B8. The record does not indicate more precisely when the 14 allege Gorman had just one vote, and would have to agree with “the majority of the [other] holders of the Series A Preferred Stock” to designate the remaining Series A designee under Section 1.2(b); agree with the other Key Holders on the two Key Holder Designees under Section 1.2(c); and, as the Pallotta Designee, agree with the Series A Designees and the Key Holder Designees on the two Independent Directors under Section 1.2(e). 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 proxy was executed and delivered. However, as long as the proxy been executed and delivered before the September 17, 2013, Annual Meeting, Gorman’s election to the board at the Annual Meeting would be valid under the terms of the Voting Agreement, even if his Written Consent on August 21, 2013, was not valid. 15 DGCL, 28 which requires any departure from the default “one share/one vote” principle to appear in the certificate of incorporation. Westech’s Restated Certificate of Incorporation provides for no such deviation, and instead explicitly provides for “one vote for each share of Common Stock.” 29