In re Westech Capital Corp., Consol. C.A. No. 8845-VCN (Del. Ch. May 29, 2014) (Noble, V.C.)

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In this post-trial Section 225 decision, the Court of Chancery resolved a dispute about the meaning of two subsections of a voting agreement that determine how its signatories would designate the directors of Westech Capital Corp. (the “Company”).  The Court previously had denied the parties’ cross motions for judgment on the pleadings because the two provisions were ambiguous.  At trial, the Court evaluated extrinsic evidence and held that one ambiguous provision provided for the designation of a director by a vote of the majority of shares and the other provided for the designation of a director by per capita voting.

The voting agreement provided for a seven-member board and contained several director designation provisions, two of which were relevant to the Court’s decision.  The first, Section 1.2(b), provided that each stockholder party to the voting agreement would vote in favor of “[o]ne person who is an Independent Director and is designated by the majority of the holders of the Series A Preferred Stock.”  The second, Section 1.2(c), provided that each stockholder would vote in favor of “[t]wo persons elected by the Key Holders ….”  John J. Gorman, IV owned a majority of the shares of each class of capital stock of the Company and, therefore, would control the election of the entire board absent the voting agreement.

At the Company’s annual meeting, Gorman and the incumbent directors proffered slates for the election of directors.  The majority of stockholders voted in favor of Gorman’s slate, and both sides filed complaints with the Court on the same day and requested that the Court determine the proper board composition.  The Court considered whether the election complied with the terms of the voting agreement.

The Court held that Section 1.2(b), the provision granting the holders of a majority of the Series A Preferred the right to elect one director, was ambiguous and, after examining extrinsic evidence, concluded that it did not clearly evidence an intent to function as a per capita voting mechanism.  Because Delaware law requires that voting agreement provisions that disenfranchise the majority of the corporate electorate must clearly evidence an intent to do so, Section 1.2(b) of the voting agreement should be interpreted to provide for a vote by the majority of the shares.  In reaching this decision, the Court found that the incumbent directors could not support their argument that Section 1.2(b) provided for per capita voting with any contemporaneous negotiating history.

The Court held that Section 1.2(c), the provision granting “Key Holders” the right to elect two directors, was ambiguous as well.  However, the Court found that this provision should be interpreted to provide for per capita voting.  Noting that the plain meaning of the undefined term “elect” set forth in Section 1.2(c) did not resolve the question, the Court determined that this provision should be construed to avoid an illogical interpretation.  If Section 1.2(c) provided for a majority of the shares vote, then Gorman would effectively be able to designate those directors as well and the identification of the “Key Holders” would be rendered meaningless.  Emphasizing that the voting agreement identified three “Key Holders” by name without any reference to their relative ownership of shares, the Court held that it was better to read Section 1.2(c) to give some effect to the drafters’ choice to list their names than to read them out of existence.

The Court rejected Gorman’s argument that per capita voting in the context of Section 1.2(c) is invalid under Section 212(a) of the Delaware General Corporation Law (the “DGCL”).  Gorman contended that Section 212(a) requires corporations to specify per capita voting in their charters.  The Court stated that Gorman’s argument was inconsistent with Section 218 of the DGCL, which permits stockholders to vote as provided by their agreement.  The Court noted that, under Section 212 of the DGCL, a corporation must announce its intent to diverge from the typical one-share one-vote scheme within its charter, but the stockholders are permitted to construct a contractual overlay to agree to vote their shares.  The Court found the stockholders had done that in Section 1.2(c) and, therefore, Section 1.2(c)’s provision for per capita voting was valid.

The Court held that the director who had been elected at the annual meeting in accordance with Section 1.2(b) of the voting agreement was validly elected, but neither slate had been validly elected in accordance with Section 1.2(c).  The Court then evaluated actions taken by Gorman to remove and appoint certain directors and held that the removal of one director was valid, but the removal of another director and the election of four other directors were invalid.  Based on this decision, the Court identified the directors who properly composed the board.

The full opinion is available here.

Topics:  Contract Disputes, Delaware General Corporation Law, Directors, Preferred Shares, Shareholders, Voting Agreement

Published In: Business Organization Updates, Civil Procedure Updates, General Business Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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