Delaware Supreme Court Clarifies Voting Agreement Interpretation: Per Share vs. Per Capita Voting Schemes

Introduction

In the landmark case of Gary Salamone, Mike Dura, and Robert W. Halder v. John J. Gorman, IV, the Supreme Court of Delaware addressed intricate issues surrounding the interpretation of voting agreements within corporate governance structures. The dispute centered on the proper interpretation of a Voting Agreement associated with Westech Capital Corporation, a financial services holding company headquartered in Austin, Texas. The primary contention was whether the Voting Agreement established a per share or per capita voting scheme for determining the composition of the company's board of directors.

The parties involved were John J. Gorman, IV ("Gorman"), the founder and majority stockholder of Westech, and the Management Group comprising Gary Salamone, Mike Dura, and Robert W. Halder. Each side presented conflicting interpretations of the Voting Agreement signed in September 2011, leading to subsequent legal actions in the Delaware Court of Chancery and ultimately an appeal to the Supreme Court of Delaware.

Summary of the Judgment

The Supreme Court of Delaware reviewed the Court of Chancery's Memorandum Opinion, which had partially upheld and partially overturned the trial court's decisions regarding the Voting Agreement's interpretation. The core issue was whether certain sections of the Voting Agreement mandated a per share or per capita voting scheme for designating and removing board members.

Ultimately, the Supreme Court affirmed parts of the Court of Chancery's decision while reversing others. The Court concluded that Section 1.2(b) of the Voting Agreement specifies a per share voting scheme, allowing Gorman, as the majority stockholder, to designate his own candidate to the board. Conversely, Section 1.2(c) was interpreted as a per capita provision, enabling the Management Group to designate directors based on the number of individual holders rather than the total shares held.

Additionally, the Court clarified that the removal provisions in Section 1.4 must symmetrically correspond to their designation counterparts in Sections 1.2(a) through 1.2(e). This interpretation invalidated Gorman's attempt to unilaterally remove Halder from the board post-resignation, as it required the approval of the specified "Persons" under Section 1.4(a).

Analysis

Precedents Cited

The judgment extensively referenced several key Delaware cases to underpin its reasoning:

• Harrah's Entertainment, Inc. v. JCC Holding Co.: Emphasized the permissibility of contractual overlays on voting rights under 8 Del. C. § 218(c) while maintaining the default “one share/one vote” principle unless explicitly altered.
• Rohe v. Reliance Training Network, Inc.: Highlighted the presumption against disenfranchising majority stockholders unless there is clear and unambiguous evidence to that effect.
• Rainbow Navigation, Inc. v. Yonge: Reinforced that agreements intending to significantly alter stockholder voting power must do so transparently and unmistakably.
• Eagle Industries, Inc. v. DeVilbiss Health Care, Inc.: Addressed the objective theory of contracts and the necessity for clear intentions in contract interpretation.
• In re Mobilactive Media, LLC S'holders Litig.: Clarified the use of extrinsic evidence in resolving contractual ambiguities.

These precedents collectively guided the Court in interpreting the Voting Agreement, especially concerning the permissible extent of contractual modifications to standard voting mechanisms.

Legal Reasoning

The Court's legal reasoning hinged on several principles:

• Contractual Ambiguity: The Court identified ambiguity in Sections 1.2(b) and 1.2(c) concerning whether they prescribed per share or per capita voting schemes. Under Delaware law, ambiguity allows courts to consider extrinsic evidence to discern the parties' intent.
• Presumption Against Disenfranchisement: As established in prior case law, Delaware courts are cautious in interpreting contracts to reduce the voting power of majority stockholders without clear intention from the parties.
• Symmetry Between Designation and Removal: The Court emphasized that the provisions for designating directors should logically align with the provisions for their removal, ensuring a balanced governance structure.
• Extrinsic Evidence Evaluation: The Court scrutinized contemporaneous negotiations, emails, and deposition testimonies to assess whether the parties intended a per share or per capita scheme. It found insufficient clear and convincing evidence to override the plain language that suggested a per share interpretation for Section 1.2(b) but upheld a per capita interpretation for Section 1.2(c).

By methodically applying these principles, the Court navigated the complex language of the Voting Agreement to arrive at a fair and balanced interpretation that respected both the explicit terms of the agreement and the underlying intentions of the parties.

Impact

This judgment has significant implications for future corporate governance disputes, particularly in Delaware, a jurisdiction renowned for its sophisticated corporate law framework. Key impacts include:

• Clarification of Voting Agreement Constructs: The decision provides a clearer framework for interpreting voting agreements, especially regarding when to apply per share versus per capita voting schemes.
• Preservation of Majority Stockholder Rights: Reinforcing the presumption against disenfranchisement ensures that majority shareholders retain their essential rights unless contracts unambiguously dictate otherwise.
• Symmetric Governance Provisions: Emphasizing the need for symmetry between the designation and removal of directors encourages balanced and equitable governance structures within corporations.
• Guidance on Extrinsic Evidence Use: The case underscores the importance of contemporaneous evidence in interpreting contractual intents, influencing how similar agreements might be drafted and contested in the future.

Corporations may now approach the drafting of their Voting Agreements with a heightened awareness of how symmetric and unambiguous their provisions need to be to withstand judicial scrutiny.

Complex Concepts Simplified

Per Share vs. Per Capita Voting Schemes

Per Share Voting: This scheme allocates voting power based on the number of shares a stockholder owns. For example, owning 100 shares grants 100 votes. It's the standard voting mechanism, adhering to the "one share/one vote" principle.

Per Capita Voting: In contrast, a per capita scheme assigns equal voting power to each individual holder, regardless of the number of shares they own. Whether a stockholder owns one share or a thousand, they receive the same number of votes.

The distinction is crucial in corporate governance as it affects how board members are nominated and elected, potentially altering the balance of power among stakeholders.

Presumption Against Disenfranchisement

Under Delaware law, there is a strong presumption that majority stockholders retain control over corporate decisions, including the election of directors. This presumption requires contracts to be clear and unambiguous if they intend to limit the voting power of such majority holders. Without explicit language indicating otherwise, courts will favor interpretations that maintain the traditional voting rights of majority shareholders.

Symmetry in Governance Provisions

Symmetry refers to the consistency between the processes for designating and removing directors. A symmetric governance structure ensures that the mechanisms for appointing directors are balanced by equivalent mechanisms for their removal. This balance prevents any single party from unilaterally controlling the board without accountability.

Conclusion

The Supreme Court of Delaware's decision in Salamone v. Gorman provides critical guidance on interpreting complex voting agreements within corporate structures. By delineating the boundaries between per share and per capita voting schemes and emphasizing the necessity for symmetric governance provisions, the Court reinforced the importance of clarity and fairness in corporate governance documents.

This case serves as a precedent for future disputes involving voting agreements, ensuring that majority stockholders' rights are preserved unless explicitly and unambiguously modified. Corporations drafting such agreements must now exercise greater precision to define voting mechanisms, thereby fostering more predictable and equitable governance outcomes.

Ultimately, the judgment underscores Delaware's commitment to upholding rigorous standards in corporate law, balancing the interests of majority and minority stakeholders, and promoting integrity and transparency in governance practices.