Del. Ct. Invalidates Bylaw Seeking CEO's Removal

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By Michael Greene

Aug. 7 — John Gorman IV's attempt to take over as Westech Capital Corp. top executive hit a bump in the road, after the Delaware Chancery Court July 31 invalidated a bylaw that would have allowed stockholders to remove and replace corporate officers.

The majority stockholder sought to implement the amended bylaw by removing the company's CEO Gary Salamone and electing himself to that role.

Vice Chancellor John W. Noble, however, held that the bylaw was invalid under Delaware law and that Gorman's actions in reliance were of no effect.

“Delaware law does not allow stockholders to remove directly corporate officers through authority purportedly conferred by a bylaw,” Noble wrote. “Such a bylaw would unduly interfere with directors’ management prerogatives by preventing them from discharging one of their most important functions.”

Legal Battle for Board

The chancery court's decision is the most recent in the ongoing battle for control of Westech's board. 

In May 2014, Noble issued a ruling that left the company with a four-member board. On appeal in late 2014, the Delaware Supreme Court determined that the company's board consisted of five members, by adding defendant Robert Halder to the list of directors.

Gorman initiated this 8 Del. C. § 225 action seeking declarations that Salamone and Halder no longer serve on Westech's board based upon developments that occurred during the appeal of the chancery court's decision.

In addition to claiming that stockholders acted through written consent to oust Salamone as CEO, Gorman additionally claimed that Halder is no longer a director because he formally resigned from his board seat.

Invalid Bylaw

In dismissing the claim seeking a declaration that Salamone is not on Westech's board, the court concluded that the amended bylaw improperly intrudes on the board's authority.

Noble reasoned that removing a corporate officer constitutes “a substantive business decision” because it allows stockholders to directly manage a corporation's business and affairs. Specifically, he noted that the bylaw did more than dictate how officers are appointed and removed, in that it permits stockholders to do so without cause.

Status Quo

Conversely, the court found that it was at least reasonably conceivable that Halder had resigned as director. The defendant argued that Halder could not have surrendered his position in a July 2014 resignation because it occurred while the chancery court's decision was under appeal.

Noble, however, found that the plaintiff had alleged facts that Halder's post-resignation conduct was consistent with a lack of interest in serving as director, which included allegations that he began working for a Westech competitor.

Accordingly, the court determined that it would issue a status quo order that will leave the company's board again with four members, excluding Halder.

The plaintiff was represented by Bayard PA, Wilmington, Del., and Fritz, Byrne, Head & Harrison PLLC, Austin, Texas.

The defendants were represented by Chipman Brown Cicero & Cole LLP, Wilmington.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/JOHN_J_GORMAN_IV_Plaintiff_v_GARY_SALAMONE_and_ROBERT_W_HALDER_De.