Philip R. Shawe is an owner and the innovation behind the largest translation company TransPerfect. (wikimedia) ()
On a 4-1 vote, the Delaware Supreme Court late Monday upheld the Delaware Court of Chancery’s order to force the sale of TransPerfect Global Inc., a profitable translation-services company deadlocked by tensions between its warring owners.
The ruling followed a dramatic hearing last month, when attorneys for TransPerfect co-founder Philip R. Shawe and his mother argued, for the first time on appeal, that a 2015 ruling by Chancellor Andre G. Bouchard amounted to an unconstitutional taking of Shawe’s property.
Bouchard, the lawyers argued on Jan. 18, had exceeded the court’s authority to appoint a custodian to sell a solvent company, when other, less-intrusive alternatives were available to resolve the impasse.
In a 31-page majority opinion, Justice Collins J. Seitz Jr. said Bouchard had acted within the scope of Section 226 of Delaware’s General Corporation Law. Under that statute, Seitz said, a custodian may be appointed when divisions among directors result in—or merely threaten—irreparable harm to a corporation.
“Here, the director and stockholder deadlock are undisputed, and the Court of Chancery made detailed factual findings of threatened and actual irreparable harm to the company, which we will not disturb on appeal,” Seitz wrote.
“We also agree with the Court of Chancery’s conclusion that, in circumstances such as this, when intermediate measures were attempted but failed, the Court of Chancery properly exercised its discretion to sell the company and distribute the proceeds to deadlocked stockholders.”
Seitz did not address the Shawes’ constitutional challenges, citing a policy of avoiding arguments that were not fairly briefed in the lower court.
Shawe, a 49 percent owner of the company, has been fiercely critical of Bouchard’s handling of the case. On Monday, Shawe turned his ire on the four-justice majority, saying the justices adopted Bouchard’s “biased and predetermined outcome.”
In an emailed statement, he said the decision set a dangerous precedent for Delaware and the companies that choose to incorporate there.
“Now, for the first time in history, no proprietor of a Delaware incorporated business can sleep easy with the specter [that] the courts may just decide to take it, and give [it] to another private citizen,” Shawe said. “Of course we will appeal this ruling to the U.S. Supreme Court, and exploring other federal challenges, for what I can only describe [as] an ‘old boy network’ state court verdict.”
For two years, Shawe has been locked in a legal war with TransPerfect’s other founder and CEO, Elizabeth Elting, who owns half of the company’s 100 total shares. Shawe’s mother Shirley owns the remaining share and aligns closely with her son.
Philip S. Kaufman, an attorney for Elting, praised Monday’s ruling in favor of his client.
”We are most gratified by the Supreme Court’s decisions today, which deliver to Ms. Elting the result to which she is entitled,” said Kaufman, of Kramer Levin Naftalis & Frankel.
An attorney for Shawe was not immediately able to comment.
Once engaged to be married, Elting and Shawe’s personal relationship deteriorated to the point that TransPerfect’s governance structure had been thrown into a hopeless state of gridlock. In 2014, she petitioned the Chancery Court to appoint a custodian to break up the firm.
Bouchard granted the request in August 2015, appointing Skadden, Arps, Slate, Meagher & Flom partner Robert B. Pincus as custodian. Bouchard later accepted Pincus’ recommendation that the company be sold in a modified auction.
The bad blood between Shawe and Elting inevitably spilled over into the litigation, where both the Supreme Court and the Court of Chancery have detailed a myriad ugly run-ins between the two.
Bouchard in August sanctioned Shawe $7.1 million for his “unusually deplorable” behavior, which included lying under oath and trying to delete evidence.
In a separate and simultaneous opinion on Monday, Seitz also upheld Bouchard’s sanctions ruling, saying the chancellor had acted well within his discretion to punish bad faith conduct. That opinion was rendered unanimously by an en banc panel of justices.
A spokesman for Shawe did not immediately provide comment on the sanctions ruling.
In a lone dissent to the majority opinion regarding the sale, Justice Karen Valihura said that Section 226 should not be interpreted so broadly as to allow a custodian to force the company’s sale without shareholder consent.
Under the statute, she said, the role of a custodian should be kept to a minimum in cases involving corporate gridlock.
“The majority opinion now puts stockholders on notice, at least prospectively, that in deadlock situations where a custodian is appointed pursuant to Section 226, a sale to a third party over the objections of stockholders is a potential permissible outcome, even for a thriving business,” Valihura said.
Like the majority, though, Valihura did not touch Shawe’s constitutional challenges, which were only raised after the case had been briefed in the high court. Both justices said the argument raised a novel issue for the courts and declined to tackle it.
Alan Dershowitz, a late addition to Shirley Shawe’s legal team, has already vowed to take his argument to the U.S. Supreme Court, and on Monday he said Shawe’s team was keeping all of its options open.
“We intend to take that novel argument to resolution,” Dershowitz said. He would not disclose any other avenues he and his clients were considering but confirmed that a petition to the nation’s high court remained likely.
Dershowitz, who tangled with Chief Justice Leo E. Strine Jr. in a tense altercation at the close of oral arguments, used the occasion on Monday to take a parting shot at Delaware’s judiciary and the role it plays in shaping American corporate law.
“I would never advise a client to incorporate in Delaware,” he said. “I think we need to have national uniformity. We can’t have one tiny state determine corporate law,” for the entire country.
He continued: “I was not impressed by the actions of the Delaware court system when it came to resolving this issue.”