Pictured in happier times are Philip Shawe and Elizabeth Elting, the founding co-owners of TransPerfect Global, Inc., a hugely successful international translation and business services company formed under Delaware law and headquartered in New York City, with 2014 revenues approaching $500 million, net income of almost $80 million, and no debt.
Now picture this:
- My lawyer instructed me to say “Ouch!” Shawe enters Elting’s office to confront her about a tax distribution she took. Elting tells Shawe to leave her office. Shawe refuses. Shawe sticks his foot in the door to block Elting from closing it. Elting tries to move his foot with her foot. While his foot is in the door, Shawe calls one of his attorneys. The next day, Shawe files with the police a “Domestic Incident Report” in which he accuses Elting of kicking him in the ankle. To ensure the matter is treated as a domestic violence incident and trigger Elting’s arrest, Shawe identifies Elting as his ex-fiancée even though their engagement ended 17 years earlier. The police contact Elting and tell her she’s going to be arrested for assault and battery, but charges are dropped after Elting’s lawyers intervene. Shawe then files a tort action against Elting, in the course of which Shawe sends Elting a letter, with copies sent to company employees, telling her to make available for inspection the shoes she was wearing on the day of the incident.
- Mommy, there’s something scary under my bed! After Elting calls off their engagement, Shawe becomes very angry, goes under Elting’s bed, and stays there for a half hour. Years later, when Elting is overseas on business, Shawe shows up unannounced at Elting’s hotel room, refuses to leave, and again goes under the bed for a half hour.
- Tell that fly on the wall we don’t need him. Shawe instructs company employees to intercept and bring to him Elting’s mail, including mail from her lawyers and their retained financial advisor, and to monitor her phone calls. On a New Year’s eve when Elting is absent, Shawe uses a master key card to enter her office, where he temporarily removes and makes a mirror image of her computer’s hard drive. Over the next two months he secretly enters her office 10 more times between the hours of 11 p.m. and 2 a.m. He also remotely accesses Elting’s hard drive on at least 20 occasions. Shawe obtains 19,000 emails from Elting’s personal Gmail account, including 12,000 privileged emails with her lawyers — How does she find time to get any work done? — some of which are provided to and read by Shawe’s lawyers.
- Battle Stations, We’re at DEFCON 1. “YOU WANT TO GO NUCLEAR OVER THIS . . . JUST SEND EVERYONE HOME NOW AND STOP SERVICING THE CLIENT. MY MISSILE KEY IS TURNED,” Shawe emails to Elting after she rejects his proposal to open an office in a certain French city. Elting ultimately relents to the request, which becomes one among many episodes of expletive-laden “mutual hostaging” by both Shawe and Elting as each demands some concession from the other as condition for consenting to the other’s demand for distributions, hirings, firings, acquisitions, buy-sell agreements, etc.
If you want the full flavor of the extraordinarily dysfunctional and poisonous relationship between these two business partners, and its toxic ripple-effects on staff, clients, and professional advisors, you’ll have to read all 104 pages of Chancellor Bouchard’s post-trial memorandum opinion released last week in Shawe v Elting, C.A. No. 9661-CB [Del Ch Aug. 13, 2015], in which he granted Elting’s petition under § 226 of the Delaware General Corporation Law to appoint a custodian to sell TransPerfect Global even though its business is highly profitable.
In the opening paragraphs of his opinion, Chancellor Bouchard sums up the situation thusly:
As explained in painstaking detail below, the state of management of the corporation has devolved into one of complete dysfunction between Shawe and Elting, resulting in irretrievable deadlocks over significant matters that are causing the business to suffer and that are threatening the business with irreparable injury, notwithstanding its profitability to date. The stockholders of the corporation have stipulated to their inability to elect successor directors, and there is no prospect they will do so in the future. The requirements of both 8 Del. C. §§ 226(a)(1) and (a)(2) thus have been satisfied, and the appointment of a custodian to sell the corporation, with a view toward maintaining the business as a going concern and maximizing value for the stockholders, affords the only just and viable remedy under the unique circumstances of this case.
Section 226, which has no analog in New York’s Business Corporation Law, authorizes the court to appoint a custodian for a solvent corporation when (1) the stockholders are so divided they are unable to elect new directors, or (2) the directors are so divided the business of the corporation “is suffering or is threatened with irreparable injury.”
The stipulation mentioned in the above-quoted passage satisfied the first ground. At pages 68-78 of his opinion Chancellor Bouchard sets forth detailed findings in support of the second ground, including deadlock over distributions, acquisitions, expense true-ups, and hiring and retention of various personnel and advisors; damage to employee morale; and growing problems with client relationships.” In sum,” the Chancellor writes,
although it is true that the Company is and has been a profitable enterprise to date, its governance structure is irretrievably dysfunctional. The Company already has suffered from this dysfunction and, in my view, is threatened with much more grievous harm to its long-term prospects if the dysfunction is not addressed.
Which leads to perhaps the most interesting part of the court’s ruling, namely, now that we know Elting and Shawe need a business divorce, how to accomplish it? Elting argued that the court should appoint a custodian to sell the company as a going concern to the highest bidder. Otherwise, she contended, she will be left with “the Hobson’s choice of remaining locked with Shawe in corporate hell or cashing out her stake for a fraction of its true value,” affording Shawe a windfall.
Shawe argued against the appointment of a custodian for any purpose, emphasizing the company’s profitability and minimizing his disagreements with Elting as mere “squabbles.” He also argued that a custodian “should not be appointed to sell the Company, or otherwise impose a ‘buy/sell’ process that requires Shawe to pay Elting more in order to preserve his ownership than a third party would pay to acquire her shares.”
Chancellor Bouchard identifies three options:
- decline to appoint a custodian, and leave the parties to their own devices;
- appoint a third director to serve as tie-breaker;
- appoint a custodian to sell the company “so that Shawe and Elting can be separated and the enterprise can be protected from their dysfunctional relationship.”
He chooses option #3. Option #1 would unjustly leave Elting with no recourse except to sell her 50% interest to a third party. “What rational person,” the Chancellor asks rhetorically, “would want to step into Elting’s shoes to partner with someone willing to ’cause constant pain’ and ‘go the distance’ to get his way?”
Option #2 is rejected “because it would enmesh an outsider and, by extension, the Court into matters of internal corporate governance for an extensive period of time,” possibly decades given that Shawe and Elting are relatively young.
Option #3, although “unusual,” is required, Chancellor Bouchard concludes, to achieve the separation of Shawe and Elting for the good of the company. Chancellor Bouchard leaves it to the court-appointed custodian to evaluate and report back to the court on a proposed plan to sell the company “with a view toward maintaining the business as a going concern and maximizing value for the stockholders” and, in particular, to analyze
the pros and cons of conducting a sale of the Company (a) in which the bidders would be limited to Shawe and Elting (individually or as part of a group), such as in a “Texas shoot out” or some other auction format, (b) in an open auction process that would include any interested bidders, or (c) in any other format the Custodian deems practicable in the circumstances of this case, which could include conducting a public offering to afford stockholders liquidity or dividing the operating assets of the Company along the production divisions that Shawe and Elting have separately managed.
There doesn’t seem to be much case precedent for custodian sales of companies as going concerns under Section 226. Chancellor Bouchard’s opinion mentions just one, Bentas v Haseotes, 2003 WL 1711856 [Del Ch Mar. 31, 2003], where the court granted the custodian’s motion to order a public auction of the corporation as a going concern rather than divide its assets between shareholder factions. Chancellor Bouchard also cites Fulk v Washington Service Associates, Inc., 2002 WL 1402273 [Del Ch June 21, 2002], a Section 273 deadlock dissolution case which I wrote about here, in which the court adopted the custodian’s recommendation of a shotgun offer to be made by the 50% owner who had sole operational control of the business.
In any event, it’ll be very interesting to see what recommendations the custodian comes back with, and what form of sale the court ultimately sanctions.
Update July 28, 2016: A lot has happened since I wrote about the case almost a year ago. Last month, over Shawe’s objection, Chancellor Bouchard decided to adopt the court-appointed custodian’s proposal for an auction sale of the company open to the current owners, Shawe and Elting, as well as to any third-party bidders. You can read the decision here. Last week, Chancellor Bouchard issued a post-hearing decision finding that Shawe had tried to destroy electronically stored information surreptitiously taken from Elting’s computer and then lied about doing so, and ordered him to pay a significant portion of Elting’s legal fees likely in the millions of dollars. That ruling is available here.
Update February 13, 2017: In a 4-1 ruling, the Delaware Supreme Court today affirmed Chancery Court’s orders appointing a custodian to sell TransPerfect. Read it here.