February 14, 2017 / 11:23 PM / a year ago

From Delaware Supreme Court, an anti-Valentine’s Day tale

(Reuters) - Philip Shawe and Elizabeth Elting were sharing a dorm room at New York University’s business school when they cofounded TransPerfect, a translation and litigation services company, in 1992. As the company took off – it now employs 3,500 people in 92 offices around the world – their love deepened. Shawe and Elting got engaged in 1996.

Elting broke the engagement in 1997, and, two years later, married another man. Shawe seems never to have recovered completely from the 1997 breakup, based on the evidence contained in an unusually vivid Delaware Supreme Court opinion Tuesday and a 2015 Chancery Court opinion. When Elting first informed him the wedding was off, he crawled under her bed and refused to come out. He crashed Elting’s 1999 wedding in Jamaica, with his mother in tow.

Years later, when Elting was on a business trip in Buenos Aires, Shawe showed up unannounced in her hotel room and once again crawled under the bed when she demanded he leave. Almost 20 years after Elting called off their engagement, Shawe tried to have her prosecuted for domestic violence, referring to her as his ex-fiancée when he filed an incident report based on a minor altercation in her office, according to the Delaware Supreme Court.

As the “domestic violence” incident shows, the bitterness between Shawe and Elting infected TransPerfect in ways large and small. The two were the company’s sole directors and, aside from a single share held by Shawe’s mother, its sole stock owners. Shawe and Elting could not agree on seemingly everyday concerns like paying patent lawyers or on big things like acquisitions and leases for office space. As their relationship degenerated into litigation, Shawe resorted to what the Delaware Supreme Court called “a secret campaign to spy on Elting and invade her privacy by intercepting her mail, monitoring her phone calls, accessing her emails (including thousands of privileged communications with her counsel), and entering her locked office without permission on numerous occasions as well as sending his so-called ‘paralegal’ there at 4:47 a.m. on another occasion,” the court said.

Somehow, TransPerfect continued to make money, about $500 million in sales annually. But the daily war between its directors endangered corporate profits. Morale was terrible, according to current and former employees cited in the Delaware rulings, and employees didn’t know whom to side with. Workers quit en masse. It was widely acknowledged within the company that Shawe and Elting’s mutual vitriol was the biggest challenge the business faced. In 2014, Elting sued Shawe in the Chancery Court of Delaware.

Chancellor Andre Bouchard of Delaware Chancery Court appointed a custodian for TransPerfect after concluding the hopeless deadlock was imperiling the company. The custodian tried to mediate a détente between Shawe and Elting. He failed. Eventually, after repeated hearings, heated motions practice and a six-day trial, Chancellor Bouchard ruled that he could neither allow the feud to destroy TransPerfect nor leave the court, via the custodian, indefinitely involved in the company’s affairs. The only way to save TransPerfect from its own directors, Bouchard found, was to order the custodian to sell their shares.

Shawe (and his mother) waged an unprecedented public campaign against Bouchard’s decision, including television ads bashing Chancery Court. In Shawe’s more conventional appeal, at the Delaware Supreme Court, his lawyers claimed Chancellor Bouchard had exceeded his statutory authority. (Shawe’s mother asserted the court-ordered sale was an unconstitutional taking under the Fifth Amendment.) For all the histrionics of the case – and the egregiousness of Shawe’s litigation conduct, as described by the court – the appeal raised a novel and legitimate question. Delaware courts have never before ordered the sale of a profitable company under the corporate law provision permitting the appointment of a custodian. Does the statute allow Chancery Court to take that drastic step?

Four members of the Supreme Court – Chief Justice Leo Strine and Justices James Vaughn, Collins Seitz and Randy Holland – held Tuesday that Chancellor Bouchard did not abuse his discretion. But they stopped short of a binding ruling on the scope of the court’s power under the custodian statute because they concluded that Shawe had waived the statutory argument by failing to raise it in the lower court. Justice Karen Valihura, meanwhile, said in a dissent that Shawe had preserved the argument – and that he was right about Bouchard exceeding his authority.

It’s fitting that the bizarre facts of the TransPerfect saga will not serve as binding precedent, since even a thousand monkeys typing for a thousand years couldn’t replicate this story. But it’s not beyond the realm of possibility that a future Chancery judge will rely on the statute allowing the appointment of custodian to order the sale of a profitable business. And because the majority opinion responds to Justice Valihura’s dissent, the Supreme Court has provided an explanation of why the statute allows a forced sale. The explanation may not be binding, but it’s a strong expression of the Supreme Court’s thinking.

The court said there’s nothing unprecedented about the appointment of a custodian for a solvent company mired in the sort of irreconcilable management disputes TransPerfect faced. Even Shawe, according to the Supreme Court, conceded Chancellor Bouchard was justified in the appointment. Under the express language of the custodian statute, the Supreme Court said, Chancery Court can order a custodian to take the same range of actions available to court-appointed receivers overseeing insolvent companies. That includes the authority to order the company liquidated, though a sell-off should always be a last resort.

Justice Valihura said in her dissent that the majority is relying on implication in the statutory language to allow a shareholder to be deprived of longstanding rights under Delaware and common law. (Her interpretive dispute with the majority centered on the meaning and placement of the phrase “as except” in the custodian statute.) Valihura conceded that Delaware courts have previously forced shareholders in joint ventures to sell their stakes when businesses are deadlocked, but she pointed out that those sales take place under a different provision of Delaware corporate law.

The majority, however, said the dissent was adding layers of interpretation to a statute that is unambiguous. “The dissent attempts to change the plain meaning of the statutory language,” the majority said. “Rules of interpretation should not be invoked to contort the plain language of a statute in a manner inconsistent with its plain meaning….Contrary to what the dissent contends, it is by no means unprecedented for the Court of Chancery to have to address the fate of a solvent Delaware corporation by setting up a fair process to have it sold as a going concern, when that outcome is necessary to best protect its constituencies.”

I suppose it is inevitable that the TransPerfect case end its time in Delaware with a scrap.

Shawe was represented at oral argument by David Goldstein of Rabinowitz Boudin Standard Krinsky & Lieberman. He did not dispute Bouchard’s finding of fact. Shawe said in a statement to my Reuters colleague Tom Hals that he intends to appeal the state Supreme Court’s decision to the U.S. Supreme Court. “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,” he said.

Elting’s counsel at oral argument was Philip Kaufman of Kramer Levin Naftalis & Frankel. She issued a statement calling Tuesday’s Delaware ruling “a complete vindication of what I’ve been saying all along (and) truly the best thing that could have happened for our company, our fabulous employees and our wonderful clients.”

The views expressed in this article are not those of Reuters News.

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