Did Del. Court Violate Shareholder Rights in TransPerfect Case?

Delaware Chancery Court in Georgetown, Delaware. Photographer: Pat Crowe II/ Bloomberg News.

Did Del. Court Violate Shareholder Rights in TransPerfect Case?

January 17, 2017

Constitutional law attorney Alan Dershowitz has taken on a client who is arguing the Delaware Chancery Court violated shareholders’ rights by ordering the forced sale of translations services provider TransPerfect Global Inc. The retired Harvard Law School professor — whose past clients include Mike Tyson, Patty Hearst, Leona Helmsley and O.J. Simpson — represents one of the owners of TransPerfect, who is calling for Delaware’s highest court to reverse the ruling.

At stake is the fate of a private company incorporated in Delaware with over $500 million in annual revenues and 3,500 employees in 90 offices worldwide. The chancery court ordered TransPerfect sold due to a feud between two of the company’s three owners—co-chief executive officers who couldn’t agree on how to run the company.

Many attorneys and Delaware law scholars say the chancery court made the right call under state law to sell TransPerfect. Others, including a group of TransPerfect employees, say the decision is an act of judicial overreach that sets a dangerous precedent for the state and its courts. The case involves more than a dozen law firms in Delaware and has become one of the most contentious corporate divorces in the state.

Co-Owners TransPerfect is 50 percent owned by Elizabeth Elting and 49 percent by Philip R. Shawe, who co-founded the company in 1992 while students at New York University. Dershowitz represents Shawe’s mother, Shirley Shawe, who owns the remaining 1 percent.

Elting and Philip Shawe were once engaged. Today, based on thousands of pages of court documents, they hate each other.

Chancellor Andre G. Bouchard granted Elting’s petition to appoint a custodian to sell TransPerfect in August 2015. The chancery court judge found that Shawe and Elting never put into contract how their relationship as stockholders would operate, or how they would govern the company. Bouchard said the sale was necessary because the company’s management had devolved into “complete dysfunction.” The “unusual” relief is “appropriate and necessary in this case,” and “affords the only just and viable remedy” to perpetual deadlock that threatens to irreparably harm the business, Bouchard wrote in his opinion.

Separately, the Delaware Supreme Court also is reviewing $7.1 million in sanctions against Shawe. In July 2016, Bouchard ordered Shawe to reimburse Elting for legal fees she incurred during a hearing. In that case, Bouchard found that Shawe repeatedly lied to the court (The case is Shawe v. Elting, Del., No. 487, 2016, Sept. 29, 2016).

Dershowitz and his client Shirley Shawe declined to comment before the oral argument.

Shirley Shawe’s brief argues that a forced sale violates the Takings and Due Process clauses of the Fifth and Fourteenth Amendments of the U.S. Constitution, as well as Delaware law.

Philip Shawe told Bloomberg BNA in a Jan. 13 e-mail that a forced sale breaches his and his mother’s constitutional rights because “the government is attempting to take my property against my will without a public purpose.”

“It appears very obvious to some of the world’s foremost experts in Constitutional Law” that the sale violates the Fifth Amendment, Shawe said.

In court filings, Shawe also argued that TransPerfect is a thriving company, and neither the statute in question — 8 Del. C. § 226 — nor case law allows the chancery court to order a sale without first exploring less drastic measures.

Irreparable Harm Elting declined to comment beyond her court filings. Her answering brief states that TransPerfect’s performance doesn’t matter: Section 226 requires only that the company is “threatened” with irreparable harm, and TransPerfect’s plummeting morale, “mass exodus of employees,” tarnished reputation and nervous clients are proof enough of that.

TransPerfect employees in a group called the Citizens for a Pro-Business Delaware agree with Shawe that the court should have tried something less drastic than a forced sale.

“There are 16 other ways he could have interpreted Section 226,” Chris Coffey, the group’s campaign manager, told Bloomberg BNA in a phone call Jan. 13. “He didn’t do any of those.”

The group, whose appeal to submit an amicus brief was denied, says employees are afraid of losing their jobs and warns the case will sully Delaware’s business-friendly reputation.

The group has run newspaper and television ads, appealed to local legislators and sent a memo to the Delaware State Bar Association calling for a rewrite of Delaware’s corporate laws.

One employee, Timothy Holland, even sued Bouchard in U.S. District Court in New York, claiming that the court violated his free-speech rights. ’50-50 Corporate Disputes’ a Rarity Lawrence Hamermesh, a professor of corporate and business law at Widener University’s Delaware Law School in Wilmington, Del., told Bloomberg BNA in an interview that the Delaware statute clearly allows a forced sale in extreme cases. He said the remedy isn’t often applied “because there’s relatively few instances of 50-50 corporate disputes.”

Delaware corporate law requires the chancery court to do “what will best protect the interests of all of the corporation’s constituencies,” including employees, the community, vendors, and the company itself, Hamermesh said. If appointing a third party to break ties would have prolonged the company’s internal conflict, the court might understandably choose to reject that option, he said.

Michael P. Kelly, the Wilmington-based chairman of McCarter & English LLP, said he is “just mystified by all the criticism” of Bouchard’s decision.

“It’s not just a deadlocked situation,” said Kelly, who has argued dozens of cases in chancery court and says he has known Bouchard for more than 25 years. “These people despise each other. How can a company go forward when the” owners despise each other?

The case is Shawe v. Elting, Del., No. 423, 2016, oral argument scheduled Jan. 18, 2017.