New Law Review Article Tackles Judicial Error in the TransPerfect Case: “Shawe v. Elting: The Imperfect Sale of TransPerfect Global, Inc.”

For those of you who run in loftier circles than I, and perhaps have an Ivy League education or a law degree, here’s a look at the TransPerfect Global case from a legal perspective. I have been shouting for years about the gravity and prevalence of legal “errors” and the repercussions for the Delaware economy, but here is a Law Review Article that will help lay out some of the many legal issues. Unfortunately, this is probably the first of many.

 

So again, for those thinking I was droning on about the Chancery Court destroying the American Dream for employees and business owners throughout the country with the TransPerfect case, without the proper background, please take a look at this Law Review Article.

 

As we climb back from our current crisis, and the carnage the Chancery Court (Andre Bouchard) and the Supreme Court (Leo Strine) did to our state, which plummeted Delaware down to #11 in incorporation confidence (after a 15-year run in first place), it is imperative that we understand the dangerous precedents and events that occurred around the $300 million TransPerfect fiasco.

 

To reverse the crisis our elites created, we must, at a minimum take steps to ensure this never happens to another successful American business again!

 

Stay tuned and see below.  I’ve pulled some relevant and interesting quotes that focus on the Chancery Courts missteps from the Law Review piece:

 


 

 

“The Delaware Supreme Court erred in two respects. First, the court affirmed the Court of Chancery’s expansive reasoning with respect to the ‘irreparable harm’ requirement …and instead accepted the Court of Chancery’s proposition that irreparable harm may encompass things like severely diminished employee morale, client skepticism, and failure to benefit from proposed acquisitions. The court focused on this erroneous interpretation of irreparable harm expansively…”

 

“Second, the court improperly affirmed the Court of Chancery’s grant of expansive custodial authority… the court accepted a custodial sale as the only means of appropriate relief without first implementing viable alternative remedies.”

 

“Also highlighted in this Law Review: “it is unlikely that the Delaware General Assembly intended to permit the Court of Chancery to order the whole sale of a company to a third party.”

 

An especially relevant quote regarding Justice Valihura:

 

“In her dissent, Justice Valihura pointed to two main principles undermining the majority’s decision. In her analysis… Justice Valihura concluded that stockholders’personal property rights are not meant to be abridged by mere implication.”

 

Some of the relevant quotes that focus on the Delaware Supreme Courts missteps:

 

“In affirming the Court of Chancery’s decision, the Delaware SupremeCourt erred in two ways. First, the court affirmed the Court of Chancery’s incorrect reasoning with respect to the “irreparable harm” requirement of Section 226… It ignored longstanding jurisprudence requiring a demonstration of imminent insolvency or loss of revenue, and instead accepted the Court of Chancery’s expansive proposition that irreparable harm may be deemed to encompass severely diminished employee morale, client skepticism, and failure to benefit from proposed acquisitions.”

 

“Second, the court improperly affirmed the Court of Chancery’s massive grant of custodial authority in that it did not consider less intrusive alternatives and ordered a sale despite shareholder objections—an unprecedented judicial act.”

 

“The court summarily accepted a custodial sale as the only means of appropriate relief, without considering that its equitable power—though significantly broad—may have some limit.”

 



 

 

For anyone who truly doesn’t understand the ramifications of this case, please see this link:

 

http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=3796&context=mlr

 

Maryland Law Review 

Shawe v. Elting: The Imperfect Sale of TransPerfect Global, Inc.

by Sarah M. Samaha

INTRODUCTION

In Shawe v. Elting, 1 the Delaware Supreme Court held that the Court of Chancery properly exercised its equitable powers under Delaware’s custodian statute when, upon finding the presence of shareholder and director deadlock, it appointed a custodian to sell a massively profitable corporation to a third party.

Phillip Shawe and Elizabeth Elting were the co-founders, co-CEOs, and the only two directors of TransPerfect Global, Inc. The closely held corporation was structured such that Shawe and Elting behaved as fifty-fifty owners of the company. In the absence of a written agreement governing the rights of stockholders, the personal and business relationships between Shawe and Elting devolved into irresolvable dysfunction, and the parties were left with no intra-corporate recourse.

In the litigation that ensued, the Court of Chancery found that the deadlock between Shawe and Elting satisfied the threshold requirements of Section 226 of the Delaware General Corporation Law and appointed a custodian to force a sale of the multi-million dollar corporation to a third party, despite Shawe’s objections.

The Delaware Supreme Court affirmed the decision, holding that the custodian statute’s grant of power was broad enough to authorize the Court of Chancery to issue such a remedy. The Delaware Supreme Court erred in two respects. First, the court affirmed the Court of Chancery’s expansive reasoning with respect to the “irreparable harm” requirement of Section 226. In doing so, it ignored longstanding jurisprudence requiring a demonstration of imminent insolvency or loss of revenue to the corporation in question, and instead accepted the Court of Chancery’s proposition that irreparable harm may encompass things like severely diminished employee morale, client skepticism, and failure to benefit from proposed acquisitions.

The court focused on this erroneous interpretation of irreparable harm expansively, despite the fact that custodianship was warranted regardless under Section 226. This Note argues that this nonessential dictum seems to have been used to illustrate some degree of proportionality between the alleged harm to the corporation and the extremity of the remedy ordered. Second, the court improperly affirmed the Court of Chancery’s grant of expansive custodial authority. Section 226 jurisprudence indicates the reluctance with which Delaware courts have ordered the intrusive custodianship remedy, and emphasizes the principle that a custodian’s authority should be as narrowly tailored as possible.

The court accepted a custodial sale as the only means of appropriate relief without first implementing viable alternative remedies. Further, in holding as it did, the court failed to recognize that the language and prior application of Section 226 does not provide stockholders with notice that a remedy as drastic as a forced sale of their company might occur, absent their consent.

(See link and/or attached story for more.)