Shawe v. Elting, No. 423, 2016 (Del. Feb. 13, 2017) (Seitz, J.)

In this split decision, a 4-1 majority of the Delaware Supreme Court affirmed the Court of Chancery’s post-trial decision to appoint a custodian under Delaware’s custodian statute to sell TransPerfect Global, Inc. (“TransPerfect”) amid a deadlock between its co-owners and board members over the objection of its 50% stockholders.

Philip Shawe and Elizabeth Elting are the co-founders, co-CEOs, and board of directors of TransPerfect, a Delaware corporation, which is owned 50% by Elting, 49% by Shawe, and 1% by Shawe’s mother, Shirley Shawe.  Once romantically involved partners, Shawe and Elting experienced a series of clashes over the years regarding their personal affairs and the company’s business affairs, which resulted in the two filing several lawsuits against each other.  The conflict eventually distilled down to Elting’s petition under 8 Del. C. § 226 (“Section 226”) requesting the Court of Chancery to declare a deadlock and appoint a custodian to sell the company. 

The Court of Chancery conducted a six-day trial filled with “unprecedented evidence of a lengthy and seriously dysfunctional relationship” between the owners.  Before its final decision, the Court of Chancery appointed a custodian to serve as a mediator to assist Shawe and Elting in settling their disputes.  After many attempts at settlement failed, the Court of Chancery concluded that the warring factions were hopelessly deadlocked as stockholders and directors.  The Court of Chancery considered alternatives to address the dysfunction and deadlock, including appointing a custodian to serve as a third director to break ties between the two factions.  Ultimately, the Court of Chancery determined that the circumstances of the case required the appointment of a custodian to sell the company and distribute the proceeds to the deadlocked stockholders.

On appeal, Philip Shawe argued that the Court of Chancery exceeded its statutory authority when it ordered the custodian to sell a solvent and profitable company over the objection of stockholders (Philip and Shirley Shawe) owning 50% of the company and that less drastic measures were available to address the deadlock.  Co-appellant Shirley Shawe argued that the custodian’s sale of the company would constitute an unconstitutional taking of her one share of TransPerfect stock. 

In a 4-to-1 decision, the Delaware Supreme Court affirmed the Court of Chancery’s decision.  First, the Supreme Court emphasized that the director and stockholder deadlock was undisputed and determined not to disturb on appeal the lower court’s detailed factual findings of threatened and irreparable harm to the company.  The Supreme Court also agreed with the Court of Chancery’s conclusion that where, as here, intermediate measures were attempted but failed, the Court of Chancery properly exercised its discretion to appoint a custodian to sell the company.  Regarding the statutory and constitutional arguments raised by the Shawes, the Supreme Court concluded those arguments were not presented to the Court of Chancery in the proceedings below and could not therefore be considered on appeal.  In response to the opinion written by the dissenting member of the Supreme Court, however, the four-member majority found that, even if the statutory argument was properly raised on appeal, the dissent’s statutory analysis (discussed below) lacked merit.  Finally, the Supreme Court found that the Court of Chancery did not abuse its discretion by ordering the sale of TransPerfect because that court had carefully considered less intrusive options and made a decision that would benefit the company as a whole, including its employees.   

Dissenting from the majority, Justice Valihura concluded that Section 226 likely does not permit the Court of Chancery to confer upon a custodian the power to sell a corporation over the objection of its stockholders.  Justice Valihura argued for a holistic reading of the DGCL, stating, “Generally, where the possibility of defeasance of a stockholder’s stock may occur over the stockholder’s objection, those restraints on free transferability and alienation of stock are expressly set forth in the relevant statute.  That fact strongly suggests that Section 226 should not be so broadly read as to allow for a forced sale or other divestiture of a stockholder’s stock by mere implication.” 

About Potter Anderson

Potter Anderson & Corroon LLP is one of the largest and most highly regarded Delaware law firms, providing legal services to regional, national, and international clients. With more than 100 attorneys, the firm’s practice is centered on corporate law, corporate litigation, intellectual property, commercial litigation, bankruptcy, labor and employment, and real estate.