Many have heard of the highly publicized litigation involving TransPerfect Global, Inc. ("TransPerfect" or the "Company"), a Delaware corporation and one of the world’s leading providers of translation and litigation support services. In February, the Delaware Supreme Court[1] affirmed Chancellor Bouchard’s decision (referred to as the "Merits Opinion")[2] to appoint a custodian and sell TransPerfect and, in the "Sanctions Opinion"[3], awarded sanctions for bad faith and vexation litigation conduct against one of the Company’s directors. Nevertheless, disputes and public outcry continue today.

TransPerfect had three stockholders: Philip R. Shawe ("Shawe"), owning forty-nine percent of the Company, Elizabeth Elting ("Elting") owning fifty percent, and Shirley Shawe, Shawe’s mother, owning one percent of the company. Shawe and Elting, TransPerfect’s two directors and only members of the board of directors, co-founded the Company in 1992 and were involved romantically until 1997, at which time Elting called off their wedding plans, beginning a saga of "simmering personal discontent" as described by Justice Seitz.

In September 2009, Shawe and Elting formed Shawe & Elting, LLC (the "LLC), in which each owned fifty percent interest. The LLC never conducted business and was only ever used to receive money from the Company, which was sometimes distributed to Shawe and Elting personally. Shawe and Elting never drafted any underlying operating agreement.

Despite the dysfunction between Shawe and Elting, TransPerfect achieved profitable growth each year for two decades. In 2014, its revenue exceeded $470 million and its net income was over $79 million. By way of example of the behavior that ensued between the two, Chancellor Bouchard in the Merits Opinion described several instances of the "palpable dysfunction" that occurred before and during the litigation, such as "Shawe engaged in a secret campaign to spy on Elting and invade her privacy by intercepting her mail, monitoring her phone calls, accessing her emails"; "Shawe sought to have Elting criminally prosecuted by referring to her as his ex-fiancée seventeen years after the fact when filing a ‘Domestic Incident Report’ as a result of a seemingly minor altercation in her office"; and "Shawe disparaged Elting publicly by unilaterally issuing a press release in the Company’s name containing false and misleading statements."

Litigation between Shawe and Elting began in May 2014 in New York when Elting sought to have Shawe removed as a director. Litigation between the two amounted to four cases filed against each other, including Elting’s petitions to the Court of Chancery, seeking the appointment of a custodian under Section 226(a)(2) of the Delaware General Corporation Law (the "DGCL") to resolve the deadlock between her and Shawe and seeking equitable dissolution of the Company and dissolution of the LLC.

Chancellor Bouchard quickly assessed Section 226(a)(1) of the DGCL, which permits appointment of a custodian when "[a]t any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have been expired or would have expired upon qualification of their successors." Chancellor Bouchard found the requirements were "plainly" met, considering that TransPerfect’s bylaws provided for a board of three, one board position was always vacant, and when Elting filed an action to hold an annual meeting to elect the third member, the stockholders instead stipulated that they were so divided that they failed to fill the vacancy or to elect Shawe and Elting’s successors.

Chancellor Bouchard then assessed Section 226(a)(2) of the DGCL, which permits the appointment of a custodian when three conditions exist: (1) director deadlock, (2) harm to the business, and (3) inability of the stockholders’ to break director deadlock. First, Chancellor Bouchard found Shawe and Elting were deadlocked on critical aspects of the Company and engaged in mutual hostaging over issues such as distributions, acquisitions, and the hiring and termination of employees. Second, Chancellor Bouchard found that although TransPerfect was historically profitable, the Company had already suffered from Shawe and Elting’s dysfunction and would continue to suffer long-term, irreparable harm, such as the loss of employees and inability to hire replacements, potential loss of clients and difficulty securing new clients, inability to grow via acquisitions (which had historically accounted for up to twenty percent of the Company’s total revenue), and damage to morale. Third and finally, Chancellor Bouchard found that the stockholders were unable to break Shawe and Elting’s deadlock and were never able to elect successors.

Having found that the three necessary conditions were met, Chancellor Bouchard then addressed whether, in the court’s discretion, a custodian should be appointed. In granting Elting’s petition and appointing a custodian to sell TransPerfect and resolve the deadlock, the Court of Chancery found that the current state of management of the Company was "complete and utter dysfunction" that could not be resolved and which amounted to "systemic divisions in the management of the Company," it would be unjust to force Elting to sell her share of the Company, Shawe’s actions likely limited the prospect of an outsider paying a fair price for Elting’s share, and appointing a third director would only amount to "perpetual oversight" on the part of the Court of Chancery.

Moreover, the Court of Chancery denied Elting’s request for equitable dissolution of the Company, but granted Elting’s petition for dissolution as to the LLC. Specifically, Chancellor Bouchard found that although Shawe’s actions were "disturbing and contrary to expected norms of behavior," they did not amount to fiduciary misconduct with respect to the Company. Instead, most of Shawe’s misconduct was directed at Elting personally. However, Chancellor Bouchard found that, with respect to the LLC, dissolution was appropriate because it was not reasonably practicable to carry on the LLC’s business given that in the past six years it had not conducted any business, Shawe and Elting were in deadlock over what to do with the LLC’s approximately $8 million in liquid assets, and there was no governing agreement to resolve the deadlock.

The Court of Chancery subsequently entered a sale order (the "Sale Order") on July 18, 2016, outlining the process that the appointed custodian "shall undertake the Modified Auction … to sell the Company[.]"

Following a two-day hearing in January 2016, Chancellor Bouchard granted Elting’s motion for sanctions related to Shawe’s behavior during the litigation, finding bad faith and vexatious litigation conduct. Although fee shifting is an extraordinary remedy, Chancellor Bouchard held it was warranted, given Shawe’s bad faith conduct. As an example of some of the outrageous behavior, Shawe directed Company employees to intercept and/or spy on Elting’s mail, email, and phone calls; stole Elting’s computer on numerous occasions and directed an employee to copy the hard drive; provided false testimony regarding employees’ roles in his deceptive acts; did nothing to preserve information on his iPhone or laptop despite litigation holds, and "allegedly" damaged the iPhone so it was never produced; deleted over 19,000 files from his laptop the day before the image of his laptop was made; deleted over 22,000 files from his laptop at a later time; falsified interrogatory answers; falsified testimony at his deposition; and submitted a false affidavit during post-trial briefing. Specifically, Chancellor Bouchard ordered Shawe to pay thirty-three percent of Elting’s attorney’s fees and expenses incurred with the underlying trial and one hundred percent of her fees and expenses related to the litigation involving sanctions. On August 19, 2016, the Court of Chancery issued its final judgment directing Shawe to pay Elting $7,103,755 within ten business days.

A public campaign followed the Merits Opinion. Many Company employees launched a public attack on the decision via newspaper advertisements, mass mailings, radio and television commercials, and door-to-door canvassing. At least one Company employee sued Chancellor Bouchard and the appointed custodian personally in the United States District Court for the Southern District of New York, raising claims under the First and Fourth Amendments of the Constitution and 42 U.S.C. § 1983.

Shawe and Shirley Shawe appealed the Merits Opinion and the Sanctions Opinion. The Delaware Supreme Court heard argument on the Merits Opinion on January 18, 2017, and the Sanctions Opinion on the briefs. The Delaware Supreme Court affirmed both decisions.

As to the Merits Opinion, Shawe argued for the first time on appeal that the Court of Chancery exceeded its statutory authority. Shawe alternatively argued that even if the Court of Chancery had the authority to order the custodian to sell the Company, it should have taken a less drastic measure before forcing a sale. Also for the first time, Shirley Shawe argued that the sale of TransPerfect amounted to an unconstitutional taking under the Fifth Amendment of the Constitution.

Writing for the 4-1 majority, Justice Seitz rejected these arguments raised for the first time, considering them waived, and held that the Court of Chancery made a decision that was best for the Company after appropriately weighing all other options. Justice Seitz found that Chancellor Bouchard’s decision was supported by the facts and that there was no abuse of discretion. Although finding that Shawe’s statutory argument was waived, Justice Seitz nevertheless rejected it on its merits under the plain, unambiguous language of Section 226 of the DGCL. Justice Seitz poignantly explained, "When a stockholder buys stock in a Delaware corporation, it knows that our statute provides the Court of Chancery broad authority to address corporate deadlocks of various kinds, authority that may well affect fundamental ownership interests." Recognizing that a sale is a remedy to be employed cautiously, Justice Seitz pointed to the Court of Chancery’s efforts to consider other alternatives, such as appointing a custodian after trial to serve as a mediator and, after that had failed for three months, giving Shawe and Elting another month to work things out before Chancellor Bouchard issued the Merits Opinion.

Justice Valihura, writing in dissent, found that although Shawe’s statutory argument and Shirley Shawe’s constitutional argument were not considered by the Court of Chancery, they should nevertheless be addressed on appeal. Further, Justice Valihura found that Section 226 of the DGCL should not be interpreted in such a way as to force a shareholder to sell his stock against his will, considering that stock is personal property and subject to "traditional property law policies favoring free alienation."

As to the Sanctions Opinion, the Delaware Supreme Court found that sanctions against Shawe were warranted and that the award was not superfluous but within the Court of Chancery’s discretion. Shawe has since filed a petition for certiorari with the United States Supreme Court with respect to the Sanctions Opinion.

The litigation has not ceased. In March, Shawe and Shirley Shawe filed suit in the District Court for the District of Delaware, C.A. 1:17-cv-00277-GMS, against the appointed custodian and Jeffrey Bullock, Delaware’s Secretary of State. Specifically, they assert claims under the Fifth and Fourteenth Amendments that the forced sale of TransPerfect violated substantive due process and amounted to an unconstitutional taking. The parties have submitted a briefing on the defendants’ motion to dismiss for lack of subject matter jurisdiction and failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Shawe and Shirley Shawe have requested oral argument on defendants’ motion.

In April, Shirley Shawe filed an action pursuant to Section 211 of the DGCL in the Court of Chancery, C.A. No. 2017-0306-AGB, seeking to compel a stockholders meeting on an expedited basis. Specifically, Shirley Shawe seeks to compel a stockholders meeting where she would vote her one percent to break the deadlock. In response, Elting filed a motion to enforce the Sale Order and for sanctions. On June 2, 2017, Chancellor Bouchard heard argument on Shirley Shawe’s motion to expedite proceedings and Elting’s motion for sanctions, and ordered the parties to mediation.

Moreover, although they recently withdrew their motion in June, Citizens for a Pro-Business Delaware, Inc. ("Citizens"), a group backed by TransPerfect employees, had filed a motion in May to intervene to enforce public access to various confidential documents related to the custodian’s oversight and requests for fees and expenses.

Citizens has also engaged in lobbying in Dover, Delaware, by attempting to push legislation, specifically Delaware Senate Bill 53 ("SB 53"), which would amend the DGCL to require a three-year "cooling off" period before the Court of Chancery could order the sale of a solvent company unless the parties stipulate to such a sale. SB 53 was reassigned to the Elections and Government Affairs Committee on March 30, 2017, but it has not yet been debated.

Although nearly hidden in the tumultuous litigation surrounding the Company, the court-ordered dissolution of the LLC is a friendly reminder that alternative entities are creatures of contract. Where relevant statutes provide little guidance, courts will turn to the governing LLC or partnership agreement. The disputes involving the LLC are a prime example of why it is imperative to have such underlying agreements.

Moreover, the continuing TransPerfect saga demonstrates the messy nature of "business divorces" in closely held businesses where tensions are high and the disputes are personal. Although the press would suggest otherwise, the concept of business divorce under the DGCL is not new. Rather, the TransPerfect litigation continues to receive a significant amount of publicity due to the underlying relationship between Shawe and Elting and the dysfunction between the two. Although Citizens argues, inter alia, that the Merits Opinion and the sale of TransPerfect will result in Delaware’s loss of millions of dollars due to decreased incorporation revenues, the Merits Opinion and the sale of TransPerfect are not revolutionary. Rather, these decisions reaffirm the Delaware Court of Chancery’s statutory authority to step in when a corporation—even a solvent corporation like TransPerfect—is in trouble.