Staff Writer for Respvblica | September 16, 2017
Coming on the heels of some major news indicating that Delaware is no longer the preferred state to incorporate in, experts have been trying to understand what has happened. How does the First State become the 11th in a world where nearly everyone used to incorporate in Delaware? Lisa Rickard, president of the Institute for Legal Reform, said, “Delaware no longer lives up to its nickname as the ‘First State.”
For some, it may be a surprise. For others who follow the Delaware climate closely, this was a moment several years in the making. A prominent writer and founding publisher of a state paper covering business, Samuel Waltz, wrote in January 2017, “Observers of Delaware’s bench and bar in 2017 will witness something that many agree is for the most part unprecedented, perhaps even historic, maybe even to the extent it could threaten the primacy of Delaware’s courts as America’s national business court of choice.” That unprecedented issue – the case of TransPerfect, an international translation company at the heart of a major lawsuit playing out since 2015 in Delaware’s court system.
The case is about two wealthy owners of a private company, one who wants to keep, run and build, and the other who wants to sell for a premium. The math works out like this: If there are two 50% portions, no one has management or company control. Arguably, the price that could be yielded for one half of the firm without that control is less than half of what one might pay for the market price of 100% of the company. The party who wants the exit strategy has asked the courts to force 100% of the firm up for sale, so that she could maximize her value. The Chancery court’s mandate is to preserve and protect the shareholders’ value, so it may seem logical that the Delaware Chancellor decided for the owner looking to maximize value.
There are dozens of articles and news on this case, and anyone can do a search to see the gory details, so we will not do it here except to say that the owner who wants to keep the company has been fighting intrepidly to save his baby; save his 4000 employees’ jobs; and keep doing what he loves. However, the the Delaware courts do not want to allow it. Some call it a lover’s quarrel, while others suggest it is merely a business decision. At heart though, is a case that constitutional lawyer Alan Dershowitz says violates the United States constitution, particularly the Fifth and 14th Amendments; due process and illegal takings, and he plans to take to the U.S. Supreme Court.
Over the past two years, it seems that every decision made by the Chancery has been in favor of one party, rather illogically. Philip Shawe, (a 49% owner) who wants to keep the company, brought ten fact witnesses, while his business partner, Elizabeth Elting (a 50% owner), brought none. Her lawyer’s word was the only factor Delaware’s Chancellor Andre Burchard regarded. It went on to include more than 120 affidavits from employees vouching for Shawe’s role in the firm; the Chancellor was unmoved.
When there was a dispute over legal bills each side paid, Shawe’s side was asked by the court to itemize and provide evidence of each and every line, while Chancellor Bouchard moved to accept Elting’s lawyers’ bills at face value.
The list of perceived improprieties goes on for a while, and there is no hard evidence of foul play, as much as there appears to be a strong suggestion of preferential treatment.
Chancellor Bouchard has well-documented long-term friendly relationships with lawyers on Elting’s side. In fact, the custodian he installed to prepare the company for the public auction, Robert Pincus, is one of his former law firm partners and country club mate. This Custodian has spent over $20 million of TransPerfect’s money in 18 months alone; on his own seemingly high fees and those of the many consultants he brought in to manage the sales process. As a result, the owners have had less money to take home – which is not the sad part, but the employees have seen a reduction in their benefits and raises as the company nears the sale.
To be sure, Shawe has made countless offers, both public and private, to buy the firm from Elting. The Custodian can entertain it and facilitate this. Yet, each time, he has yielded to Elting who refuses. Shawe’s mother, Shirley Shawe a 1% owner), has even offered the 1% she owns to Elting to allow her 51% control of management, to avert the sale. That too was refused. Elting’s goal, aside from a bigger cash payout, is to see Shawe as far away and disconnected from the company they both built together since 1993. In fact. in June 2017, at a hearing on the issue, one of Elting’s attorneys named Philip Kaufman of the firm Kramer Levin, emphasized that Elting did not want Shawe to have any part of the firm.
These very issues have also manifested themselves in the very way the custodian Robert Pincus is looking to set up the sale. He has suggested that Shawe will not be able to even bid for the firm if he does not drop all his lawsuits, and has set up a sale process that may appear to have yet another twist that could preclude Shawe. First, they want to maximize value by imposing a demanding noncompete on Shawe – the person who appears to be the drive and energy of the firm, and second, is something that one can only see if they truly look hard at the facts.
In a small, unnoticed bit of news, the custodian recently added financial giant Credit Suisse, to the auction team. Why is that of concern? CS is also the lead financial advisor to one of TransPerfect’s biggest competitors Lionbridge Technologies, which was bought this year by the hedge fund H.I.G. CS holds some portion of H.I.G.’s note for the purchase, and that could potentially influence whether Lionbridge would be seen as the “better bidder,” should they choose to enter a bid for TransPerfect. All indicators suggest that they will.
What this means is that in a fair fight, based on the market value, Shawe stands a fair chance of winning a bid for his own firm – if he is permitted to bid at all. This CS-Lionbridge relationship however, can add an element of disparity, unrelated to actual market price.
Why do I raise this? The Custodian had made every decision in parity with the wants and desires of the person with the weaker case, Elting. High spending, exclusive bidding and even setting up a possible preferential sale situation, all the while, the other two shareholders, Shawe and his mother, have been opposing it, offering solutions to end corporate deadlock and money to buy Elting’s portion.
The Chancery Court has yielded to Elting and her lawyers who seem to be part of the boy’s club in Delaware, and Shawe has been left battling with every legal option available. He has also used media.; and the lower courts have tried make everything restricted as a result. Shawe recently won a small victory for himself, and a large one for our constitutional rights when a Delaware Federal Court ruled that the lower court has no good reason to make the case files privileged, and opened most of them to the public.
Also at issue here is the fate of the jobs – 2800 in the United States and 1200 in nearly 100 offices all over the world, including Amsterdam, Barcelona, Tel Aviv, Bangkok and London. Logic has it, when a company is bought, the purchaser will seek to rein in costs, offshore jobs and eradicate duplicate positions (if the buyer is another translation or e-discovery firm). Delaware’s decision to allow the forced sale seems to be indifferent to the employees.
The Delaware business courts have been losing ground and it is not hard to see why. They seem to be on a trajectory of severe failure; falling into the chasm that too often politicians and even some in the judiciary seem to have fallen, a pit of cronyism and prejudice, and irregular financial advantage.