Thursday, February 16, 2017

Dissolution and sanctions appropriate for feuding co-owners

By Amy Leisinger, J.D.

The Delaware Supreme Court affirmed chancery court decisions appointing a custodian to sell a highly profitable, yet managerially dysfunctional company and requiring one of the company’s CEOs to pay over $7.1 million in sanctions to his business partner in connection with litigation misconduct. Over the dissent of one justice, the court found that the lower court did not abuse its discretion in determining that dissolution was the most effective solution to address the deadlock and ongoing threats to the company and rejected additional arguments made for the first time on appeal. In a separate opinion, the court concluded that the chancery court did not abuse its discretion by sanctioning the officer and ordering him to pay his business partner’s fees “based on a clear record of egregious misconduct and repeated falsehoods during the litigation” (Shawe v. Elting (custodian, sanctions), February 13, 2017, Seitz, C.).

Company turmoil. TransPerfect Global, Inc. (TPG), one of the world’s leading providers of translation, website localization, and litigation support services, is owned and operated by Elizabeth Elting and Philip Shawe; Elting owns 50 of the company’s shares, Shawe owns 49, and Shawe’s mother owns the remaining one. Several years ago, disputes between Shawe and Elting became a regular occurrence. Elting suggested that Shawe buy her out, but the agreement was never signed, and the parties began to engage in “mutual hostaging,” blocking each other’s activities and regularly undermining each other’s decisions. The extremely tumultuous relationship, including personal harassment, continued over time, and several attempts to compromise failed.

Chancery Court decisions. Elting moved for dissolution of TransPerfect and the appointment of a custodian to sell the company and to resolve the deadlocks between Shawe and Elting. The chancery court granted the motion, noting that, the business of even a profitable corporation may suffer “irreparable injury” when directors’ approaches are so diametrically opposed that they are unable to govern. The company has already suffered from dysfunction and is threatened with much more grievous harm if the issues are not addressed, the court stated.

The chancery court also ordered Shawe to pay over $7.1 million in sanctions after finding that he made false statements, recklessly failed to safeguard evidence, and intentionally sought to destroy other evidence he had been ordered to make available. While agreeing to sustain certain of Shawe’s objections to the total payment requested, the court found that Shawe’s “deplorable behavior” warranted redress in the form of attorney fees expend in addressing his misconduct.

Forced sale appropriate. On appeal, Shawe and his mother challenged the decision to appoint a custodian to sell the company, arguing (for the first time on appeal) that the court exceeded its statutory authority, that “less drastic” measures could have been taken to address the issues, and that the custodian’s sale of the company could result in an unconstitutional taking of their TPG shares. The court noted that, under Delaware law, a court may appoint a custodian for dissolution of a solvent corporation when the stockholders are so divided that they have failed to elect directors and the business of is suffering or threatened with irreparable injury. The court agreed with the chancery court that a profitable business could be suffering from “irreparable injury” when directors cannot effectively govern. The deadlock was undisputed, the court found, and the chancery court made extensive factual findings of threatened and actual harm to the company. With the failure of intermediate measures, the court properly exercised its discretion to sell the company and distribute the proceeds, according to the court.

In addition, the court stated that it generally would not consider arguments made for the first time on appeal but did address the issues in response to the dissenting opinion’s discussion of the arguments. The dissent argues that interpretive principles lead to the statutory language being read to permit liquidation only in certain circumstances, the majority noted, but, if a statute is unambiguous, the plain meaning controls. Under a plain reading, the custodian has the powers of a receiver and his duties are to continue the business unless the court otherwise orders, according to the court.

Sanctions appropriate. With regard to sanctions, Shawe argued that the chancery court erred in finding that he acted in bad faith during the course of the proceedings, the court stated, but it found clear evidence that he intentionally deleted computer files to thwart the discovery process and was, at best, reckless in failing to safeguard evidence on his phone. In addition, the court found that the evidence showed that Shawe provided false interrogatory answers and deposition testimony and lied during the merits trial to cover up his deletions and his extraction of information from Elting’s computer. He contends that, because Elting was not prejudiced by his misconduct, the court was without power to sanction him. However, the court stated, there is no requirement that efforts to thwart proceedings be successful, and courts have found bad faith where parties have unnecessarily prolonged litigation and falsified records and testimony. “Shawe’s behavior was ‘unusually deplorable,’ and thus the Court of Chancery acted well within its discretion by sanctioning him,” the court concluded.

The cases are No. 423, 2016 and No. 487, 2016.