Monday, August 17, 2015

Dissolution the Solution for Owners’ Dysfunction and Resulting 'Tantrums'

By Amy Leisinger, J.D.

The Delaware Chancery Court has granted a motion for dissolution of a highly profitable company. According to the court, the “state of management of the corporation has devolved into one of complete dysfunction” and “irretrievable deadlocks over significant matters” are threatening the business. After reviewing in detail the co-owners’ “temper tantrums” and “mutual hostaging,” the court appointed a custodian to sell the corporation. The court also dismissed one co-owner’s claims of “abdication of business judgment” and “sabotage” against the other, finding them barred by unclean hands (In re Shawe & Elting LLC, August 13, 2015, Bouchard, C.).

Background. 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, who started the company in a college dorm room over 20 years ago. TPG has 100 shares of common stock issued and outstanding: Elting owns 50, Shawe owns 49, and Shawe’s mother owns the remaining one. Shawe has treated his mother’s share as his own property and considers himself a 50-percent owner of the company. TPG’s third director seat has remained vacant since the company organization, and Shawe and Elting never entered into any written agreements governing the operations of the company or their relationship as stockholders.

Nearly five years ago, disputes between Shawe and Elting became a regular occurrence. They argued over business and personal expenditures, hiring and firing of employees, and methods by which to cover tax liability. Elting suggested that Shawe buy her out and had a draft stockholders’ agreement prepared. However, the agreement was never signed, and the parties began to engage in “mutual hostaging,” blocking each other’s activities to garner approval of their own, and regularly undermined each other’s decisions. The tumultuous relationship continued over time, and several attempts to compromise failed. Shawe harassed employees loyal to Elting and spied on her communications with TPG employees and the counsel she retained with regard to the business issues, and Elting took steps to block execution of Shawe’s decisions. Shawe began to disparaging Elting within TPG and publicly, even filing an assault charge against her after a tense interaction, and Elting impeded the annual review of the TPG’s financials.

Elting filed a motion for dissolution of TPG and the appointment of a custodian to sell the company and to resolve the deadlocks between Shawe and Elting.

Dissolution. Under Delaware law, the court may appoint a custodian for dissolution of a solvent corporation when “the stockholders are so divided that they have failed to elect successors to directors” and the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided. The court found that Shawe and Elting are deadlocked on several matters of critical importance to TPG but noted that the issue of harm is a closer question because the company has been highly profitable. However, the court stated, the business of a profitable corporation may be suffering from an “irreparable injury” when the directors’ approaches are so diametrically opposed that they are unable to govern. Further, TPG has already suffered from dysfunction and is threatened with much more grievous harm if the issues are not addressed, according to the court. As such, the court granted Elting’s motion for dissolution but refused to impose her proposed conditions on a sale of TPG or to enter an order barring Shawe from bidding to acquire the company,

Unclean hands. The court also rejected Shawe’s claims against Etling for breach of fiduciary duty and unjust enrichment. Shawe failed to prove his allegations, the court stated, and Elting successfully raised the affirmative defenses of unclean hands and acquiescence. Both Shawe and Elting were involved in the dysfunctional management of TPG, and, as such, the claims must be dismissed, the court concluded.

The case is No. 9661-CB.