by Sam Waltz, Founding Publisher
A dramatic conflict with startling echoes of the “War of the Roses” movie is about to escalate in Delaware Court of Chancery.
And throw in former New York City Mayor Rudy Giuliani for good measure to stir things up, seemingly attempting to bully Delaware Chancellor Andre Bouchard into an unprecedented action in America’s top “court of equity,” effectively telling Bouchard that his decision is not equitable, and it may even be illegal.
In the 1989 movie, Michael Douglas and Kathleen Turner played attorney Oliver Rose and his ex-wife Barbara Rose in a vicious post-divorce ego-fight for the rights to their family home. They ultimately kill each other. In a dramatic finale involving a falling chandelier rather than allow the other “to win.”
In proof of the adage that “truth is stranger than fiction,” the real-life version is playing out in a Delaware courtroom this week, with a $500 million company two former business partners built together as the prize neither appears to want the other “to win.”
It features Elizabeth “Liz” Elting and Michael Shawe, two estranged lovers — once engaged to each other 1996-97 — who in 1992 co-founded TransPerfect in their shared dorm room at New York University. The company grew to become one of the legal industry’s leading suppliers of translation services. But Elting and Shawe are seemingly ready to see their company destroyed rather than allow the other to win.
And, in a made-for-Broadway (or TV) twist, it features an attempt this week by arguably America’s most important former mayor, 9/11 hero New York City Mayor Rudy Giuliani, to ride to the rescue.
Giuliani seeks to influence Chancery, even to insert himself in an unprecedented extrajudicial intervention in front of Delaware’s Chancellor Andre Bouchard, to halt Bouchard’s proposed sale of TransPerfect so Giuliani can propose an alternate solution.
At issue for Giuliani is Chancellor Bouchard’s appointment last August of Skadden Arps Slate Meagher & Flom partner Robert B. Pincus as custodian to oversee the Chancery-ordered sale of translation giant TransPerfect Global Inc.
Chancellor Bouchard ruled that the deadlock between Elting and Shawe seemed so dysfunctional and impossible to end that it threatened the financial future of the richly profitable firm, now likely doing about $500 million in revenues, with profits perhaps approaching the 15 percent to 20 percent range. Bouchard has another hearing in the case scheduled for April 27.
Already, each side has created its own legal dream team, “lawyering up” in a way that raised even experienced eyebrows.
Representing Elting, among others, are attorneys from Paul Weiss, Kramer Levin, with local counsel from Potter Anderson and Proctor Heyman.
Representing Shawe, among others, are attorneys from Sullivan & Cromwell, Kaplan Rice, Frankfurt Kurnit, with local counsel from Richards Layton and Morris James.
Mayor Giuliani wades Into Chancery
Although Giuliani is not a member of the Delaware Bar, there are legal mechanisms he could use to be heard.
Giuliani takes issue with the proposed sale of the company which has seemed to remain, for the most part, healthy throughout, despite the seeming rot in the leadership at the top.
“I heard about this case from a mutual friend, a former partner of mine, and he asked my firm to take a look at it,” said Giuliani, proceeding to highlight a few issues he has with it, although without specifying who exactly his client, if any, might be.
“I don’t like courts, I consider courts part of the government, and I don’t like the government ordering companies to do things like dissolve themselves, especially when it’s a successful [business] organization,” he said.
“Moreover, I wasn’t sure if there was a good argument for it, or a bad argument for it. When I read the opinion, I was completely surprised by the conclusion the judge reached. The chancellor internally contradicted himself.”
“He analyzed it under Section 226. That gives him three possibilities. One, he can leave it alone. Second, he can appoint a third vote. As a last resort, he can order dissolution. He comes to conclusion that he’s going to use the last resort. But, there’s not enough evidence for equitable distribution. The circumstances are not egregious enough,” Giuliani added.
“Boards fight all the time, but there is a way to resolve through mediation and proper valuation. It’s un-American that a court can seemingly capriciously decide to dissolve a profitable and operational company,” Giuliani said.
“The company is not at risk, its recent numbers show otherwise (that it is not at risk), and it is not in disarray, as its management teams have signed affidavits stating as much. The chancellor is either not paying attention to the facts that are public or he is taking one side over another. The Chancellor appears to want to not merely force the sale of the company, but to award the control premium to one party alone. That is not equitable, and this is an equity court.”
Giuliani said he has not decided if he and his firm will file an amicus brief or seek some increased intervention in the case beyond speaking out in advance of finalization of the Chancery decision. “All they asked me to do was review [the case], and come up with my fair and accurate conclusion. We haven’t reached those decisions.”
“Would I consider [asking Chancery Court to appoint Giuliani as mediator]? Maybe, but that is not what I’m here for,” Giuliani added. “This is a very bad precedent, if you can dissolve a company that just made a 14 percent profit last year, where the conduct was not egregious enough to require equitable dissolution.”
Asked if he perceived which party might bear greater responsibility, if either, in the business governance crisis, he said, “I have no sense of a party who occupies the ‘moral high ground’ in this case. I just think that if you give this more time, you might end up with a solution.”
It’s business, and it’s personal
According to Chancellor Bouchard’s opinion last year, Elting in 1997 called off her engagement to Shawe, and in 1999 she married Michael Burlant.
Burlant subsequently became collateral damage “roadkill” in the firefight between the two (via Shawe’s dismissal in 2013 of Burlant’s employer Cushman & Wakefield, the company’s real estate broker for 20 years).
Shawe married in 2011, but a reading of Chancellor Bouchard’s opinion suggests that he remains “a lover scorned,” having seemingly never gotten over Elting’s break-off with him. And rather than a working relationship between the two of them becoming more accommodating, it has devolved into what they and the court called “mutual hostaging.”
Essence of that “mutual hostaging” is that decisions are centralized to the top, not delegated, and each decision of even modest proportion is negotiated ad hoc, with each of the parties tying a decision that one is seeking to a decision or outcome the other is seeking. Even acquisitions are not safe, some prospective ones having been lost, with business leaders throughout the TransPerfect company virtually handcuffed by the intransigence at the top.
The language — in meetings, hallways and even e-mails — would make a sailor blush, and much of the e-mail language is repeated in the chancellor’s opinion. Even employees are held hostage, one of them a C-level human resources executive who appeared to have her work visa called into question in a way that ultimately jeopardized her ability to remain employed in the United States.
Equity in the business is split 50-50 between Elting and Shawe, although Shawe long before had tucked 1 percent of his 50 percent in the name of his mother Shirley Shawe so the (former) partners could legally call TransPerfect a “woman-owned firm.” However, the court acknowledged that for all practical purposes Shawe is controlling his mother’s interest as his own.
And, according to Chancellor Bouchard’s opinion, the company in 2015 had about 92 offices in 86 countries, 3,500 full-time employees, some 10,000 additional translators and editors working in about 170 languages, generating some $471 million in revenues in 2014. Figures for 2015 have not been provided, but the growth momentum — despite the bickering — should have landed the firm in the $500 million range of revenues, and fast-growing professional services businesses like this one often are throwing off pre-tax profits up to 20 percent, although much obviously is being reinvested to fuel growth.
Chancellor Bouchard’s opinion is replete with perceptive and comprehensive comments on the business, but he notes “the state of management of the corporation has devolved into one of complete dysfunction between Shawe and Elting, resulting in irretrievable deadlocks over significant matters that are causing the business to suffer and that are threatening the business with irreparable injury, notwithstanding its profitability to date.”
Blogger Pileggi chimes in
Francis G.X. Pileggi, the dean of Delaware’s legal bloggers on Delaware’s corporate law and cases, was a bit surprised to hear of Giuliani’s interest.
“The case was based on a Delaware statute that says, in essence, if there is a 50/50 deadlock, you can go to court and get a ‘business divorce.’ ”
“In other words, if you cannot get along together, and no person has a majority, the court will set you asunder. If you don’t want the court to split up the company, don’t come to court,” added Pileggi, who is a partner with Eckert Seaman in Wilmington. “The core issue was whether a deadlock existed and whether they could continue as a business — as opposed to ‘who was right or wrong’ which was mostly a secondary issue and not the primary issue.”
Former Supreme Justice Ridgely Defends Bouchard
“Chancellor Bouchard is really just applying a statute that addresses the unusual circumstance of stockholder and director deadlock,” said Henry duPont “Hank” Ridgely, who spent 30-plus years on Delaware’s bench, concluding with a decade on the appellate Delaware Supreme Court, before retiring a year ago to join DLA Piper, a global law firm. It’s the Delaware Supreme Court that would receive any appeal by any of the parties, making Justice Ridgely’s view a particularly relevant indicator.
“The Chancellor forewarned these parties, ‘work out this, or I’m going to have to do what I’m going to have to do,’ ” added Justice Ridgely. “They seem to have been trying to find some kind of buy-sell arrangement, and they’ve failed.”
“This case really is a lesson on the importance of having written agreements in place in advance for buying and selling respective interests. They had nothing of that kind in the beginning, nor were they ever able to agree upon one afterwards. The Chancellor called it ‘dysfunctional,’ and it truly is. There’s evidence that the company is also losing employees.”
“This really is a growing area of business law, what we call ‘business divorce,’ ” Justice Ridgely added. “In fact, I just attended an ABA Business Law section in Montreal where I served on a panel on business divorce.
Regarding Giuliani’s attempted intervention, Justice Ridgely sees little promise that the former mayor might prevail.
“There’s no reasonable expectation that outside comment is going to distract a Delaware court from the facts present in the case, and the applicable law in Delaware,” added Justice Ridgely. “Delaware courts are quite used to scrutiny of their rulings, and they know rulings will be looked at locally, nationally and internationally. Judges know that, and that is why they are so careful with regard to the precedential value they set.”
Giuliani intervention surprises Hamermesh
Larry Hamermesh, a professor of law at the Delaware Law School at Widener University, raised his eyebrows when informed of Giuliani’s effort to engage the Delaware courts in discussion of the case.
“I find it very unusual for a party with no apparent interest in a Chancery issue to sound off on this, and I’m a bit suspicious of his motives,” said Hamermesh, an expert on Delaware law, including Chancery Court practice. “I don’t see anything to complain about, given what the Chancellor has done.
“I’m not offended with the idea of a direction to sell a company in the face of a deadlock of the ‘War of the Roses’ proportions,” he added. “It’s consistent with statute. It’s consistent with precedent. It’s consistent with protecting the business.”
“If TransPerfect is sold, it’s not the death knell of this business, if the buyer can continue to run the business. And, if selling the business is sufficiently bad for both the warring parties, the threat of that may be the only way to get them to settle the issues. It may be the only plausible way.”
“What will likely come out on April 27 is another order. It will be appealable, and there are procedures for staying judgments pending appeal,” added Hamermesh. “That’s a fairly standard step. I think any appeal would be expedited.”
Although Chancellor Bouchard and the Bench do not speak of such active cases, Chancellor Bouchard’s next move is April 27, and little doubt exists in Delaware that Giuliani will not get what he’s seeking from the Delaware bench.