Shawe V. Elting
2015 WL 4874733 (2017)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under 8 Del. C. § 226, the Court of Chancery has the statutory authority to appoint a custodian and order the sale of a solvent corporation as a going concern to resolve irreparable stockholder and director deadlock, even over the objection of a stockholder.
Facts:
- Elizabeth Elting and Philip Shawe co-founded the translation services company TransPerfect Global, Inc. (TPG) in 1992 while they were romantically involved and living together.
- TPG's stock was divided with 50 shares to Elting, 49 shares to Shawe, and one share to Shawe's mother, Shirley Shawe, though Philip Shawe effectively controlled his mother's share, creating a 50/50 ownership split between himself and Elting.
- Elting and Shawe were the only two directors on TPG's board.
- After their romantic relationship ended acrimoniously in 1997, their professional relationship deteriorated into extreme personal hostility and dysfunction.
- Shawe engaged in numerous acts of egregious misconduct against Elting, including spying on her, intercepting her communications, entering her locked office without permission, and disparaging her publicly and within the company.
- The conflict created a complete and permanent deadlock at both the stockholder and director levels, preventing the election of new directors and halting key business decisions such as acquisitions, employee management, and financial audits.
- This severe dysfunction caused threatened and actual irreparable harm to the company, including plummeting employee morale, high turnover of key personnel, customer concerns, and a halt to the company's previously successful acquisition-based growth.
- Despite the intense internal turmoil and managerial deadlock, the company remained highly profitable.
Procedural Posture:
- Elizabeth Elting filed a petition in the Delaware Court of Chancery under 8 Del. C. § 226, seeking the appointment of a custodian to sell TransPerfect Global, Inc. (TPG) due to stockholder and director deadlock.
- The action was functionally consolidated with several other lawsuits between Elting and Philip Shawe.
- The Court of Chancery conducted a six-day trial to hear evidence on the deadlock and related claims.
- Following the trial, the Court of Chancery appointed a custodian to serve as a mediator, but settlement efforts failed.
- The Court of Chancery issued an opinion finding that the requirements of § 226 were satisfied and that the most appropriate remedy was to appoint a custodian to sell the company.
- Philip Shawe and Shirley Shawe, the appellants, filed an interlocutory appeal of the Court of Chancery's decision and subsequent orders to the Delaware Supreme Court, with Elting as the appellee.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the Delaware Court of Chancery have the statutory authority under 8 Del. C. § 226 to appoint a custodian and order the sale of a solvent corporation to resolve a stockholder and director deadlock, even over the objection of a stockholder?
Opinions:
Majority - Seitz, J.
Yes. The Court of Chancery has the authority under 8 Del. C. § 226 to order the sale of a solvent, deadlocked corporation. The statutory prerequisites for appointing a custodian were met under both § 226(a)(1) due to stockholder deadlock (which the parties stipulated) and § 226(a)(2) due to director deadlock causing irreparable harm. The trial court's findings of irreparable harm—including damage to employee morale, customer relationships, and company goodwill—were amply supported by the record. While a custodian's default duty under § 226(b) is to 'continue the business,' the statute contains a critical exception: 'except when the Court shall otherwise order.' This clause grants the Court of Chancery broad, discretionary authority to fashion an appropriate remedy, including ordering a custodian to sell the company as a going concern. Given the 'complete and utter dysfunction' and the failure of less intrusive measures like mediation, the trial court reasonably concluded that a sale was the only viable remedy to protect the corporation and its stakeholders, as appointing a tie-breaking director would have resulted in perpetual court oversight. Selling the company as a going concern maximizes value for stockholders and protects employees, distinguishing it from a destructive asset liquidation.
Dissenting - Valihura, J.
No. The Court of Chancery exceeded its statutory authority by ordering a forced sale of a stockholder's shares over their objection. Stock is personal property, and any statute permitting a forced divestiture of such property must do so with express language, which § 226 lacks. Other sections of the Delaware General Corporation Law (DGCL) that permit forced divestitures, such as merger or joint-venture dissolution statutes, do so explicitly, providing fair notice to stockholders. The 'except when the Court shall otherwise order' clause in § 226(b) should be interpreted narrowly and does not grant unlimited power to order a sale of a solvent company. Delaware common law has a long-standing principle of minimizing judicial interference in corporate affairs; ordering a sale is the most extreme remedy possible and was inappropriate here without first attempting less drastic, incremental solutions, such as appointing a provisional director. The cases cited by the majority are distinguishable because they involved stockholder consent to the sale, which is absent here. The court's order effectively creates a 'judicially created notice' of a drastic remedy that the legislature did not authorize.
Analysis:
This landmark decision significantly clarifies and expands the remedial power of the Delaware Court of Chancery under 8 Del. C. § 226. It establishes that the court's authority in cases of corporate deadlock is not limited to appointing a tie-breaking director but can extend to the forced sale of a profitable, solvent company. The ruling emphasizes that extreme, irreparable dysfunction between founders can constitute 'irreparable harm' sufficient to justify such a drastic remedy, even when the company is financially successful. This holding puts owners of closely-held corporations on notice that failing to establish contractual exit mechanisms, like buy-sell agreements, can result in a court-ordered sale of the entire enterprise as the ultimate solution to intractable management disputes.
Unlock the full brief for Shawe V. Elting