Manufactured Deadlocks? The Problematic “Bad Faith Defense” to Forced-Sales of Delaware Corporations Under Section 226 of the Delaware General Corporation Law
Manufactured Deadlocks? The P roblematic “Bad Faith Defense” to Forced-Sales of Delaware Corporations Under Section 226 of the Delaware General Corporation Law
Brian C. Durkin 0
0 Boston College Law School
Follow this and additional works at: http://lawdigitalcommons.bc.edu/bclr Part of the Business Organizations Law Commons, Commercial Law Commons, and the State
-
Article 6
1 See Shawe v. Elting, 157 A.3d 152, 156 (Del. 2017);In re Shawe & Elting LLC, C.A. No.
9661-CB, C.A. No. 9686-CB, C.A. No. 9700-CB, C.A. No. 10449-CB, 2015 WL 4874733, at *3
(Del. Ch. Aug. 13, 2015),aff’d, Shawe v. Elting, 157 A.3d 152 (Del. 2017). This dispute in its
entirety (including both the lower court and appellate actions) is referred to throughout the text of
this Note as the “TransPerfect case.” See infra notes 2–174 and accompanying text. The Chancery
Court Order of August 13,2015, will be cited as “In re Shaw” in the footnotes and the Delaware
Supreme Court opinion will be cited as“Shawe v. Elting.” See infra notes 2–174 and
accompanying text.
vices.”2 In 2007 they incorporated TransPerfect in Delaware as part of a
company-wide reorganization.3 In recent years, TransPerfect has achieved
staggering profitable growth, recognizing in 2014, for example, revenues
exceeding $470 million and a net income of $78.9 mill4ioDn.espite the
corporation’s considerable success, Shawe and Elting’s relationship began
to deteriorate in 2011, and eventually became so hostile that in May 2014,
Shawe and Elting filed a total of four individual lawsuits against one
anohter.5 Of the four separate actions filed, one has since gained national
attention: Elting’s petition in the DelawareChancery Court seeking an
appointment of a custodian under Title 8, Section 226(a)(2) of the Delaware
General Corporation Law to sell the corporation as a whole.6
2 See In re Shawe, 2015 WL 4874733, at *3. Shawe and Elting were engaged in 1996 but
ended their personal relationship in 1997S.ee id. According to Elting, Shawe was thoroughly
upset by the breakup and would“say horrendous things” about the man that Elting subsequently
married in 1999. See id.
3 See id. Along with translation services, TransPerfect offerswebsite localization and
litigation support services and employs over 3500 people. See Shawe v. Elting, 157 A.3d at 156. Shawe
and Elting incorporated TransPerfect as a Subchapter S corporation, which allowed for certain
income tax benefits—specifically, the ability for income not to be taxed at the corporate level.See
26 U.S.C. § 1361 (2012) (defining Subchapter S corporations);In re Shawe, 2015 WL 4874733, at
*3. There are 100 shares of common stock of the corporation issued and outstandingIn. re Shawe,
2015 WL 4874733, at *3. Elting owns (and has owned since the corporation’s founding) fifty shares,
and Shawe has owned fort-ynine shares, with Shawes’ mother, Shirley Shawe, owning the laste-r
maining share. See Shawe v. Elting, 157 A.3d at 156. For all intents and purposes, Shawe and Elting
are each viewed (and treated by the Chancery Court) as 50% owners despite the fact that technically
speaking, Shawe is only a 49% ownerS.ee In re Shawe, 2015 WL 4874733. at *1T.his is so
because Shawe’s mother has essentially pledged to vote in tandem with Shawe on all issueIsd.. This
point will become relevant in the pages that follow discussing Elti’nsgpetition filed under Title 8,
Section 226 of the Delaware General Corporation LawS.ee DEL. CODE ANN. tit. 8, § 226 (2011)
(authorizing the appointment of a custodian or receiver for deadlocked corporations with more than
one stockholder). See generally In re Shawe, 2015 WL 4874733(assessing Elting’s petition for the
appointment of a custodian.) Elting originaly filed a petition for dissolution under Title 6, Section
273, a joint venture dissolution statue that governs cou-ortrdered dissolutions of corporations with
only two stockholders. See DEL. CODE ANN. tit. 8, § 273 (authorizing the dissolution of corporations
with only two 50% stockholder)s; In re Shawe, 2015 WL 4874733 n.7. As noted by the Chancery
Court in the TransPerfect case, Elting eventually dropped that action, recognizing that because there
are technically three stockholders, Section 273 did not apply, and instead pursued the appointment of
a custodian under Section 226. In re Shawe, 2015 WL 4874733 n.7.
4 See In re Shawe, 2015 WL 4874733, at *4.
5 Id. at *18. At trial, the Chancery Court inIn re Shawe examined the breakdown of Shawe
and Elting’s interpersonal relationship in “painstaking detail” and the Delaware Supreme Court’s
opinion reiterated a few examples of the toxic nature of their relationship: Shawe engaged in a
“secret campaign to spy on Elting,”seeking to have Elting criminally prosecuted, and disparaged
Elting by disseminating a memorandum to company employees and issuing a press release
containing “false and misleading information.” See Shawe v. Elting, 157 A.3d at 156–57; In re Shawe,
2015 WL 4874733, at *2, *27.
6 See DEL. CODE A (...truncated)