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America’s Top Business Court Gets Dragged Into a Lover’s Quarrel

Aug. 31, 2016, 1:01 PM

By Jef Feeley and Katherine Greifeld, Bloomberg News

It was the classic love story — turned soap opera. Elizabeth Elting and Philip Shawe founded a Manhattan-based translation-services company in their New York University dorm room for MBA students two decades ago. They owned it 50-50. Eventually, they got engaged.

But by 2011 the couple was feuding over who should run the company, TransPerfect Global Inc., and bickering about everything from taxes to payroll. They broke off their engagement.

Today, this story of love and business gone bad is at the center of an unlikely debate: whether Delaware’s mighty business court — which has legal authority over half of all U.S. public companies — has grown too powerful. With the ex-lovers at bitter odds, a judge, citing two earlier Delaware cases, ordered that the company be sold at auction. Shawe decried the ruling as draconian. Within months, some TransPerfect executives created a committee that is now blanketing the state with ads and lobbying lawmakers to curtail the court’s power.

The group’s high-profile campaign against the ruling is unprecedented in a state long seen as friendly to business interests. Yet the reaction marks just the latest attempt by some corporations to push back against a court they’ve described as over-reaching and not as receptive to business as it used to be. In recent years, companies including Dole Food Co. and have criticized the court and the state for not adopting pro-business measures, such as shifting legal fees to losing parties and discouraging shareholder suits.

Grassroots Effort?

“Why wouldn’t executives think twice about coming to Delaware if they knew a judge could just order a sale of their company without looking at other alternatives,” said Chris Coffey, a managing director at New York’s Tusk Strategies, which was hired to orchestrate the campaign. (Coffey is an ex-aide to former New York Mayor Michael Bloomberg, who owns Bloomberg LP, the parent company of Bloomberg News.)

The court’s defenders dismiss critics as self-interested companies wrapping themselves in an anti-court mantle. The detractors are “all flying the flag that Delaware isn’t as business-friendly as it used to be,” said Larry Hamermesh, a Widener University professor who teaches Delaware corporate law. “The reality is that they are all unhappy litigants who don’t have a good basis for their argument.”

Friendly Reputation

Chancery Judge Travis Laster singled out the TransPerfect lobbying effort, led by the group called Citizens for Pro-Business Delaware.

Indeed, during an unrelated case in June, Laster said, “The rule of law doesn’t change based on whether you are rich enough to hire your own PR firm and lobbying groups.”

The controversy poses a challenge to Delaware officials, who carefully guard their court’s business-friendly reputation as rivals like Nevada and Oklahoma woo companies with their own enticements. More than one million legal entities are incorporated in Delaware paying annual fees of more than $1 billion, accounting for one-quarter of the state’s budget. The state’s reputation goes back more than a century when it sought to lure companies from New York and elsewhere by writing laws that give directors wide latitude.

Citizens for Pro-Business Delaware grew out of a ruling by Chancery Judge Andre Bouchard, who concluded in May that a two-year legal battle between Elting, 50, and Shawe, 47, left him no choice but to order the software firm sold.

‘Irretrievably Dysfunctional’

The pair, both holding the CEO title, were at loggerheads. The impasse created an “irretrievably dysfunctional” management, Bouchard said. At one point, Shawe called police and accused Elting of assaulting him, according to court documents. No one was prosecuted in connection with the incident.

Neither Shawe nor Elting could agree on buying each other out. Nor on what should happen to the company. Elting wanted it sold, Shawe opposed it and is now appealing Bouchard’s opinion.

With revenue exceeding $500 million last year, and 4,000 employees, TransPerfect could fetch as much as $1.2 billion in a sale, according to court filings.

After Bouchard’s ruling, a TransPerfect employee contacted Coffey, an acquaintance, about creating the Citizens committee. The judge’s decision was “the most drastic option available” for a profitable company, Coffey said, suggesting that an administrator could run the firm instead.

“It’s like scheduling major surgery to cure a common cold,” he said.

Dozen Executives

Who’s behind the Citizens committee is a mystery. Coffey said about a dozen well-compensated executives have been paying his fees. Neither Coffey nor Shawe will identify them because, they say, the court-imposed custodian now overseeing the company has demanded that employees not speak publicly about the dispute. Coffey said “several hundreds of thousands of dollars” have already been spent on the campaign.According to public records, the committee was formed by Timothy Holland, TransPerfect’s director of corporate strategy, who has also filed a lawsuit accusing Bouchard of trampling on employees’ free-speech rights by backing the custodian’s order. Bouchard declined to comment. Holland didn’t return requests for comment.

‘Not Helpful’

Shawe said he’s not a part of the employees’ campaign and isn’t providing funding even though he’s sympathetic to their cause.

“I’ve actually asked them to stop because it’s not helpful to my case to have the judge unhappy about their efforts,” he said in an interview.

Elting declined to comment through her lawyer.

The executives are fighting the sale order because they are worried about private-equity ownership taking over the company and demanding deep staff cuts, said Coffey. That would be “destroying the meritocracy,” said Barnaby Wass, a vice president at the company and a group member.

Their campaign has included going door-to-door in districts of key legislators, submitting op-eds to newspapers, airing radio ads, distributing mass mailings and hiring a lobbyist to pressure politicians.

“This is not a company that was polluting the environment or harming people,” said Gene Kagan, a former TransPerfect software engineer who handed out fliers at a state fair in July seeking signatures for a petition. “I don’t see why a judge should have the power to order the sale of such a company.”

Profitable Business

In fact, Bouchard’s order isn’t the first time a U.S. judge has ordered a profitable business to be sold, and won’t be the last, said Robert Thompson, a Georgetown University law professor.

“This ruling doesn’t jump out as an example of judicial overreach,” he said. “The usual response to one of these orders would be to appeal the decision, not to set up a lobbying campaign to change the law.”

The tension between Delaware and some companies could stem from the court’s growing power and prestige, as well as its role in high-profile disputes, such as the Viacom Inc. debacle over Sumner Redstone’s media fortune.

Last year, Dole CEO David Murdock threatened to cancel a 15-year agreement to ship bananas and pineapples through the Port of Wilmington if the state didn’t crack down on suits disputing a company’s valuation of its shares. and DuPont Co. joined in that call for changes.

Time Waste

Delaware lawmakers fended off Murdoch’s demands and the CEO agreed to pay about $170 million to settle claims he shortchanged investors.

Changing corporate law in Delaware isn’t easy. The legislature typically alters these statutes only on the recommendation of the Delaware State Bar Association. That’s why William B. Chandler III, Bouchard’s predecessor as chancery’s chief judge, thinks the TransPerfect campaign is a waste of time.

“They’d have been better off flushing that money down the toilet,” said Chandler, who retired in 2011 and is now a partner at Wilson Sonsini Goodrich & Rosanti PC.

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