Small Court, Big Judicial Overreach Into Free Market

The Ladies Professional Golf Association announced last week that TransPerfect Global would be the official provider for translation software of the LPGA tour. TransPerfect, with more than $500 million in annual revenue, reportedly saw its sales grow 14 percent from the last year and booked contracts with corporate giants Walmart and Hewlett-Packard. SmartCEO Magazine recognized it earlier this year as a winner of the 2016 Future 50 Award.

Doesn’t quite seem dysfunctional.

Yet, despite success, profitability and recognition in the private sector, the public sector – in this case a Delaware court – has decided to force the co-owners to sell the firm that grew from an enterprise established in 1992 in a New York University dorm room to a giant among privately-held software firms. The rationale – “dysfunction.”

Image source: Flickr/Joe Gratz
Image source: Flickr/Joe Gratz

Dysfunction or not, there has been rancor – considerable rancor – between co-owners and founders Phil Shawe and Elizabeth Elting, who after a breakup have been entangled in litigation over the firm. Arguably, any company could perform better without the turmoil, but matter-of-factly, this company seems to be doing just fine even with the angst at the top.

Those concerned about erosion of free enterprise or judicial overreach should care deeply about this case for two reasons. First, a court is ordering the sale of a profitable company because the owners don’t get along. Second, such a legal precedent in a Delaware court could impact some of the nation’s largest employers.

Delaware is the incorporation capital of the world. Though a left-leaning state, it has a mostly business-friendly environment prompting 65 percent of Fortune 500 companies to incorporate there. The New York Times previously reported that 285,000 corporations – including Walmart, Coca-Cola, American Airlines, and JP Morgan Chase are incorporated at a single address in Wilmington. If the ruling by Delaware Court of Chancery Chief Judge Andre Bouchard stands, it could create considerable uncertainty for many large firms, thus considerable uncertainty with the economy.

More directly, Bouchard’s decision will impact the company’s near 4,000 employees working in offices in 90 cities. The company is already being forced to spend about one-sixth of its profits to pay for extra personnel to meet the court’s mandate, this includes an attorney tasked with selling the business, investment bankers and accountants, Crain’s reported.

A May 23 memo from the court-appointed custodian to employees (with the key goal of warning against talking to the press), asserted, “TransPerfect is performing exceptionally well and growing quickly, thanks to your hard work.” That begs the obvious question: Why then must the company be sold?

TransPerfect employees who are pushing the Delaware state legislature to block the judge’s mandate are making the argument that such a precedent would poison Delaware’s reputation as a strong business climate.

“On behalf of the more than 600 members of Citizens for a Pro-Business Delaware, we are proud to work for TransPerfect, and believe in its strength and its future. Now, thanks to an outrageous mandate by the Delaware courts, we may see the company sold away from the current ownership and management team with which we worked so closely to build this company,” the employees said in a statement last week. “Making matters worse, other businesses incorporated in Delaware that have always been protected by the state’s pro-business policies could suffer the same fate. If the governor and the state legislature want to protect Delaware businesses, and ensure future businesses incorporate in the state, they must take action, and they must do so now.”

Even former New York Mayor Rudy Giuliani raised a similar concern with The News Journal, saying, “It appears to be a very intrusive ruling in terms of the free market. I hate to see the government, including courts, sharing in the control of a private business.”

But the judge’s opinion called a forced sale the “only just and viable remedy” to the confrontation at the top of the firm.

“The primary issue for decision is whether the Court should grant Elting’s petition to appoint a custodian to sell the corporation under 8 Del. C. § 226 even though the corporation is highly profitable,” Judge Bouchard wrote in his August 2015 opinion. “Although it is unusual to grant such relief, it is appropriate and necessary in this case.”

The judge continued, “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.”

A less intrusive remedy, also allowed by law, could have been to appoint a tie-breaking board member to prevent the deadlocks.

For his part, Shawe offered Elting $300 million for Elting’s 50 percent, while a group of employees pooled their resources to buy out Elting for $200 million. But Bouchard is expected to issue a ruling shortly to order the procedure for the sale.

This won’t likely be the final ruling. If the matter isn’t resolved and the case works its way up through higher coursethe case, it’s a matter those concerned about the free market and judicial overreach should keep an eye on.

Fred Lucas is the author of “Tainted by Suspicion: The Secret Deals and Electoral Electoral Chaos of Disputed Presidential Elections.”

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