Law School Case Brief
Shawe v. Elting - 157 A.3d 152 (Del. 2017)
Under the custodian statute, Del. Code Ann. tit. 8, §226, the court of chancery may appoint a custodian when the stockholders are unable to elect directors whose terms have expired. Further, a custodian may be appointed when the corporation's business is suffering from, or is threatened with, irreparable injury because of divisions between the directors, and the stockholders are unable to terminate the division. In circumstances when intermediate measures have been attempted but failed, the court of chancery properly exercises its discretion to sell the corporation and distribute the proceeds to deadlocked stockholders.
Philip Shawe and Elizabeth Elting are founders, co-CEOs, and board members of TransPerfect Global, Inc. (TPG), a Delaware corporation that acting as a holding company for the main operating company, TransPerfect Translations International, Inc. (TPI), a New York corporation. TPG provides translation, website localization, and litigation support services. The personal issues between Shawe and Elting affected the management of the company, which led Elting to file a petition under 8 Del. C. § 226 to declare a deadlock and appoint a custodian to sell TPG.
The Court of Chancery ruled that the requirements were satisfied to appoint a custodian. The Court of Chancery considered three options: first, allow the parties to decide for themselves; second, appoint a custodian chosen by the Court to serve as a third director, and; third, to appoint a custodian to sell the company so that Shawe and Elting can be separated and the enterprise protected from their dysfunctional relationship. The Court found that the third choice was the most appropriate remedy.
Did the Court of Chancery have the authority to order the sale of the solvent company?
The Court found that the factual circumstances of the case support the finding of the Court of Chancery. The deadlock and dysfunction between Shawe and Elting was causing threatened and actual irreparable injury to the company. The Court ruled under a plain reading of §226(b), the custodian has the powers of a receiver under §291, and his duties are to continue the business unless the Court otherwise orders, and except under the special circumstances of abandoned businesses and close corporations. According to the Court, the Court of Chancery did not abuse its discretion in ordering for the sale of the company because it thoroughly examined the options available to it before coming to such conclusion. The Court affirmed the Court of Chancery’s opinion orders.
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