IN THE SUPREME COURT OF THE STATE OF DELAWARE

PHILIP R. SHAWE and SHIRLEY
SHAWE,

Respondents Below- Appellants,

v.

ELIZABETH ELTING,

Petitioner Below- Appellee. § § No. 423, 2016 § § § § Court Below—Court of Chancery § of the State of Delaware § § C.A. Nos. 9686, 9700, and 10449 § § § §

Submitted: January 18, 2017

Decided: February 13, 2017

Before STRINE

, Chief Justice; HOLLAND

, VALIHURA

, VAUGHN , and

SEITZ , Justices, constituting the Court en Banc

.

Upon Appeal from the Court of Chancery of the State of Delaware: AFFIRMED

.

Lisa A. Schmidt, Esquire, Robert L. Burns, Esquire and Nicholas R. Rodriguez, Esquire, Richards Layton & Finger, P.A., Wilmington , Delaware; Philip L. Graham, Jr., Esquire, John L. Hardiman, Esquire and Penny Shane, Esquire, Sullivan & Cromwell LLP, New York, New York; Howard J. Kaplan, Esquire and Joseph A. Matteo, Esquire, Kaplan Rice LLP, New Yor k, New York and David B. Goldstein, Esquire ( argued ), Rabinowitz, Boudin, Standard, Krinsky & Lieberma n P.C., New York, New York for Respondent Below, Appe llant Philip R. Shawe.

Jeremy D. Eicher, Esquire,Thomas A. Uebler, Esquire and Mark M. Dalle Pazze, Esquire, Cooch and Taylor, P.A., Wilmington, Delawa re; Alan M. Dershowitz, Esquire ( argued ), Cambridge, Massachusetts; Adam K. Grant, Esquire , Polsinelli PC, New York, New York, for Respondent Below, Appel lant Shirley Shawe.Kevin R. Shannon, Esquire, Berton W. Ashman, Jr., E squire, Christopher N. Kelly,

Esquire, Jaclyn C. Levy, Esquire and Mathew A. Gold en, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware; Philip S. Kauf man, Esquire ( argued ), Ronald S. Greenberg, Esquire, Jeffrey S. Trachtman, Esquire, Marjorie E. Sheldon, Esquire and Jared I. Heller, Esquire, Kramer Levin Naftalis & Frankel LLP, New York, New York; Eric Alan Stone, Esquire, Robert A. Atkins, Esquire and Gerard E. Harper, Esquire, Paul, Weiss, Rifkand, Wharton & Garrison LLP, New York, New York, for Petitioner Below, Appellee Elizabeth Elting.

SEITZ , Justice, for the Majority:Philip Shawe and his mother, Shirley Shawe, have fi led an interlocutory

appeal from the Court of Chancery’s August 13, 2015 opinion and July 18, 2016

order, and related orders, appointing a custodian u nder 8 Del. C. § 226 to sell

TransPerfect Global, Inc., a Delaware corporation. After a six-day trial filled with

unprecedented evidence of a lengthy and seriously d ysfunctional relationship

between the owners, culminating in Philip Shawe’s l itigation misconduct, the

Court of Chancery issued a 104-page opinion conclud ing that the warring factions

were hopelessly deadlocked as stockholders and dire ctors. The court carefully

considered three alternatives to address the dysfun ction and deadlock, and in the

end decided that the circumstances of the case requ ired the appointment of a

custodian to sell the company.

On appeal, the Shawes do not challenge the Court of Chancery’s many

factual findings of serious dysfunction and deadloc k. Instead, Philip Shawe claims

for the first time on appeal that the court exceede d its statutory authority when it

ordered the custodian to sell a solvent company. A lternatively, Shawe contends

that less drastic measures were available to addres s the deadlock. Shirley Shawe

has taken a different tack, and argues for the firs t time on appeal that the

custodian’s sale of the company might result in an unconstitutional taking of her

one share of TransPerfect Global stock.2

We disagree with the Shawes and affirm the Court o f Chancery’s judgment.

First, under the custodian statute, the Court of Ch ancery may appoint a custodian

when the stockholders are unable to elect directors whose terms have expired.

Here, the parties stipulated that they were unable to do so. Further, a custodian

may be appointed when the corporation’s business is suffering from, or is

threatened with, irreparable injury because of divi sions between the directors, and

the stockholders are unable to terminate the divisi on. Here, the director and

stockholder deadlock are undisputed, and the Court of Chancery made detailed

factual findings of threatened and actual irreparab le harm to the company which

we will not disturb on appeal. We also agree with the Court of Chancery’s

conclusion that, in circumstances such as this, whe n intermediate measures were

attempted but failed, the Court of Chancery properl y exercised its discretion to sell

the company and distribute the proceeds to deadlock ed stockholders.

Finally, Philip and Shirley Shawe have attempted t o raise statutory and

constitutional arguments that were not considered b y the Court of Chancery.

Under this Court’s long-standing rules and the impo rtant policy reasons guiding

them, we do not consider arguments raised by the Sh awes for the first time on

appeal. Our dissenting colleague has concluded, ho wever, that even though the

statutory argument was never considered by the Cour t of Chancery, it should be3

addressed for the first time on appeal. Thus, in r esponse to the dissent, we explain

why we disagree with its interpretation of the cust odian statute.

I.

TransPerfect Global, Inc. (“TPG”) is a Delaware co rporation that acts as a

holding company for the main operating company, Tra nsPerfect Translations

International, Inc. (“TPI”), a New York corporation . Both entities will be referred

to as the “Company.” The Company provides translat ion, website localization, and

litigation support services from 92 offices in 86 w orldwide cities. It has over 3,500

full-time employees and maintains a network of over 10,000 translators, editors,

and proofreaders in about 170 different languages. Elting and Shawe co-founded

the Company and are co-chief executive officers and board members.

TPG has 100 shares of common stock issued and outs tanding, divided fifty

shares to Elting, forty-nine shares to Shawe, and o ne share to Shirley Shawe. In

this Opinion, we refer to Philip Shawe as “Shawe,” and Shirley Shawe by her full

name. The one share allocated to Shirley Shawe all owed TPG to claim the benefits

of being a majority women-owned business. We credi t the Court of Chancery’s

finding, based on evidence introduced at trial, tha t Shawe “has treated his mother’s4

share as his own property and himself as a 50% co-o wner of the Company.” 1 After

a corporate reorganization in 2007, TPG’s bylaws pr ovided for a three member

board of directors, or a different number fixed by the stockholders. Elting and

Shawe have been the only directors since the Compan y’s reorganization in 2007.

To fully appreciate the personal nature of the lon g-running discord leading

to the Court of Chancery’s ruling, we go back to th e Company’s founding and the

troubled romantic relationship between the founders . Elting and Shawe cofounded the business in 1992 while living together in a dormitory room attending

New York University’s business school. They were e ngaged in 1996, but Elting

called the marriage off in 1997. As the Court of C hancery found, “Shawe did not

take the break-up well, and would ‘terrorize’ her a nd say ‘horrendous things’ about

her husband, Michael Burlant, whom she married in 1 999.” 2 On two separate

occasions, Shawe responded to the rejection by craw ling under Elting’s bed and

refusing to leave. 3

1 In re Shawe & Elting LLC , 2015 WL 4874733, at *2 (Del. Ch. Aug. 13, 2015). Elting demonstrated at trial that Shawe held a general pro xy for Mrs. Shawe’s one share, and consistently held himself out as the 50% owner of T PG. Id

. 2 Id . at *3.

3 When Elting ended their engagement, Shawe refused to leave the apartment and crawled under her bed and stayed there for at least half an hour. App. to Opening Br. at 2393 (Trial Tr.). On another occasion, Elting was traveling alone in Bue nos Aires looking for space to open a new

office. She arrived at her hotel room to find that Shawe had showed up unannounced. When she asked him to leave, he crawled under her hotel bed and stayed there for about half an hour. Id

.5

As the Company grew, the founders were not satisfi ed with their financial

success, and brought their simmering personal disco ntent into the Company’s

business affairs. The Court of Chancery catalogued the serious clashes over the

years between Shawe and Elting and their surrogates before, and remarkably,

during the litigation:

• Shawe engaged in a secret campaign to spy on Elti ng and invade her privacy by intercepting her mail, monitoring her ph one calls, accessing her emails (including thousands of privil eged communications with her counsel), and entering her locked office without permission on numerous occasions as well as sending his socalled “paralegal” there at 4:47 a.m. on another oc casion.

• Shawe co-opted the services of Company advisors ( e.g., Gerber and Kasowitz) to assist him in advancing his personal a genda against Elting.

• Shawe unilaterally hired numerous employees to pe rform Shared Services functions (Accounting and Finance) and eve n to work in divisions Elting managed (Chris Patten in TRI) with out her knowledge or consent by creating “off book” arrange ments and fabricating documents.

• Shawe sought to have Elting criminally prosecuted by referring to her as his ex-fiancée seventeen years after the fac t when filing a “Domestic Incident Report” as a result of a seeming ly minor

altercation in her office.

• Shawe disparaged Elting and tried to marginalize her within the Company by gratuitously disseminating a memorandum (on Gerber’s letterhead) to employees in her own division accusi ng her of collusion and financial improprieties.6

• Shawe disparaged Elting publicly by unilaterally issuing a press release in the Company’s name containing false and misleading

statements

. 4

These were just some of the highlights of the fact s found by the Court of

Chancery after a lengthy trial. The court also mad e detailed findings about

continuous acrimonious disputes over personal and b usiness expenses, weekly if

not daily temper tantrums, and “mutual hostaging” b etween the founders over

proposed acquisitions, stockholder distributions, e mployee hiring, pay and

bonuses, and office locations. The court also foun d that Shawe bullied Elting and

those aligned with her, expressing his desire to “c reate constant pain” for Elting

until she agreed with Shawe’s plans. 5 It was common for senior officers to be

drawn into their disputes, who were then abused by threatened firings, substantial

fines, inappropriate emails, and by withholding com pensation and promotions.

Specific to the Company’s operations, the Court of Chancery heard days of

testimony leading to findings that:

• Elting refused to pay litigation counsel to defen d significant ongoing patent infringement litigation.

• Shawe fired real estate professionals, public rel ations professionals, refused to execute leases, and interfered with the Company’s payroll

processes.

4 In re Shawe & Elting LLC , 2015 WL 4874733, at *27 (internal citations omitt ed).

5 Id . at *6.7

• Shawe refused to engage in an annual expense true up, and interfered with the annual review of the Company’s financials and its audit process.

• Shawe falsified corporate records to avoid revie w by Elting.

The Court of Chancery best captured the lengths th at Shawe would go to

harass Elting in its recounting of Elting’s plane t rip to Paris in 2014:

On December 2, 2014, Elting boarded a red eye flig ht to Paris and discovered, to her surprise, that Shawe was sea ted across the aisle

from her. Shawe claimed to have “no idea” she woul d be on the flight. In truth, Shawe previously learned that El ting would be on the flight and made arrangements to be seated next to h er without her knowledge. Elting changed seats. The next day, Sh awe sent a text message to several of his allies, stating: “Was nex t to Liz on the plane to Paris and she switched seats ;).” Two of the re cipients of the text message were Nathan Richards and Joe Campbell, both of whom are implicated in events concerning Shawe’s alleged spo liation of evidence, which is the subject of a motion for sanc tions discussed

below.

I find Shawe’s characterization of the incident as an attempt to
extend an olive branch not to be credible. He did not deny telling Elting that he had “no idea” she would be on the fl ight, which was not true, and the smiley-face emoticon at the end of hi s text message suggests he was amused by yet another opportunity t o harass Elting, who Shawe knew full well would not welcome his pres ence on the flight. 6

II.

While Shawe and Elting continued to harass each ot her, interfere with the

business, and demoralize the employees, they filed four lawsuits against each

6 Id . at *23 (internal citations omitted).8

other. 7 The conflict eventually distilled down to Elting’ s petition under 8 Del

. C

.

§ 226 to declare a deadlock and appoint a custodian to sell TPG.

The court dedicated enormous resources to the dispu te. It held twelve

hearings, decided sixteen motions, and conducted a six-day trial. Before its final

decision, the Court of Chancery took the measured s tep of appointing a custodian

to serve as a mediator to assist Shawe and Elting t o try and settle their disputes.

The court also delayed its post-trial decision for two months to await the parties’

ongoing efforts to resolve the controversy. After the many attempts at settlement

failed, the Court of Chancery issued its 104-page d ecision finding that “the

evidence presented at trial warrants the appointmen t of a custodian to sell the

Company to resolve the deadlocks between Shawe and Elting.” 8

First, the Court of Chancery found that Elting had satisfied the requirements

of § 226(a)(1) to appoint a custodian for stockhold er deadlock because the parties

stipulated that they were divided and unable to ele ct successor directors. Next, the

court held that Elting satisfied the three requirem ents of § 226(a)(2) for

7 On May 8, 2014, Elting filed an action in New York seeking to remove Shawe as a TPI director. On May 15, 2014, she filed a verified pe tition for dissolution of Shawe & Elting LLC (Shawe and Elting’s joint owned asset protection an d distribution vehicle) in the Court of Chancery. On May 22, 2014, Shawe filed a verified complaint in the Court of Chancery individually and derivatively on behalf of TPG asse rting claims against Elting for waste, breach of fiduciary duty, unjust enrichment, breach of con tract, and indemnification. On May 23, 2014, Elting filed a petition in the Court of Chancery se eking the appointment of a custodian to sell the Company, and dissolution of TPG under the court’s e quitable powers. Id . at *18.

8 Id

.9

appointment of a custodian due to director deadlock . As to the first requirement,

the existence of deadlocks, the court reviewed in p ainstaking detail its many

factual findings, now undisputed on appeal, support ing its conclusion that the

distrust Shawe and Elting have for each other “stri kes at the heart of the palpable

dysfunction that exists in the governance of the Co mpany.” 9 The Court of

Chancery also held that the second requirement, the stockholders’ inability to

break the director deadlock, was satisfied by the p arties’ stipulation of deadlock.

Turning to the final requirement, harm to the busi ness, the Court of

Chancery considered the profitability of the Compan y, but also made the

commonsense observation that the statute contemplat es appointment of custodians

for profitable corporations which, like distressed companies, can suffer or be

threatened with irreparable injury. The court then catalogued some of the many

examples of actual and threatened irreparable injur y to the Company:

• Kevin Obarski (Senior Vice President of Sales) ca lled the feud the “biggest business issue” the Company faces, and bem oaned that the “crazy arbitrary stuff” coming out of it was “the n umber 1 reason people leave to go to work at competitors.”

• Michael Sank (Vice President of Corporate Develop ment) agreed: “it’s so obviously the biggest problem the company faces.”

• Yu-Kai Ng (Chief Information Officer) identified as a Company goal in the wake of the 2013 Avengers meeting the n eed to find a way

9 In re Shawe & Elting LLC , 2015 WL 4874733, at *27.10

for Shawe and Elting to work together “without nega tively impacting everyone else.”

• Mark Hagerty (Chief Technology Officer) testified that the conflict “hurts company morale” and “is detrimental to the c ompany.”

• Robert DeNoia (former Vice President of Human Res ources) expressed his frustration with the “pervasive and c ontinuous hostile environment where inappropriate behavior impacts th e morale, health and well-being of myself and the staff.”

• Roy Trujillo (Chief Operating Officer), in a lett er drafted for submission to a special master appointed in the New York action, attributed the “mass exodus” in Accounting and Fina nce to “the ongoing disputes and stressful environment created by it.” He further stated that “[e]mployees are resigning and leaving these departments at unprecedented rates,” that “[t]he morale and ret ention issue will likely spread,” and that “[t]he company’s reputatio n is taking a beating, internally and externally.”

• Kai Chu (an Accounting employee), attributed the “plummeting” morale and loss of employees in Accounting to the “ diametrically opposed” orders that had been received from Shawe a nd Elting.

• Fiona Asmah (a Finance employee) testified that t he disputes and conflicting directives have caused her and others t o feel “caught in the middle,” have created an “unhealthy work environmen t,” and have “affected employee morale.” 10

Shawe himself acknowledged “the potential for grie vously harming” the

Company by his continued feuding with Elting. 11 The Court of Chancery also

found that major clients who are free to use compet itive services have expressed

concerns about the dispute. Shawe and Elting have also been unable to agree on

10 Id. at *29 (internal citations omitted).

11 Id. at *15 (internal citation omitted).11

acquisitions which generally accounted for between 16.5-20% of the Company’s

annual revenue and 8-14% of its annual net profit. The Company has made no

acquisitions since 2013. As the Court of Chancery held:

[A]lthough it is true that the Company is and has b een a profitable enterprise to date, its governance structure is irr etrievably dysfunctional. The Company already has suffered fr om this dysfunction and, in my view, is threatened with muc h more grievous harm to its long-term prospects if the dysfunction is not addressed. 12

When it came to the scope of the custodian’s autho rity, the Court of

Chancery considered three alternatives. First, the court could do nothing and

“leave the parties to their own devices.” 13 The court rejected this option because

the “management of the Company is one of complete a nd utter dysfunction that is

causing the business to suffer and threatens it wit h irreparable harm

notwithstanding its profitability to date.” 14 The Chancellor “found Elting’s distrust

of Shawe to be justified” and “Shawe’s actions have cast a pall on the prospect that

a third party would pay a fair price for her shares .” 15 The court thus decided

against the “do nothing” option because “equity wil l not suffer a wrong without a

remedy.” 16

12 Id . at *30.

13 Id . at *31.

14 Id

. 15 In re Shawe & Elting LLC , 2015 WL 4874733, at *31.

16 Id . (quoting Weinberger v. UOP, Inc. , 1985 WL 11546, at *9 (Del. Ch. Jan. 30, 1985), aff’d

, 497 A.2d 792, 1985 WL 188543 (Del. 1985) (TABLE)).12

Second, the court considered whether to appoint a custodian to serve as a

third director or act in some capacity to break the ties between the two factions.

He rejected this option because:

[I]t would enmesh an outsider and, by extension, th e Court into matters of internal corporate governance for an ext ensive period of time. Shawe and Elting are both relatively young. Absent a separation, their tenure as directors and co-CEO’s of the Company

could continue for decades. It is not sensible for the Court to exercise essentially perpetual oversight over the internal a ffairs of the Company. 17

This left the Court of Chancery with a final optio n—“appoint a custodian to

sell the Company so that Shawe and Elting can be se parated and the enterprise can

be protected from their dysfunctional relationship. ” 18 The court recognized that the

remedy was “unusual,” and “should be implemented on ly as a last resort and with

extreme caution.” 19 But after reviewing the statute and case law, the court

determined that the Court of Chancery “has appointe d custodians to resolve

deadlocks involving profitable corporations and aut horized them to conduct a sale

of the corporation.” 20 Further, the Chancellor held:

Having conducted a six-day trial, decided at least sixteen motions, held numerous lengthy hearings, and considered care fully the documentary evidence and credibility of the witness es along with the parties’ extensive submissions, the painfully obvio us conclusion is

17 Id

. 18 Id.

19 Id

. 20 Id . (citing Bentas v. Haseotes , 769 A.2d 70, 73 n. 3 (Del. Ch. 2000) and Fulk v. Wash. Serv.
Assocs., Inc. , 2002 WL 1402273, *2 (Del. Ch. June 21, 2002)).13

that Shawe and Elting need to be separated from eac h other in the management of the Company for its own good. Their dysfunction must be excised to safeguard the Company. 21

III.

Shawe’s primary argument on appeal is that the cou rt exceeded its statutory

authority when it ordered the custodian to sell a s olvent company. Alternatively,

Shawe argues that, even if the statutory authority existed to authorize the custodian

to sell the Company, the Court of Chancery should h ave tried other measures to

address the deadlock before resorting to a sale of the Company. We find, however,

that Shawe failed to raise his statutory argument i n the Court of Chancery, and

cannot raise it for the first time on appeal. We a lso find that the Court of Chancery

took a measured approach to the dispute, and only o rdered the custodian to sell the

Company after attempting less intrusive measures, a nd reasonably concluding

other less intrusive measures would not be effectiv e. The court’s decision to

appoint a custodian to sell the Company was support ed by the facts found after

trial, was permitted by the statute, and thus was n ot an abuse of discretion. 22

A.

The statute, 8 Del

. C . § 226(a), provides that “[t]he Court of Chancery, upon

application of any stockholder, may appoint 1 or mo re persons to be custodians,

21 In re Shawe & Elting LLC , 2015 WL 4874733, at *31.

22 Giuricich v. Emtrol Corp. , 449 A.2d 232, 240 (Del. 1982) (applying abuse of discretion standard).14

and, if the corporation is insolvent, to be receive rs, of and for any corporation [].”

As this prefatory language contemplates, custodians are appointed for solvent

corporations, and receivers are appointed for insol vent corporations.

There are three pathways to appoint a custodian fo r a solvent corporation,

two of which are relevant to this case. First, a c ustodian may be appointed when:

(1) At any meeting held for the election of directors t he stockholders are so divided that they have failed to elect succe ssors to directors whose terms have expired or would have expired upon qualification of their successors . . . . 23

Or, a custodian may also be appointed when:

(2) The business of the corporation is suffering or is threatened with irreparable injury because the directors are so div ided respecting the management of the affairs of the corporation th at the required vote for action by the board of directors cannot be obtained and the

stockholders are unable to terminate this division

. . . . 24

Shawe does not contest the Court of Chancery’s rul ing that a custodian may

be appointed under § 226(a)(1) due to the stockhold er deadlock between Shawe

and Elting, and their inability to elect successor directors. Nor could he. Shawe

and Elting stipulated to the stockholder deadlock r equired by the statute. 25

Shawe does challenge the Court of Chancery’s appoi ntment of a custodian

under § 226(a)(2), claiming that the court misappli ed the requirement that the court

23 8 Del

. C . § 226(a)(1).

24 Id . § 226(a)(2).

25 App. to Opening Br. at 3181-85 (Stipulation and Or der).15

find irreparable injury to the business of the corp oration. According to Shawe, the

court improperly relied on case law defining irrepa rable injury in the temporary

injunction context, instead of applying a supposedl y more rigorous “imminent

corporate paralysis” standard under § 226. Shawe a rgues that applying the wrong

standard “trivializes and undermines Section 226” b ecause judicial intervention is

only permitted in “extreme circumstances.” 26

First, the argument is academic because Shawe agre ed that the Court of

Chancery was authorized to appoint a custodian unde r § 226(a)(1). Elting need not

show irreparable injury under the first part of the statute. 27 Further, the Court of

Chancery did not misapply the threatened or actual irreparable injury requirement.

As the court observed, “irreparable injury” is “a f amiliar equitable principle”

which takes into account factors like “harm to a co rporation’s reputation, goodwill,

customer relationships, and employee morale.” 28 Whether describing the standard

as the Chancellor did, or as imminent corporate par alysis, it is a distinction without

a difference. This Court in Giuricich v. Emtrol Corp. used the same words

interchangeably. 29 The Court of Chancery properly applied the words of the

26 Shawe Opening Br. at 29.

27 Giuricich , 449 A.2d at 238 (irreparable injury not required before appointing a custodian under § 226(a)(1)).

28 In re Shawe & Elting LLC , 2015 WL 4874733, at *28.

29 449 A.2d at 239 n.13 (describing “imminent corpora te paralysis” as equivalent to “irreparable harm” when considering whether irreparable harm is required before appointment of custodian under § 226(a)(1)).16

statute and settled principles of irreparable injur y to evaluate the likelihood of

threatened or actual irreparable injury to the Comp any’s business.

Far from trivializing the irreparable injury requi rement, the Court of

Chancery accepted the fact that the Company was pro fitable, but also recognized

the extremely dysfunctional relationship between th e founders and its effect on all

of the Company’s operations. If allowed to persist , the Company was likely to

continue on the path of plummeting employee morale, key employee departures,

customer uncertainty, damage to the Company’s publi c reputation and goodwill,

and a fundamental inability to grow the Company thr ough acquisitions.

We will not disturb these factual findings on appe al. The trial record amply

supports the Court of Chancery’s finding that the d eadlock and dysfunction

between the founders is causing threatened and actu al irreparable injury to the

Company. 30

B.

Having decided that the Court of Chancery properly exercised its discretion

under § 226 to appoint a custodian of the Company, we turn to Shawe’s primary

argument raised for the first time on appeal—that t he custodian statute does not

30 Shawe also raises an unclean hands defense, claimi ng that Elting’s obstructionist conduct barred the appointment of a custodian. The argumen t was not fairly presented to the Court of Chancery, and will not be considered for the first time on appeal. Supr. Ct. R. 8 (“Only questions fairly presented to the trial court may b e presented for review; provided, however, that when the interests of justice so require, the Court may consider and determine any question not so presented.”).17

authorize the court to order the custodian to sell the Company over the

stockholders’ objection. Shawe also argues that in structing the custodian to sell

the Company is an extreme remedy, and should not ha ve been imposed without

first attempting less-drastic remedies, such as usi ng the custodian as a third director

to break the ongoing deadlocks between the founders

.

For the important reasons expressed in Part IV of t his Opinion, our Court

requires that arguments be considered in the first instance by the trial court before

appellate review. 31 We have closely scrutinized Shawe’s record citati ons where he

claims his statutory argument was raised below, and find each of his citations

unconvincing or supporting the opposite conclusion. 32 The argument is waived.

31 Supr. Ct. R. 8. To avoid Rule 8, the dissent conc ludes that Shawe’s statutory argument was fairly encompassed within his general argument made below—that the Court of Chancery should not order a sale under Section 226. Dissent at 2, n .3. But Rule 8 is not satisfied by attempting to anchor serious appellate arguments in the shifting sands of general arguments made below. As the following footnote demonstrates, Shawe not only failed to raise the statutory argument in the Court of Chancery, he took positions inconsistent w ith the dissent’s interpretation of § 226. The Court of Chancery addressed a myriad of issues rais ed by eleven law firms, including Shawe’s litigation misconduct. The statutory interpretatio n argument was not one of them. The statutory interpretation argument “credibly can be avoided” b ecause it was never presented to the Court of Chancery, and the Shawes took positions in the Cour t of Chancery contrary to those offered by the dissent for the first time on appeal. See Dissent at 2, n.3.

32 App. to Opening Br. at 3786-91 (Shawe Post-Trial B rief) (Court of Chancery should not appoint a custodian to sell the business because th e statute “ discourages dissolution” and

“Delaware courts refuse to exercise their discretio n to dissolve solvent companies where other measures ‘milder’ than dissolution are available.”) (emphasis in original); id . at 3836 (Shawe Answering Post-Trial Brief) (“Elting has not met th e very high standard for appointment of a custodian to dissolve and sell the Company under Se ction 226” and “Dissolution is a last, not first resort.”); id . at 3850 (Shawe Answering Post-Trial Brief) (“Ther e is no precedent for ordering dissolution because of one failed election of directors.”); id . at 3852-57 (Shawe Answering Post-Trial Brief) (attempting to distingu ish case law but no mention of custodian’s lack of authority to sell the Company under § 226(b )); id . at 2382-83 (Shawe Answering Post-18

Even if the argument was properly before us, we fin d that the arguments relied

upon by the dissent for the first time on appeal la ck merit. 33

Section 226(b) of the statute provides that:

A custodian appointed under this section shall have all the powers and title of a receiver appointed under § 291 of this t itle, but the authority

of the custodian is to continue the business of the corporation, and not to liquidate its affairs and distribute its assets, except when the Court shall otherwise order, and except in cases arising under paragraph (a)(3) of this section or § 352(a)(2) of this title

. 34

Section 394 of the Delaware General Corporation La w (“DGCL”) provides

that all corporations agree to make all provisions of the DGCL part of their

charters. Under the express language of the custod ian statute, the Court of

Chancery has the authority to “otherwise order” the custodian to “liquidate [the

Company’s] affairs and distribute its assets” rathe r than “continue the business of

the corporation.” 35 In other words, the custodian’s default duty is t o continue the

Trial Brief) (no argument made that § 226(b) preclu des sale of the Company—only arguing that “Elting has provided no grounds” to dissolve the Co mpany); id . at 3916-23 (Post-Trial Oral Argument) (arguing that the custodian’s authority s hould be “sharply limited” and “rarely, if ever,” appropriate under § 226 but no argument that the statute does not permit a sale, and describing sale as the “ultimate remedy”); id . at 4114-16 (Shawe’s Objections to Sale Report) (Shawe Answering Post-Trial Brief) (challenging cus todian’s sale authority under an improper delegation argument, but not under § 226(b)).

33 The dissent chides the majority for responding to the waived statutory interpretation arguments. The dissent has, however, undertaken an exhaustive analysis of § 226, an analysis that we believe is mistaken. Thus, we are obliged to point out why the waived argument has no

merit.

34 8 Del. C. § 226(b).

35 Id

.19

business of the corporation, but the Court of Chanc ery can displace the default

duty by ordering that the company’s affairs be liqu idated.

Several sources confirm the Court of Chancery’s bro ad authority under the

statute, which includes ordering a sale. As the co urt noted, the Court of Chancery

has previously authorized a custodian to sell a com pany when faced with

stockholder deadlock. 36 This Court has also recognized the broad authorit y granted

the Court of Chancery under the statute. Section 2 26(b) provides that the

custodian shall have “all the powers and title of a receiver appointed under

§ 291.” 37 Although we have cautioned that normally the cust odian’s authority

“should be kept to a minimum” and “should be exerci sed only insofar as the goals

of fairness and justice . . . require,” we have als o observed that the court’s broad

36 See Bentas , 769 A.2d at 73 n. 3 (ordering appointment of a cu stodian to resolve deadlock for a “solvent and profitable corporation”). The court au thorized the custodian to auction the company

in a later decision. Bentas v. Haseotoes , 2003 WL 1711856 (Del. Ch. Mar. 31, 2003). See also

Fulk , 2002 WL 1402273, at *2, 10 (Court appointed a cus todian to sell a corporation that had “consistently been profitable,” and found that “now here does the statute require that a sale under Section 273 must take the form of a piecemeal sale of the corporation’s assets. Although Section 273 permits such a sale, its language is equally co nsistent with a court-ordered sale of the entire business to a third party as a going concern.”); In re Supreme Oil Co., Inc. , 2015 WL 2455952 (Del. Ch. May 22, 2015) (ordering custodian to sell profitable company); Brown v. Rosenberg

, 1981 WL 7638, at *5 (Del. Ch. Dec. 17, 1981) (Recog nizing “that it is more likely than unlikely that a [c]ourt will end up appointing a receiver to liquidate a corporation where there are but two stockholders, both of whom own 50% of the corporati on’s shares, when they are unable to agree on anything.”). Although these examples involve ac tions where the parties eventually agreed the business should be liquidated or sold, they demonst rate the Court of Chancery’s exercise of its broad discretion to fashion an appropriate remedy t o resolve a deadlock.

37 8 Del

. C . § 226(b).20

authority to set a receiver’s duties under § 291 le ads to the same conclusion for a

custodian’s authority under § 226(b):

We interpret this section [226(b)] as setting forth the maximum statutory limits on the powers of the custodian. S ection 291, to which § 226(b) specifically refers, states: “the powers o f the [receiver] shall be such and shall continue so long as the Court sha ll deem necessary.” Thus, under §§ 226 and 291, the Court of Chancery m ay determine the duration of the appointment and the specific po wers to be conferred upon the custodian. 38

The dissent does not take issue with the express la nguage of the statute that

the custodian has all of the powers of a receiver u nder § 291. Nonetheless, it

appears to argue that a custodian is not empowered to exercise the powers of a

receiver when the court “otherwise orders” that a d eadlocked solvent company be

sold. 39 According to the dissent, even though the languag e “except as the Court

shall otherwise order” directly modifies the phrase coming before it— “ not to

liquidate its affairs and distribute its assets”—an d is followed by the words “and

except”—the dissent argues that interpretive princi ples should be applied to require

that the exception language be read to permit liqui dation only in circumstances

similar to § 226(a)(3) (corporations that have aban doned their business) and

§ 352(a)(3) (custodians for close corporations).

38 Giuricich , 449 A.2d at 240.

39 Dissent at 6-7, n.12; 23, n.63.21

The problems with this interpretation of the statut e are apparent. The dissent

attempts to change the plain meaning of the statuto ry language by invoking rules of

statutory interpretation. But if a statute is clea r and unambiguous, “the plain

meaning of the statutory language controls.” 40 This is because “[a]n unambiguous

statute precludes the need for judicial interpretat ion.” 41

Under a plain reading of § 226(b), the custodian ha s the powers of a receiver

under § 291, and his duties are to continue the bus iness unless the Court otherwise

orders, and except under the special circumstances of abandoned businesses and

close corporations. Rules of interpretation should not be invoked to contort the

plain language of a statute in a manner inconsisten t with its plain meaning.

Further, the dissent’s interpretation also ignores the conjunctive words “and

except.” The statute cannot reasonably be read to express the three exceptions as a

series of similar events. Instead, when the words “and except” are given meaning,

the statute is reasonably read to list three distin ct exceptions to the custodian’s

default duty to maintain the business—“except when the Court shall otherwise

order;” and “except in cases arising under paragrap h (a)(3) of this section;” or

“§ 352(a)(2) of this title.” 42

40 LeVan v. Independence Mall, Inc. , 940 A.2d 929, 932-33 (Del. 2007) (quoting Eliason v. Englehart , 733 A.2d 944, 946 (Del. 1999)).

41 Id

. 42 8 Del. C. § 226(b).22

The dissent also points to § 273, a section of the DGCL permitting

dissolution of joint venture corporations when two 50% owner-stockholders are

deadlocked. In many instances, that statute has be en employed to break a deadlock

through a sale of the corporation under the auspice s of the Court of Chancery and a

fiduciary appointed by it for that purpose. 43 Contrary to what the dissent contends,

it is by no means unprecedented for the Court of Ch ancery to have to address the

fate of a solvent Delaware corporation by setting u p a fair process to have it sold as

a going concern, when that outcome is necessary to best protect its constituencies.

As the Chancellor observed, this case “was within a whisker” of § 273. 44

The only novelty here is that this case arises unde r § 226, because the economic

and functional reality of the deadlock does not fal l precisely under § 273. But,

consistent with the flexible and efficient design o f the DGCL, § 226 allows the

Court of Chancery to address this situation by usin g its power to deal with cases on

a situational basis. Rather than read the key lang uage “except when the Court shall

otherwise order” as having no significance, we read it consistently with the o verall

43 See, e.g.

, Fulk , 2002 WL 1402273, at *2, 10; Matter of Bermor, Inc. , 2015 WL 554861, at *5 (Del. Ch. Feb. 9, 2015) (appointing receiver); In re Bermor, Inc. , 2015 WL 7856593 (Del .Ch. Dec. 2, 2015) (ORDER) (order approving receiver’s p lan of sale); see also Kortum v. Webasto Sunroofs Inc. , 769 A.2d 113 (Del. Ch. Feb. 9, 2000) (noting that “if the Section 273 action proceeds to a conclusion, it is possible that . . . all of [the company’s] outstanding shares will be sold at a public auction.”).

44 App. to Opening Br. at 2911 (Trial Tr.) (“It’s int eresting, this case is within a whisker of a 273 case where that would not be a very unremarkable re quest to make. And obviously, the Court has enormous equitable discretion, but it’s practic al.”).23

design of the statute, and its intention to allow o ur Court of Chancery the discretion

to deal sensibly with corporations that are unable to move forward with

governance because their owners cannot take fundame ntal action to elect a new

board. That the Chancellor looked for guidance to the remedies entered in cases

under § 273 was not error on his part. Instead, it suggests that the court understood

TPG’s economic reality as identical to a 50-50 dead lock, and that the tools used to

sensibly address those deadlocks would inform his d iscretion under § 226.

It is also not convincing to characterize the metho d chosen by the Chancellor

as somehow different for purposes of § 226 because it involves a sale of the

corporation’s stock, rather than its underlying ass ets. Stockholders of Delaware

corporations are only entitled to the rights that c ome with their stock, and those

rights are subject to the Court of Chancery’s power under statutes like § 226. 45

Many Delaware statutes, including those dealing wit h certain mergers, subject

stockholders to giving up their shares over their o bjection.

When a stockholder buys stock in a Delaware corpora tion, it knows that our

statute provides the Court of Chancery broad author ity to address corporate

deadlocks of various kinds, authority that may well affect fundamental ownership

interests. Stockholders buy stock in Delaware corp orations to gain from the

underlying operations of the corporation. It is th erefore inconsistent with the

45 8 Del. C. § 394.24

practical and efficient design of corporate law in the DGCL, to require asset sales

and liquidations, simply to allow stockholders to h old their paper shares and

receive a final, and likely lower, liquidating divi dend. Nor is it the case that sales

of corporate assets or of the entire corporation ar e somehow unusual when the

corporation in managerial deadlock is profitable. The reality is that most of the

cases in which the Court of Chancery has ordered a sale or its equivalent in the

context of § 273 dealt with profitable corporations

. 46 Those are the corporations

that parties tend to fight over, especially in the Court of Chancery, because most

insolvent corporation cases are handled by federal bankruptcy courts. Parties

intractably deadlocked will rarely want what the di ssent characterizes as a lesser

remedy like asset sales and dissolution.

This case illustrates that reality well. Here, mak ing a distinction between

liquidation and sale has no real practical effect. TPG acts as a holding company

for the main wholly-owned operating company, TPI, a nd other subsidiaries. If we

accepted Shawe’s interpretation of § 226(b), after remand the Court of Chancery

46 The dissent points out that in the cases relied on by Elting, the stockholders did not object to the corporation’s sale. See, e.g.

, In re Supreme Oil Co. , 2015 WL 2455952 (Del. Ch. May 22, 2015 (ORDER); EB Trust v. Info. Mgmt. Servs., Inc. , No. 9443 (Del. Ch. June 17, 2014) (ORDER); Fulk , 2002 WL 1402273 (Del. Ch. June 21, 2002); Bentas , 1999 WL 1022112 (Del. Ch. Nov. 5, 1999). But the absence of cases where stockholders object to a company sale is not surprising, when the alternative remedy within the Court of Chancery’s discretion is a liquidation of the corporation’s assets. As noted above, it wo uld be the rare case when the shareholders would engage in self-defeating behavior by giving u p the value of a successful business’s goodwill and other intangible assets in favor of a liquidation of its physical assets.25

could exalt form over substance and order TPG’s ass ets—TPI and other subsidiary

companies—liquidated through a sale process, and th e proceeds distributed to TPG

and then its stockholders. Shawe concedes as much. 47 Such meaningless

corporate shuffling illustrates why a reasonable re ading of the statute includes a

custodian’s authority to sell TPG instead of its pa rts. Neither Elting nor Shawe

want an asset sale, and for good reason. Selling T PG as a going concern will

protect TPG’s employees from the ruinous consequenc es of an asset sale and

provide the maximum return to the stockholders. 48

Shawe also faults the Court of Chancery for orderi ng a sale instead of

experimenting with less-intrusive measures. We agr ee with Shawe that a sale is a

remedy to be employed reluctantly and cautiously, a fter a consideration of other

options. The Court of Chancery should always consi der less drastic alternatives

before authorizing the custodian to sell a solvent company. But the remedy to

address the deadlock is ultimately within the Court of Chancery’s discretion. 49 The

court did not abuse its discretion in this case.

47 Shawe Opening Br. at 18-19 (“Section 226(b) . . . provides for continuation of the business or liquidation or distribution of the corporation’s as sets . . . .” (emphasis omitted)); see also App. to Opening Br. at 3786-91 (Shawe Pre-Trial Brief) (arg uing that, under the facts of this case, the Court “should not dissolve the Company pursuant to its equitable powers.”).

48 The dissent has no substantive response to the rea lity set forth above, except to claim that the point was not conceded by the Shawes and “[n]o part y during this appeal has even suggested that either a liquidation or a sale of assets is an opti on.” Dissent at 6-7, n.12.

49 Gotham Partners, L.P. v. Hallwood Realty Partners, L.P. , 817 A.2d 160, 175 (Del. 2002) (“This Court reviews the Court of Chancery’s fashio ning of remedies for abuse of discretion.”).26

First, the court attempted other less intrusive me asures by appointing a

custodian immediately after trial ended to serve “a s a mediator to assist Elting and

Shawe in negotiating a resolution of their disputes .” 50 Almost three months later,

after the first attempt at mediation failed, the co urt gave the parties another month

before issuing its post-trial opinion “to afford th em additional time to seek to

resolve their disputes through the auspices of the mediator.” 51 The Court of

Chancery was also aware of repeated efforts to reso lve the dispute in New York,

including settlement discussions, a mediation, and multiple sessions with a courtappointed Special Master. The Court of Chancery ga ve the parties every

opportunity to resolve their acrimonious dispute ou tside the courthouse.

Further, the court considered whether to appoint a custodian “to serve as a

third director or some form of tie-breaking mechani sm in the governance of the

Company.” 52 But the court rejected this option because:

[I]t would enmesh an outsider, and, by extension, t he Court into matters of internal corporate governance for an ext ensive period of time. Shawe and Elting are both relatively young. Absent a separation, their tenure as directors and co-CEOs o f the Company

could continue for decades. It is not sensible for the Court to exercise essentially perpetual oversight over the internal a ffairs of the Company. 53

50 In re Shawe & Elting LLC , 2015 WL 4874733, at *25.

51 Id

. 52 Id . at *31.

53 Id

.27

And, although Shawe characterizes the Chancellor’s remedy as extremely

intrusive, the appointment of a custodian to act as a constant monitor and tiebreaker—which is what would be required given the a bundant record that Shawe

and Elting cannot work together constructively—woul d itself be expensive,

cumbersome, and very intrusive. Moreover, that app roach would not facilitate, as

the Chancellor’s ruling does, the ability of the Co mpany to capitalize on its

business model in the efficient, flexible way that commerce demands. By

preserving the Company as a whole in his remedy and allowing it to be owned and

managed in the manner required to take advantage of evolving opportunities and to

meet challenges effectively, the Chancellor’s remed y also was well designed to

protect the other constituencies of the Company—not ably its employees—by

positioning the company to succeed and thus to secu re the jobs of its workforce.

The Chancellor was in the best position to assess the viability of options

short of sale. Aware of the “extreme caution” that must be exercised before

ordering a sale, he nonetheless determined that “th e painfully obvious conclusion

is that Shawe and Elting need to be separated from each other in the management28

of the Company. Their dysfunction must be excised to safeguard the Company.” 54

We will not second-guess that first-hand judgment o n appeal. 55

IV.

For the first time on appeal, Shirley Shawe raises a novel argument that the

Court of Chancery lacked the authority to order TPG ’s sale. Specifically, she

alleges that the possibility that she would have to sell her share violates the

Takings and Due Process Clauses of the United State s and Delaware Constitutions.

Shirley Shawe admits that she did not properly pres ent this issue before the Court

of Chancery. 56

Under Supreme Court Rule 8, this Court only consid ers questions fairly

presented to the trial court. 57 The rule provides a narrow exception “if [this Co urt]

finds that the trial court committed plain error re quiring review in the interests of

54 Id

. 55 Shawe makes two other arguments on appeal, which w e find without merit. First, Shawe claims that by ordering a sale, Elting will receive a “control premium” that she could only receive through a contract, such as a buy-sell agre ement. The Court of Chancery correctly rejected this argument, reasoning that “the provisi ons of the Delaware General Corporation Law, including those afforded under section 226, apply b y default,” and thus the existence of a control premium shared by all the stockholders is irrelevan t to the analysis. Id . at *32. Shawe also claims that the court’s privilege rulings were erro neous. We need not evaluate the Court of Chancery’s privilege rulings to find that the court properly considered as part of its analysis how Shawe obtained the documents without Elting’s conse nt. Shawe instructed a surrogate to break into Elting’s office and copy documents from her co mputer. Privileged or not, Shawe’s conduct was reprehensible and confirmed the court’s conclus ion that a custodian was necessary to sell the Company instead of some measure short of a sale, do omed to fail.

56 Shirley Shawe Opening Br. at 4.

57 Supr. Ct. R. 8.29

justice.” 58 This standard has been applied in both criminal a nd civil cases. 59 We

have previously refused to review constitutional ar guments raised for the first time

on appeal. 60

“When reviewing for plain error, ‘the error complai ned of must be so clearly

prejudicial to substantial rights as to jeopardize the fairness and integrity of the

trial process.’” 61 “Furthermore, the doctrine of plain error is limi ted to material

defects which are apparent on the face of the recor d; which are basic, serious and

fundamental in their character, and which clearly d eprive an accused of a

58 Smith v. Del. State Univ. , 47 A.3d 472, 479 (Del. 2012). This Court has pre viously used a different standard, which Shirley Shawe characteriz es as a three part test: (1) “whether the issue is outcome-determinative and may have significant i mplications for future cases”; (2) whether the Court’s “consideration of the issue will promot e judicial economy because it will avoid the necessity of reconsidering the [issue],” ( e.g. , Sandt v. Del. Solid Waste Auth. , 640 A.2d 1030, 1034 (Del. 1994)); and (3) when a question of publi c policy is involved relating to constitutional

guarantees, Rickards v. State , 77 A.2d 199, 202 (Del. 1950). That standard is m uch less frequently used, especially in our more recent case s, and Shirley Shawe cannot explain why we should prefer it to the more typically applied plai n error standard.

59 Smith , 47 A.3d at 479 (applying plain error standard in civil case); Sheehan v. Oblates of St.

Francis de Sales , 15 A.3d 1247, 1255 (Del. 2011) (same); Estate of Swan v. Balan , 956 A.2d 1222, 1227 (Del. 2008) (same); Beebe Med. Ctr., Inc. v. Bailey , 913 A.2d 543, 555 (Del. 2006) (same); Lagola v. Thomas , 867 A.2d 891, 897 (Del. 2005) (same); Potter v. Blackburn , 850 A.2d 294, 297 (Del. 2004) (same); Duphily v. Del. Elec. Co-op., Inc. , 662 A.2d 821, 832 (Del. 1995) (same); Culver v. Bennett , 588 A.2d 1094, 1097 (Del. 1991) (same).

60 See Cassidy v. Cassidy , 689 A.2d 1182, 1184-85 (Del. 1997) (stating that interests of justice did not require court to consider whether a statute was unconstitutionally vague or whether the court engaged in unconstitutional delegation of jud icial authority). But see Turner v. State , 5 A.3d 612 (Del. 2010) (interests of justice required the Court to review whether the trial judge left the courtroom before the defense finished closing a rgument because, if true, the trial judge’s behavior would have “jeopardize[d] the fairness and integrity of the trial process.”) (quoting Wainright , 504 A.2d at 1100)).

61 Smith , 47 A.3d at 479 (quoting Wainwright v. State , 504 A.2d 1096, 1100 (Del. 1986)).30

substantial right, or which clearly show manifest i njustice.” 62 As one learned

treatise states:

It is axiomatic that an appellate court will genera lly not review any

issue not raised in the court below. This rule is based on the principle that it is fundamentally unfair to fault the trial court for failing to rule correctly on an issue it was never given the opport unity to consider. Furthermore, it is unfair to allow a party to choos e to remain silent in the trial court in the face of error, taking a chan ce on a favorable outcome, and subsequently assert error on appeal if the outcome in the

trial court is unfavorable. 63

Opponents should have a fair chance to address arg uments at the trial court.

It is prudent for the development of the law that a ppellate courts have the benefits

that come with a full record and input from learned trial judges. Thus, fair

presentation facilitates the process by which the a pplication of rights in an

individual case affects others in other cases and s ociety in general.

Shirley Shawe urges this Court to consider her new argument under the

interests of justice exception because the ruling w ill have significant implications

for future cases. But that is exactly why we shoul d not address her argument. The

record is largely undeveloped, the trial judge did not have the opportunity to make

a thoughtful ruling, and Shirley Shawe’s briefs onl y cursorily address the issue.

Because this Court takes such complex constitutiona l issues seriously, and because

we cannot see how it was plain error for the Court of Chancery to, without

62 Wainwright , 504 A.2d at 1100.

63 5 A M

. J UR

. 2 D Appellate Review § 618 (2016) (citations omitted).31

prompting from the eleven different law firms repre senting the Shawes’ interests in

this litigation, fail to assess Shirley Shawe’s nov el takings argument, we consider

the constitutional arguments waived for failure to raise them first in the Court of

Chancery.

Finally, Shirley Shawe argues that the Court of Ch ancery erred when it

dismissed with prejudice the derivative claims brou ght against Elting. Shawe has

not appealed the dismissal with prejudice. We agre e with the Court of Chancery

that Shirley Shawe’s active participation in two of the three “coordinated and

functionally consolidated” actions before the Court of Chancery put her on notice

that the claims could be dismissed based on Shawe’s unclean hands. The court

also found that Shawe functionally represented Shir ley Shawe’s ownership interest

in the Company. Thus, she is bound by the dismissa l with prejudice of the

derivative claims brought by Shawe.

V.

The Court of Chancery’s August 13, 2015 opinion an d July 18, 2016 order,

and the related orders, are affirmed.VALIHURA , Justice, dissenting:

The Court of Chancery generally has broad discretion in fashioning certain

equitable remedies. 1 Although this might suggest that this Court should defer to

the Chancellor who ordered one of the most extreme remedies possible

— a sale of

a financially successful corporation over the objections of one or more of its three

stockhold ers

— our review of the Court of Chanc ery‟s order requires construction

of a statute, namely, 8 Del. C. § 226 (“Section 226”) . Embedded in this choice of

remedy is t he question of whether a court

- appointed custodian has the power to

force the sale of a stockholder‟s stock absent that stockholder‟s consent

. The

interpretation of a statute is a question of law which we review de novo

. 2 My

analysis of the statutory scheme sug gests that the answer is “no.” Accordingly, I

1 The Court of Chancery has broad discretion, for example, in fashioning a remedy for a fiduciary violation, and the propriety of such a remedy is ordinarily reviewed for abuse of

discretion. See Berger v. Pubco Corp. , 976 A.2d 132, 139 (Del. 2009) ( en banc ). But, here, there were express findings post

- trial that there were no breaches of fiduciary duty. See, e.g.

, In re Shawe & Elting LLC, 2015 WL 4874733, at *34 (Del. Ch. Aug. 13, 2015 ) (“ In sum, the asserted acts of misconduct committed by Shawe that El ting has identified

— although disturbing and contrary to expected norms of behavior

— do not establish the very high level of fiduciary misconduct resulting in harm to the Company or its stockholders (in their capacity as stockholders) necessary to impose the remedy of equitable dissolution.” ). Instead, the Court of Chancery was fashioning a remedy pursuant to Section 226, where this Court has held that the intrusion into the business of the corporation must be kept to a minimum. See Giuricich v.

Emtrol Corp

. , 449 A.2d 232, 240 (Del. 1982).

2 Corvel Corp. v. Homeland Ins. Co. of N.Y. , 112 A.3d 863, 868 (Del. 2015); see also N. River Ins. Co. v. Mine Safety Appliances Co. , 105 A.3d 369, 380

- 81 (Del. 2014) (“[W] e do not defer

to the trial court on embed ded leg al conclusions and review them de novo .” (citations omitted)),

as revised (Nov. 10, 2014).2

respectfully DISSENT

. 3

G iven that we are faced with a question as to the permissible limits of the

Court of Chancery‟s power under Section 226, the flexibility typically afforded the

Court of Chancery in fashioning equitable remedies must yield to the more specific

principles und erlying the relevant statutory provisions and common law

interpreting the se provisions

. 4 The first principle concerns the uncontested fact

that, in the DGCL, stock is “personal property” and is generally subject to

traditional proper t y law policies favoring free alienation. 5 Generally, where the

3 Much of the Majority Opinion addresses the Court of Chancery‟s power to appoint a

custodian

— a proposition that is not seriously contested by anyone here. Rather, it is the Modified Auction‟s forced sale provisions that are chiefly at issue. As to that main issue, the Majority declines to formally address the key statutory arguments on the grounds of waiver. Instead, they offer several pages of pure dicta on the i ssue. I believe that the statutory arguments are fairly encompassed within Shawe‟s explicit argument below

— that the Court of Chancery

should not order a sale under Section 226. Clearly, Section 22 6 and its proper scope have been a central focus all along . Given that fact, I do not see how a statutory analysis credibly can be

avoided. See, e.g

., N. River , 105 A.3d at 382

- 83 (rejecting a Rule 8 challenge and allowing additional reasoning to be presented in support of a “broader issue” that had been raised ); Mundy

v. Holden , 204 A.2d 83, 87 (Del. 1964) (“[W]hen the argument is merely an additional reason in support of a proposition urged below, there is no acceptable reason why in the interest of a speedy end to litigation the argument should not be conside red.” (citation omitted) (internal quotation marks omitted)).

4 See, e.g., STAAR Surgical Co. v. Waggoner , 588 A.2d 1130, 1137 n.2 (Del. 1991) (“Again, we emphasize that our courts must act with caution and restraint when granting equitable relief in derogation of established principles of corporate law.” (citing Ala. By

- Prods. Corp. v. Neal, 588 A.2d 255, 258 (Del. 1991))). Even under an “abuse of discretion” standard of review, the trial

court‟s discretion is not unlimited. See, e.g. , 1 Dan B. Dobb s, Law of Remedies: Damages

Equity

- Restitution 118 (2d ed. 1993) (“With the equitable remedy, the injunction should restore the plaintiff to her entitlement, no more, no less.”).

5 See 2 Drexler, Black & Sparks, Delaware Corporation Law and Practice § 22. 01 at 22

- 2 (2015) (“[C]orporate stock is personal property,” and “[t]he free alienability of personal property is a valuable attribute of property ownership worthy of protection by the courts.”) ; 12 Fletcher Cyc. Corp s

. § 5452 (Sept. 2016) (“ The owner of the shares, as in the case of other personal property, has an absolute and inherent right, as an incident of his or her ownership, to sell or3

possibility of defeasance of a stockholder‟s stock may occur over the stockholder‟s

objection, those restraints on free transferability and alienation of stock are

expressly set forth in the relevant statut e . That fact strongly suggests that Section

226 should not be so broadly read as to allow for a forced sale or other divestiture

of a stockholder‟s stock by mere implication. The second principle is the long

standing , uncontested common law principle that t he involvement of the Court of

Chancery and court

- appointed custodian s in a corporation‟s business and affa irs

should be kept to a minimum. 6 This long

- standing common law view is reflected

in the fact that the parties here cannot point to a single case in the history of our

Section 226 jurisprudence where a court has ordered a custodial sale of a company

over a stockholder‟s objections. These specific policies should be the analytical

focal point in construing Section 226 and the permissible limit s of the trial court‟s

power. 7

transfer the shares at will, except insofar as the right may be restricted by the art icles of incorporation, bylaw s, an agreement among shareholders, or between sh areholders and the corporation.”).

6 See, e.g.

, Giuricich , 449 A.2d at 240

.

7 We followed this statute

- oriented approach, for example, in Berger , where we considered “what remedy [was] appropriate in a „sh ort form‟ merger under 8 Del. C. § 253, where the corporation‟s minority stockholders [ were ] involuntarily cashed out without being furnished [with] the factual information material to an informed shareholder decision whether or not to seek appraisal.” Be rger , 976 A.2d at 133. In evaluating four possible alternative remedies, this Court stated that “the optimal alternative would be the remedy that best effectuates the policies underlying the short form merger statute (Section 253), [and] the appraisal statute (Section 262)

. . . , taking into account considerations of practicality of implementation and fairness to the litigants.” Id. at 140. Likewise, the focus here should be on proper construction of Section 226 in resolving the question of the scope of the Court of Chancery‟s power

.4

The appellants add a constitutional gloss on appeal that was not raised

below , namely, t hey contend that a forced sale of their stock might well constitute

an unconstitutional “taking” of their personal property in violation of the Fifth

Amendment to the United States Constitution and of Article I, Section 8 of the

Delaware Constitution. They contend that in order to avoid this potential

constitutional problem, Section 226 ought to be construed more narrowly in favor

of the i mplementation of less drastic remedies. The “takings” argument presents

novel issues of first impression

, which I would not reach

.

A holistic reading of the DGCL supports the view that divestiture of a

stockholder‟s stock may occur over the stockholder‟ s objection in a number of

situations

—

but only when the relevant statute expressly so provides. 8 E xamples

where a stockholder is forced to give up her shares have one thing in common

—

the relevant statutory provisions expressly contemplate that situation and provide

fair notice that it may occur. Here, Section 226 contains no such express provision

or notice of such potential forced divestiture . I know of no situations in the DGCL

where a forced sale of stock can occur absent fair notice

, and the M ajority cites to

none

. T he absence of authority grounded in the statute

, the conceded absence of

any similar cases under Section 226, and our common law‟s strong preference for

the least intrusive remedies in cases involving court

- appointed custodians suggest

8 See Grimes v. Al teon Inc. , 804 A.2d 256, 260 (Del. 2002) ( en banc ) (“One must read in pari

materia the relevant provisions of the Corporation Law

. ” (italics added) ).5

that the Chancellor went too far too fast in ordering the Modified Auction.

I.

The Statutory Scheme Suggests that the Court of Chancery

Lacked the Power to Order Stockholders to Sell Their Shares

In its current form, Section 226(a) permits the Court of Chancery to appoint

a custodian in the event of stockholder deadlock, director deadlock, or

abandonment of the corporation:

The Court of Chancery, upon application of any stockholder, may appoint 1 or m ore persons to be custodians and, if the corporation is insolvent, to be receivers, of and for any corporation when:

(1) At any meeting held for the election of directors the

stockholders are so divided that they have failed to elect

successors to directors whose terms have expired or would have expired upon qualification of their successors; or

(2) The business of the corporation is suffering or is threatened

with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that

the required vote for action by the board of directors cannot be

obtained and the stockholders are unable to terminate this division; or

(3) The corporation has abandoned its business and has failed

within a reasonable time to take steps to dissolve, liquidate or distribute its assets. 9

In the case of shareholder deadlock, as here, “ [ t ] he decision to appoint a

custodian

. . . is committed to the [ c ] ourt‟s discretion” and does not require a

9 8 Del. C. § 226(a).6

showing of irreparable injury to the corporation. 10

Section 226(b) sets forth the authority of the custodian and states that the

custodian‟s authority is to continue the business of the corporation and not to

liquidate its affairs and distribute its assets:

A custodian appointed under this section shall have all the powers and

title of a receiver appointed under § 291 of this title, but the authority

of the custodian is to continue the business of the corporation and not

to liquidate its affairs and distribut e its assets

, except when the Court

shall otherwise order and except in cases arising under paragraph (a)(3) of this section or § 352(a)(2) of this title. 11

In the event of a court

- ordered liquidation, t he custodian takes custody of the assets

of the corpor

ation

— not of the stockholder ‟s stock (which is the stockholder‟s

personal property)

. 12 Section 159 of the DGCL provides that “[t]he shares of stock

10 Miller v. Miller , 2009 WL 554920, at *3

- 4 (Del. Ch. Feb. 10, 2009), as revised (Feb. 17, 2009).

11 8 Del. C. § 226(b) (emphasis added) . Section 291, which governs receivers for insolvent corporations, provides:

Whenever a corporation shall be insolvent, the Court of Chancery, on the application of any creditor or stockholder thereof, may, at any time, appoint 1 or more persons to be receivers of and for the corporation, to take charge of its assets, estate, effects, business and affairs, and to collect the outstanding debts, claims, and property due and belonging to the corporation, with power to prosecute and defend, in the name of the corporation or otherwise, all claims or suits, to appoint an agent or agents under them, and to do all other acts which might be done by the corporation and which may be necessary or proper. The powers of the receivers shall be such and shall continue so long as the Court shall deem necessary.

Id. § 291.

12 In a liquidation under Section 226(b), the corporation‟s property is sold. The s tockholders continue to own shares, but the corporation is no longer a going concern, and its operating assets are replaced with cash. Liquidation is available by court order and when a corporation has abandoned its business, is insolvent, or needs to win d up its affairs

— circumstances7

in every corporation shall be deemed personal property and transferable as

provided in Article 8 of subtitle I of Title 6.” 13 T his Court

, in Grimes v. Alteon

, 14

stated that “[s]hares of stock are „ a species of property right‟ that is of

„foundational importance to our economic system.‟” 15

Although the powers of the custodian under Section 226 are defined by

reference to Section 291, as this Court has stated, Section 226 powers “are not as

unlimited as the powers of a receiver appointed under the general equitable powers

of the court, or under the forerunner to the present [Section] 226(a)(1) .” 16 Nor

does Section 291 grant the receiver power over the personal property of the

stockholders

, although a receiver may sell the property of t he corporation under

unquestionably not present here. Thus, I disagree with the Majority‟s statement that “in the context of this case, making a distinction between liquidation and sale has no real practical effect.” Majority Op. at 2 4 . The Ma jority further suggests that, after remand, the Court of Chancery could order TPG‟s assets liquidated through a sale process and distribute the proceeds

to the stockholders. Id. at 2 5 . It further contends that “Shawe concedes as much.” Id. (cit ing Opening Br. of Philip R. Shawe at 18

- 19). Shawe‟s statements cannot be fairly viewed as a concession that liquidation was an option here. No party during this appeal has even suggested that either a liquidation or a sale of assets is an option.

13 8 Del. C. § 159.

14 804 A.2d 256 (Del. 2002)

.

15 Id. at 262 (internal omission removed) (quoting Kalageorgi v. Victor Kamkin, Inc. , 750 A.2d 531, 538 (Del. Ch. 1999)).

16 Giuricich , 449 A.2d at 237; see also id. at 240 (holding in that case that the powers of the custodian “shall be sharply limited”). Indeed, the default statutory obligation under Section 226 is to continue the business and not to liquidate its affairs or distribute its assets. The Majority, in

fo cusing on the reference to powers under Section 291, ignores the limitation on that power which immediately follows that reference

— which is “ but the authority of the custodian is to

continue the business . . . .” 8 Del. C. § 226(b). I address the excepti ons to that default statutory

rule in footnote 52.8

certain circumstances. 17

Review of the relevant statutory scheme suggests that it is unlikely that the

Ge neral Assembly intended to permit a stockholder‟s fundamental personal

property rights to be abridged by mere implication. Where the DGCL does so

permit restrictions on the stockholder‟s free transferability and alienation of her

stock

, including forced d ispositions and transfers of stock ownership, it does so

expressly. Examples include Section 2 51(c) ( permitting approval of merger s by a

majority of stockholders, such that dissenting stockholder s are divested of their

stock subject only to appraisal rights under Section 262); Section 273 ( authorizing

dissolution of a joint venture owned by two 50% stockholders ) ; and Section 303 (a)

( involving actions that may be taken in bankruptcy proceedings that are deemed to

be unanimous actions of the stockholders )

.

As to the first of these examples, the DGCL contemplates the conversion of

shares when corporations merge. 18 Section 251 of the DGCL governs mergers.

Subs ections 251(b) and (c) set forth requirements that a merger agreement must

satisfy. Section 251(b)(5), for example, provides that a merger agreement shall

17 See 8 Del. C. § 297.

18 Id. § 251(c) (“ If a majority of the outstanding stock of the corporation entitled to vote thereon shall be voted for the adoption of the [merger] agreement, that fact shall be cert ified on the agreement by the secretary or assistant secretary of the corporation, provided that such certification on the agreement shall not be required if a certificate of merger or consolidation is filed in lieu of filing the agreement

. If the agreeme nt shall be so adopted and certified by each constituent corporation, it shall then be filed and shall become effective , in accordance

with § 103 of this title.” (emphasis added)).9

state:

The manner, if any, of converting the shares of each of the constituent corporations into shares or other securities of the corporation or resulting from the merger or consolidat ion, or of cancelling some or all of such shares, and, if any shares of any of the constituent corporations are not to remain outstanding, to be converted solely into

shares or other securities of the surviving or resulting corporation or

to be cancelled, the cash, property, rights or securities of any other corporation or entity which the holders of such shares are to receive in exchange for

, or upon conversion of such shares and the surrender of

any certificates evidencing them, which cash, property, righ ts or securities of any other corporation or entity may be in addition to or in

lieu of shares or other securities of the surviving or resulting corporation [

. ] ” 19

Section 251(c) requires that the merger agreement required by subsection (b)

be submitted to t he stockholders at an annual or special meeting “for the purpose

of acting on the agreement .” 20 It also sets forth notice requirements. Because the

power to merge is expressly conferred by statute, every stockholder of a Delaware

corporation accepts his o r her shares with notice of these provisions. Though a

stockholder might be able to pursue an appraisal action to ensure he or she has

received adequate compensation, 21 he or she cannot prevent the merger from

19 Id. § 251(b)(5). The legislative synopsis of the 2003 amendment to Section 251(b )(5) states:

The amendments to Sections 251, 252, 253, 254, 255, 256, 257, 263 and 264 clarify that shares or other interests of a constituent corporation or other entity to a merger or consolidation may be converted, cancelled or unaffected by the merger.

Del. S.B. 84 syn., 142d Gen. Assem. (2003).

20 8 Del. C. § 251(c).

21 See id. § 262.10

proceeding on the basis of absence of consent

. 22 Importantly, it is clear from the

express words of the statute that this outcome is a possibility. 23

Section 273 applies to joint ventures owned in equal parts by two

stockholders and expressly allows for dissolution over the objection of one of

them. 24 Its purpose is to alleviate a “fundamental deadlock” by “removing the

need for obtaining a unanimous vote [

. ]” 25 Section 273 “contemplates that the

Court of Chancery will enforce an agreed

- upon disposition of the assets or, absent

such agreement, that the court may order compulsory dissolution of the venture.” 26

Thus, Section 273 expressly permits dissolution of a joint venture even if one 50%

owner objects. “The legislature enacted Section 273 to provide a speedy method

of dissolving a joint venture corp oration when its two 50/50 shareholders are in

22 Assuming the merger was otherwise beyond reproach.

23 The Majority states that, “[m]any Delaware statutes, including those dealing with certain mergers, subject stockholders to giving up their shares over their objection.” Majority Op. at 22. I agree. The point the Majority completely fails to address is t hat all of these statutes expressly provide fair notice to stockholders that this may occur.

24 The Majority acknowledges that this case “does not fall precisely under [Section] 273[,]” presumably because the Company has three stockholders and is not a join t venture. Majority Op.

at 2 3 . Being “within a whisker” of Section 273 ignores the core principle that “[t]he legislative body is presumed to have inserted every provision for some useful purpose and construction, and

when different terms are used in var ious parts of a statute it is reasonable to assume that a

distinction between the terms was intended.” Giuricich , 449 A.2d at 238 (internal quotation marks omitted) (citation omitted). For the same reason, it is unreasonable to broadly read the “except w hen the Court shall otherwise order” language in Section 226 as affording the trial court broad discretion to employ Section 273‟s remedial provisions. See Majority Op. at 2 2

- 2 3

.

25 In re Arthur Treacher’s Fish & Chips , 1980 WL 268070, at *3

- 4 (Del. Ch. Ju ly 1, 1980).

26 Edward P. Welch, Robert S. Saunders, & Jennifer C. Voss, Folk on the Delaware General Corporation Law § 273.1, at 10

- 63 (6th ed. 2016).11

deadlock.” 27 Section 273(a) provides, in relevant part:

If the stockholders of a corporation of this State, having only 2

stockholders each of which own 50% of the stock therein, shall be engaged in the prosec ution of a joint venture and if such stockholders

shall be unable to agree upon the desirability of discontinuing such joint venture and disposing of the assets used in such venture, either

stockholder may, unless otherwise provided in the certificate of

i ncorporation of the corporation or in a written agreement between

the stockholders

, file with the Court of Chancery a petition stating that

it desires to discontinue such joint venture and to dispose of the assets
used in such venture in accordance with a plan to be agreed upon by

both stockholders or that, if no such plan shall be agreed upon by both stockholders, the corporation be dissolved.

. . . 28

“Accordingly, the Court may provide relief to a shareholder if (1) the corporation

has only two 50% shareho lders (2) who are prosecuting a joint venture and (3) who

are unable to agree on discontinuing the joint venture.” 29 The Majority‟s attempt

to bring this case within the ambit of Section 273 ignores the significance of that

separate statute

— a point acknowledge d by the Chancellor, who agreed that Section

273 did not apply. 30

Section 303(a ) provides that corporate actions taken pursuant to orders of the

courts in federal bankruptcy proceedings may be taken “without further action by

27 Wah Chang Smelting & Refining Co. of Am. v. Cleveland Tungsten Inc. , 1996 WL 487941, at *3 (Del. Ch. Aug 19, 1996) (citations omitted).

28 8 Del. C. § 273(a) (emphasis added).

29 Wah Chang , 1996 WL 487941, at *3 (citing In re Coffee Assocs., Inc. , 1993 WL 51 2505 (Del. Ch. Dec. 3, 1993)).

30 See In re Shawe & Elting LLC

, 2015 WL 4874733 , at *2 n.7 (“Eltin g initially asserted a claim

for dissolution in C.A. No. 9700

- CB under 8 Del. C. § 273. Ms. Shawe ‟ s legal ownership of one percent of TPG made that statute inapplicable, and Elting appropriately withdrew that claim. ”).12

[the corporation‟s ] directors or stockholders” and that “ [ s ] uch power and authority

may be exercised” by a representative appointed by the court “with like effect as if

exercised and taken by unanimous action of the directors and stockholders of the

corporation.” 31 These ac tions may allow the corporation, for example, to:

amend its certificate of incorporation, and make any change in its capital or capital stock, or any other amendment, change, or alteration,

or provision, authorized by this chapter; be dissolved, transfer a ll or part of its assets, merge or consolidate as permitted by this chapter, in

which case, however, no stockholder shall have any statutory right of appraisal of such stockholder‟s stock

. . . . 32

In contrast to each of the provisions above, Section 226 contains no language that

suggests that a court

- ordered custodian has the power to compel a forced

disposition of a stockholder‟s personal property (stock).

Relatedly, other provisions of the DGCL address restr ictions on transfers of

stock and also make clear that restrictions must be stated expressly and clearly

.

For example, restrictions are often utilized in closely held corporations in order to

protect the utilization of certain tax treatment. Section 202 sets forth requirements

for a valid restriction on the transfers of securities. T he restriction must be “ noted

conspicuously ” on the stock certificate

, and it may be imposed in the corporation‟s

certificate of incorporation or bylaw s

. 33 Also, “[u]nless noted conspicuously” on

31 8 Del. C. § 303(a).

32 Id. § 303 (b)

.

33 Id. § 202(a)

- (b).13

the stock certificate, such restrictions are “ineffective except against a person with

actual knowledge of the restriction.” 34 Notably, the “ noted conspicuously” and

“actual knowledge” phrases are derived from the Uniform Commercial Code (the

“UCC”) as adopted in Delaware (to which Section 159 refers) and “should be

interpreted in light of the relevant Code definitions.” 35

Although Delaware courts ge nerally have been reluctant to invalidate stock

restrictions

, 36 t his approach is “consistent with the general principle that Delaware

corporate law is enabling, and does not impose choices on market participants.” 37

“Delaware public policy generally empower s market participants to decide for

themselves whether to enter into contracts restricting their right to sell their

shares.” 38 But a forced transfer, untethered to any express statutory authorization

,

and absent notice of such possible defeasance, divestiture

, or transfer, is counter to

the principles of free alienation

. The general view that the DGCL is broadly

enabling does not undercut the conclusion that Section 226 ought to be construed

34 Id. § 202(a). Section 202(c) describes various types of restrictions on transfers of securities

which are permissible under that Section

.

35 Folk

, supra note 26 , § 202.06 at 6

- 19 (listing the following UCC provisions: 6 Del. C. § 1

- 20 1 (10) (“conspicuous”) and 6 Del. C. § 1

- 202 (definitions of “notice,” “knowledge,” etc.) )

.

36 Capital Grp. Cos.

, Inc. v. Armour , 2005 WL 678564, at *9 (Del. Ch. Mar. 15, 2005).

37 Id. This is clear in a number of different contexts. See, e.g.

, Bershad v. Curtiss

- Wright Corp.

, 535 A.2d 840, 845 (Del. 1987) (“ Stockholders in Delaware corporations have a right to cont rol

and vote the ir shares in their own interest. . . . Clearly, a stockholder is under no duty to sell its holdings in a corporation, even if it is a majority shareholder, merely because the sale would profit the minority. ” (citations omitted)).

38 Agranoff v. Miller , 1999 WL 219650, at *16 (Del. Ch. Apr. 12, 1999) (citing 8 Del. C. § 202)

, aff ’ d as modified , 737 A.2d 530

, 1999 WL 636634 (Del. July 28, 1999) (TABLE).14

narrowly by a court to bar a custodian ‟s sale of a stockh older‟s stock absent

consent. Rather, the enabling aspect of the DGCL implies an element of

consensual structuring of the corporate contract concerning the relevant

participants. 39

To further illustrate the importance attributed to fair notice in the DGCL

, in

Grimes

, this Court identified as one of “two fundamental policies of Corporation

Law” ensuring “certainty in the instruments upon which the corporation‟s capital

structure is based.” 40 This Court repeated the need for “strict adherence to

statutory formality in matters relating t o the issuance of capital stock ” and noted

that “Delaware‟s statutory structure implements these policies through a „clear and

easily followed legal road map‟ o f statutory provisions.” 41 There, this Court

rejected a claim of validity of an oral promise made to a stockholder by the CEO to

sell ten percent of the corporation‟s future private stock offering to the stockholder.

This Court held that Sections 151, 152

, 153, 157, 161

, and 166 of the DGCL

, when

read together, “contemplate board approval and a written instrument evidencing

39 See, e.g., Jones Apparel G r p., Inc. v. Maxwell Shoe Co. , 883 A.2d 837, 845 (Del. Ch. 2004) (noting that the DGCL is “widely regarded as the most flexible in the nation because it leaves the parties to the corporate contract (managers and stockholders) with great leeway to structure their relations, subject to relativel y loose statutory constrai nts”); see also Folk

, supra note 26

, § 202.6,

at 6

- 20 n. 5 8 (observing that “[t]he argument that a restriction may be imposed without the stockholder‟s consent, based upon a reserved general power to amend the corporation‟s

cert ificate, has been rejected” (citing B & H Warehouse, Inc. v. Atlas Van Lines, Inc. , 490 F.2d 818, 825

- 26 (5th Cir. 1974))).

40 Grimes , 804 A.2d at 260 (citing Kalageorgi , 750 A.2d at 538

- 39).

41 Id. (quoting Kalageorgi , 750 A.2d at 538 ).15

the relevant transactions affecting issuance of stock and the corporation‟s capital

structure.” 42 In the instant case, although factually distinguishable, the same need

for “ [c] ertainty in investor expectations” 43 suggests a court should not have power

to order stockholders to sell their stock to a third party over their objections

—

without, at least, advance statutory fair notice to stockholders of such a possibility.

This narrow er construction of Section 226 is further supported by examining

the special provision s for close corporations in S ections 352 and 353

, which also

embody concepts of notice and consent, as well as a statutory preference for less

drastic, interim remedies t o address deadlock situations. For example, Sections

352 and 353 expressly provide for provisional directors in deadlock situations.

Section 352 empowers the Court of Chancery , in addition to Section 226, to

appoint a custodian for a close corporation in two scenarios. The first is where

“[p]ursuant to § 351 of this title the business and affairs of the corporation are

managed by the stockholders and they are so divided that the business of th e

corporation is suffering or is threatened with irreparable injury and any remedy

with respect to such deadlock provided in the certificate of incorporation or bylaws

42 Id. at 261. Section 166, for example, “relating to the formalities required of stock subscriptions, provides that subscription agreements are not enforceable against the subscriber unless in writing and signed by the subscriber.” Id.

43 Id. at 266.16

or in any written agreement of the stockholders has failed [

. ] ” 44 The second occurs

where a stockholder has the “right to the dissolution of the corporation under a

provision of the certificate of incorporation permitted by § 355 of this title.” 45

Notably, under Section 355, a stockholder of a close corporation does not have a

right of dissolu tion unless that right is provided in the corporation‟s charter.

Again, the concepts of fair notice and consent are expressly set forth in the statute.

S ubs ections 355(b) and (c) provide:

(b) If the certificate of incorporation as originally filed does n ot

contain a provision authorized by subsection (a) of this section, the

certificate may be amended to include such provision if adopted by

the affirmative vote of the holders of all the outstanding stock

, whether or not entitled to vote, unless the certificate of incorporation specifically authorizes such an amendment by a vote which shall be

not less than 2/3 of all the outstanding stock whether or not entitled to

vote.

44 8 Del. C. § 352(a)(1). To invoke management by the stockholders pursuant to Section 351, the corporation must be a close corporation, its certificate of incorporation must “provide that the business of the corporation shall be managed by the stockholders of the co rporation rather than by a board of directors[,]” and the existence of the provision on the certificate must be “noted conspicuously on the face or back of every stock certificate issued by such corporation.” Id. § 351. If these requirements are satisfie d, such corporations may avoid calling stockholder meetings to elect directors , all stockholders are by default considered directors, and all stockholders are “subject to all liabilities of directors.” Id. Because TransPerfect is not a close corporation and is managed by a board of directors, Section 351 does not apply and, likewise, neither does the possibility of seeking appointment of a custodian pursuant to Section 352(a)(1). However, the General Assembly‟s approach to deadlock in the context of close corporations is relevant, particularly since TransPerfect has only three stockholders

.

45 Id. § 352(a)(2). Section 355 permits a close corporation to provide in its certificate of incorporation that one or more stockholders, or a percentage of the stockholders, may force the corporation to dissolve. Id. § 355(a). The provision will not be effective unless each of the corporation‟s stock certificates “conspicuously note[s]” the existence of the provision. Id. § 355(c). Cf. Fletcher

, supra note 5 , at § 8035 (“[S] tatutory provisions for judicial dissolution of corporations are strictly construed .”).17

(c) Each stock certificate in any corporation whose certificate of incorporation authorizes dissolution as permitted by this section shall conspicuously note on the face thereof the existence of the provision

. Unless noted conspicuously on the face of the stock certificate, the provision is ineffective. 46

As an alternative to appointin g a custodian, Section 353(a) provides:

[T]he Court of Chancery may appoint a provisional director for a close corporation if the directors are so divided respecting the

management of the corporation ‟ s business and affairs that the votes required for actio n by the board of directors cannot be obtained with

the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally. 47

Additionally, “Section 352(b) expressly invites the [c]ourt t o opt for the less

intrusive remedy of a provisional director as authorized by Section 353 if the

[c]ourt concludes that such an alternative order would be in the best interests of the

corporation. Accordingly, the [c]ourt is authorized

— and, by virtue of this

provision, mildly encouraged

— to consider resort to that more limited remedy even

if the petition itself makes no application for such relief.” 48

Delaware law also provides for both statutory and equitable dissolution of

Delaware corporations, either of which may cause the involuntary divestiture of

stockholders‟ personal property interests. Subchapter X of the DGCL details the

46 8 Del. C. § 355(b)

- (c) (emphasis added).

47 Id. § 353(a).

48 Donald J. Wolfe , Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the

Delaware Court of Chancery § 8.09[e][1]

, at 8

- 221 (Matthew Bender & Co. 2014) (footnote omitted).18

procedures for dissolution. 49 Section 275 provides, in relevant part:

(a) If it should be deemed advisable in the judgment of the board of

directors of any corporation that it should be dissolved, the board,

after the adoption of a resolution to that effect by a majority of the

whole board at any meeting called for that purpose, shall cause notice

of the adoption of the resolutio n and of a meeting of stockholders to
take action upon the resolution to be mailed to each stockholder

entitled to vote thereon as of the record date for determining the

stockholders entitled to notice of the meeting.

(b) At the meeting a vote shall be tak en upon the proposed

dissolution. If a majority of the outstanding stock of the corporation

entitled to vote thereon shall vote for the proposed dissolution

, a certification of dissolution shall be filed with the Secretary of State

pursuant to subsection (d) of this section.

(c) Dissolution of a corporation may also be authorized without action

of the directors if all the stockholders entitled to vote thereon shall

consent in writing and a certificate of dissolution shall be filed with

the Secretary of Sta te pursuant to subsection (d) of this section. 50

The dissolution process contemplated by Section 275 is voluntary in that

dissolution will only occur if a majority of stockholders either vote in favor of the

dissolution or consent of all stockholders to the dissolution is obtained in writing

.

However, much like a merger under the DGCL, a dissenting stockholder may be

involuntarily divested of his or her property interest even if he or she votes against

the majority. 51 T he dissolution statutory scheme contem plates both relinquishment

49 8 Del. C. § § 271

- 85.

50 Id. § 275.

51 The Court of Chancery‟s power to order equitable dissolution also does not support the argument that the court has broad power to order a custodian to sell a corporation over the objections of stockholders in these circumstances. Under the doctrin e of equitable dissolution, a court of equity “may order the dissolution of a solvent company and the appointment of a19

of an interest in personal property and the protective mechanism of a stockholder

vote.

At oral argument, there was a suggestion that Ms. Shaw e conceded in her

Reply Brief that the Court of Chancery had the power to order dissolution or

liquidation here and that, a fortiori , the Court could have ordered a sale of the

entire company. I did not read Ms. Shawe‟s Reply Brief to concede that either

d issolution or liquidation would be appropriate here, and, indeed, at oral argument

her couns el strongly contended that the references in her Reply Brief were

intended to apply only when a company is insolvent

— a situation unquestionably

not present here. I disagree with that suggestion , in any event, since Section

226(b) explicitly establishes the overarching requirement that “the authority of the

custodian or receiver „only upon a showing of gross mismanagement, positive misconduct by corporate officers, breach of trust, or extreme circumstances showing imminent danger of great loss to the corporation which, otherwise, cannot be prevented.‟” Carlson v. Hallinan , 925 A.2d 506, 543 (Del. Ch. 2006) (quoting Chapman v. Fluorodynamics, Inc ., 1970 WL 806, at *4 (Del. Ch. Mar. 20, 1970)). Courts “exercise[] this power to dissolve a solvent corporation with „great restraint‟ and only upon a „strong showing.‟” Id . (citations omitted). Further, “[m]ere dissension among corporate stockholders seldom, if ever, justifies the appointment of a receiver for a solvent corporation .” Id. (quoting Hall v. John S. Isaacs & Sons Farms, Inc. , 163 A.2d 288, 293 (Del. Ch. 1960 )); see also VTB Bank v. Navitron Projects Corp. , 2014 WL 1691250, at *5 (Del. Ch. Apr. 28, 2014) (“Where the company is solvent, a „strong showing‟ is necessary to invoke [the remedy of the equitable appointment of a receiver, which] should „not be resorted to if milder measures will give the plaintiff, whether creditor or shareholder, adequate protection for his rights.‟” (footnote s omitted) (citations omitted)); Theodora Hldg. Corp. v. Henderson , 257 A.2d 398, 406 (Del. Ch. 1969) (“It is plain, we think, that for a court to order a dissolution or liquidation of a solvent corporation, the proponents must show . . . a fraudulent disr egard of the minority‟s rights, or some other fact which indicates an imminent danger of great loss resulting from fraudulent or absolute mismanagement.” (citations omitted) (internal quotation marks omitted)). The Court of Chancery expressly found that e quitable dissolution was not warranted here because “the record does not show that Shawe engaged in self

- dealing or financially enriched himself at the Company‟s expense.” In re Shawe & Elting, LLC

, 2015 WL 4874733 at

*34.20

custodian is to continue the business of the corporation and not to liquidate its

affairs and distribute its as sets.” A dissolution under the circumstances here would

be in consistent with that express statutory requirement

. 52 No one has seriously

52 Moreover, the language in Section 226(b) creating three circumscribed “exceptions” to the general requirement that a custodian “continue the business of the corporation and not

. . . liquidate its affairs and distribute its assets,” cannot reasonably be re ad to authorize the forced sale of a solvent corporation to a third party over the objections of its stockholders. The exceptions in Section 226(b) allow for deviation from the general rule that the custodian must

continue the business only “when the Cour t shall otherwise order and except in cases arising under paragraph (a)(3) of this section or § 352(a)(2) of this title.” 8 Del. C. § 226(b). First, this “exception” language does not provide express notice of a possible defeasance of one‟s ownership int erest in stock

—unlike other statutes which explicitly contemplate defeasance, whether voluntary or involuntary, as a possibility. Nor does Section 226‟s reference to Section 291 provide sufficient notice of such a possible defeasance, since, among other t hings, Section 291 applies only to insolvent corporations. The Majority avoids this point altogether. Second, the three exceptions necessarily modify the custodian‟s default obligation to continue the business of the corporation and not to liquidate its affairs or distribute its assets. The second and third exceptions simply provide for limited circumstances in which a custodian‟s default obligation does not apply

— namely, where a corporation has abandoned its business (as in Section 226(a)(3)) or where a stockholder in a close corporation has the right, pursuant to the close corporation‟s certificate of incorporation, to dissolution of the close corpora tion (as in Section 352(a)(2)). The first exception (“except when the Court shall otherwise order”) log ically should be read in the context of the second and third exceptions

— both of which explicitly identify limited circumstances in which a custodian has no obligation to continue the business of the corporation. It is unreasonable, then, to read the first exception as empowering the Court of Chancery to fashion a remedy wholly incongruous with the two other exceptions. Therefore, the first exception, as the second and third, can only reasonably be read to allow only for a similar

discontinuation of the bu siness ( e.g

. , liquidation , distribution of assets, or dissolution )

. In short, the exceptions in Section 226(b) do not authorize a forced sale of this solvent corporation to a third party over the objections of stockholders. Perhaps that is why the Majority endeavors mightily to equate the proposed forced auction of TransPerfect to one of the scenarios contemplated by the exceptions in Section 226(b) (which contemplate discontinuation of the business)

— a liquidation, a dissolution, or a distribution o f assets. The problem with that lies in

the fact that a sale or auction of a thriving business is a far cry from a liquidation, dissolution, or distribution of assets. The remedy of a sale does not contemplate, as do liquidation, dissolution,

and distrib ution of assets, the winding up of a corporation‟s business. Thus, to the limited extent that Section 226(b) empowers a custodian to undertake a liquidation, dissolution, or distribution of assets, that power does not, a fortiori

, allow a custodian to auc tion the corporation over the objections of its stockholders.21

argued on appeal that a dissolution , an asset sale, or a liquidation is an option. 53

The Majority acknowledges that “[n]either Elting nor Shawe want an asset sale,”

which it says could result in “ruinous consequences[.]” 54

Other involuntary divestitures outside the corporate arena support the

concept that express statutory authorization i s needed for a court

- ordered forced

sale to occur. For example, “[e]quity courts have historically upheld the right of a

tenant in common to seek a partition of personal property.” 55 The partition of real

property is contemplated by 25 Del. C. § 721(a), w hich provides:

When any 2 or more persons hold lands and tenements within this

State as joint tenants or tenants in common, or as parceners under the

intestate laws of this State, or when any persons hold an interest either

in possession or in remainder i n lands and tenements within this State,

. . . any 1 or more of them

. . . may present a petition to the Court of Chancery

. . . . The petition shall state the facts, describe the lands

and tenements so held, and pray partition thereof among the several

p arties entitled to such lands and tenements according to their several

and respective interests. 56

53 The Majority‟s statement that I have suggested that “a lesser remedy like asset sales and dissolution” would be more acceptable remedies is perplexing and just plain wrong. Majority Op. at 2 4 . Nowhere do I suggest that they are “lesser remedies” or that stockholders of solvent companies would prefer these remedies.

54 Id. at 24.

55 JFL, Inc. v. NJE Aircraft Corp ., 1988 WL 58274, at *2 (Del. Ch. June 2, 1988) ; see Carradin

v. Carradin , 1980 WL 1 0015, at *2 (Del. Ch. Jan. 31, 1980) ( “A bill seeking partition of personal property is unquestionably within the historical jurisdiction of equity courts [

. ] ” ).

56 25 Del. C. § 721 (a) ; see id. § 751 ( conferring on the Court of Chancery “general equity powers” to effect partition).22

“Partition means a severance of interests which are concurrent.” 57 “The

purpose of a partition proceeding is to eliminate a present concurrent interest in the

same property so that each owner may enjoy and possess his or her interest in

severalty.” 58 As a general rule, a co

- owner‟s right to seek partition of jointly

owned property is “almost absolute, since the right is an incident of common

ownership.” 59 Impor tantly, this remedy is part of a statutory scheme that expressly

contemplates the relinquishment of some or all of co

- owners‟ property interests,

including by a court

- ordered sale. 60

The Court of Chancery‟s decisions appointing a custodian and accepting the

Custodian‟s recommendation with respect to the Modified Auction contain no

textual an alysis of the relevant statutory scheme. Instead, the Chancellor relied on

two cases

, which are distinguishable due to the presence of stockholder consent to

57 Peters v. Robinson , 636 A.2d 926, 929 (Del. 1994) ( “Such types of contemporaneous co

ownerships are usually either joint tena ncies or tenancies in common.”).

58 Id

. (citations omitted).

59 Hamilton v. Hamilton , 597 A.2d 856, 859 (Del. Fam. Ct. 1990) (citing 68 C.J.S. Partition § [30] ) (additional citation omitted) ; see also Chalfant v. Cornett , 1996 WL 162262, at *2

- 4 (Del. Ch. Mar. 25, 1996) (discussing the limited circumstances in which courts may equitably deny the right to partition). Similarly, Delaware law provides for the equitable division, distribution, and assignment of marital property in proceedings for divorce or annulment. See 13

Del. C. § 1513(a).

60 See 25 Del. C. § § 729, 7 33; Libeau v. Fox , 892 A.2d 1068, 1071 (Del. 2006) (“If a physical

division of the property would be detrimental to the co

- owners‟ interests, the Court of Chancery may order that the property be sold at public auction and the proceeds divided among the co

owners.”)

.23

the sale s i n both of those cases

. In Benta s v. Haseotes

, 61 the parties agreed that

liquidation was necessary but disagreed on the method that would “maximize

stockholder value

. ” 62 I n Fulk v. Washington Service Associates, Inc.

, 63 the parties

“endorse[d]” and “support[ ed]” a custodian‟s plan for sale of a corporation

pursuant to Section 273, objecting only to certain closing terms. 64

Moreover, it is no answer, as Ms. Elting suggests, that Section 394 provides

that all corporations agree to make all provisions (including Section 226) part of

their respective charters. 65 This is a circular argument. 66 The question here is what

are the limits , if any, of the court‟s power under Section 226? Our statutory

scheme should be read harmoniously. 67 R eading the statutory scheme

61 2003 WL 1711856 (Del. Ch. Mar. 31, 2003).

62 Id. at *2

- 3 (describing the parties‟ competing plans for liquidation).

63 2002 WL 1402273 (Del. Ch. June 21, 2002).

64 Id. at *6

.

65 8 Del. C. § 394 (“ This chapter and all amendments thereof shall be a part of the charter or certificate of incorporation of every corporation except so far as the same are inapplicable and inappropriate to the objects of the corporation. ”). The Majority suggests that when stockholders buy stock in a Delaware corporation, t hey should understand that the “Court of Chancery has broad authority to address corporate deadlocks” and to “deal sensibly with corporations[.]” Majority Op. at 2 3 . What is sensible, though, is that investors should be able to expect that

courts will ad here to the statutory and common law road map respecting capital stock. The words “otherwise order” do not constitute adequate notice that a stockholder could be forced to sell her holdings in a forced auction of a thriving company.

66 The circularity of M s. Elting‟s argument is apparent. For example, she contends that “ [Ms. Shawe‟s] interest in the Company has always been subject to all the provisions of the [DGCL], including [ S ] ection 226, which constitutes an integral part of [the Company‟s] charter and

authorizes the court

- ordered sal e at issue.” Ans wering Br. at 4.

67 See Grimes , 804 A.2d at 260, 265 n.35 (citing 2A Norman J. Singer , Sutherland on Statutory

Construction § 46:05 (2000) (“[E]ach part or section [of a statute] should be construed in24

harmoniously compels the conclusion that Section 226 does not permit the Court

of Chancery to confer upon a custodian the power to sell a corporation over the

objection of its shareholders. Thus, I believe that the Court of Chancery erred by

ordering the Modified Auction.

II.

The Common Law Rule of Judicial Restrai nt Regarding Custodial Powers Suggest s a More Limited Remedy

Similarly, the policies of judicial restraint embedded in our common law

underlying Section 226 suggest that the Modified Auction Order‟s forced sale

provision goes too far

. Historically, “the common law generally disdained judicial

relief of any kind with respect to a solvent but deadlocked corporation.” 68 Though

the pre

- 1967 iteration of Section 226 vested in the Court of Chancery the discretion

to appoint receivers of and for deadlocked corpo rations, the court was hesitant to

interfere in the business of deadlocked but solvent companies. 69 This Court has

conne ction with every other part or section so as to produce a harmonious whole.” (alterations in

Grimes ))).

68 Wolfe & Pittenger, supra note 48

, § 8.09[b]

, at 8

- 203; see Salnita Corp. v. Walter Hldg. Corp.

, 168 A. 74, 75 (Del. Ch. 1933) (“A court should never wrest control of a business from the hands

of those who have demonstrated t heir ability to manage it well, unless it be satisfied that no course, short of the violent one, is open as a corrective to great and imminent harm.”).

69 See Paulman v. Kritzer Radiant Coils, Inc ., 14 3 A.2d 272, 272

- 74 (Del. Ch. 1958) (“Plaintiffs emphas ize that this deadlock can go on indefinitely, which is true. But such a consequence is necessarily implicit in the arithmetic of stock holdings. In and of itself it is not a sufficient reason to appoint a receiver under the present law.”); see also Hall , 163 A.2d at 293 (“Under some circumstances courts of equity will appoint liquidating receivers for solvent corporations, but the power to do so is always exercised with great restraint and only upon a showing of gross mismanagement, positive misconduct b y the corporate officers, breach of trust, or extreme25

observed that the General Assembly‟s intent with respect to the 1967 revisions

“was to ease the onerous burden of proof under the prior case law which made the

appointment of a receiver for a solvent corporation almost hopeless, despite a

potentially permanent shareholder

- deadlock.” 70

But even so, this Court has determined that “[t]he involvement of the Court

of Chancery and its custodian in t he corporation‟s business and affairs should be

kept to a minimum and should be exercised only insofar as the goals of fairness

and justice, as stated [in Giuricich ], require.” 71 Consistent with this sentiment, a t

least since the 1967 revisions, the parties have pointed to no case in which the

Court of Chancery has exercised its power under Section 226 to order that a

company be sold over stockholder objection. 72 Although cases exist in which the

Court of Chancery has authorized a custodian to sel l a deadlocked corporation

pursuant to Section 226, such authorization has been granted only upon agreement

circumstances showing imminent danger of great loss to the corporation which, otherwise, cannot be prevented.”).

70 Giuricich , 449 A.2d at 238

- 39 (footnote omitted). This Court has stated that pre

- 1967 cases applying “general equitable principles” or earlier statutes addressing stockholder deadlock are “neither governing nor persuasive” in applications of the modern version of Section 226. Id. at 236. However, the common law backdrop against which toda y‟s Section 226 evolved is helpful to understanding the scope of custodial power intended by the General Assembly

.

71 Id. at 240 ; see Miller , 2009 WL 554920, at *4.

72 Also, there appears to be no such court

- ordered sales prior to the current version of the s tatute. Cf. Tansey v. Oil Producing Royalties, Inc. , 133 A.2d 141, 146

- 47 (Del. Ch. 1957) (ordering appointment of a liquidating receiver for a solvent corporation, without noting whether any stockholders objected, due to the gross mismanagement of the co rporation by its majority stockholder, who testified at trial that he intended to dissolve the company anyway).26

by stockholders that a sale was appropriate. In particular, the cases on which Ms.

Elting relies nearly universally involved situations where the s tockholders

consented to a sale. 73 For example, in Fulk

, 74 a stockholder sought relief under

Section 273, and a court

- appointed custodian recommended a sale process in

which one stockholder would buy the other‟s fifty percent share

. 75 With the

exception of certain details

, 76 the parties “endorse[d]” and “support[ed]” the

custodian‟s plan. 77 Likewise, in Bentas

, 78 the Court of Chancery ordered that a

corporation be auctioned only after two stockholder factions submitted competing

proposals to liquidate the comp any. More recently, i n EB Trust v. Information

Management Services, Inc.

, 79 the parties to a Section 226 proceeding “agreed that a

sale of 100% of the stock of the [c]ompany is the best means of maximizing value

73 One case did not involve a sale, but rather a discovery dispute. In Brown v. Rosenberg , 1981 WL 7638 (Del. Ch. Dec. 17, 1981), the Court of Chancery stated that “it is more likely than unlikely that a [c]ourt will end up appointing a receiver to liquidate a corporation where there are but two stockholders, both of whom own 50% of the corporation‟s shares, when they are unable to agree on anyth ing.” Brown , 1981 WL 7638, at *5. This language, which has never been cited by another court, appears in dictum at the end of the court‟s order resolving a discovery dispute between the parties. Id.

74 2002 WL 1402273 (Del. Ch. June 21, 2002).

75 Id. at * 5.

76 For instance, the stockholders disagreed on whether the seller and the company‟s employees could be enjoined from competing with the corporation following the sale. Id. at *6.

77 Id. ; see also Tr. of Oral Arg. at 3, Fulk v. Wash. Serv. Assocs., Inc.

, No. 17747 (Del. Ch. June 4, 2001) (“[T]he parties are in agreement that this corporation needs to be dissolved.”).

78 See Bentas v. Haseotes ( Bentas I ), 1999 WL 1022112 (Del. Ch. Nov. 5, 1999); Bentas v.

Haseotes ( Bentas II

) , 769 A.2d 70 (Del. Ch. 2000); Be ntas v. Haseotes ( Bentas III ), 2003 WL 1711856 (Del. Ch. Mar. 31, 2003).

79 Order Appointing Custodian, EB Trust v. Info. Mgmt. Servs., Inc. , No. 9443 (Del. Ch. June 17, 2014) (ORDER).27

for the benefit of the stockholders [

. ] ” 80 Similarly, in In re Supreme Oil

Company

, 81 “the parties agreed [in a Section 226 action] that a sale of 100% of the

stock of the [c]ompany or the buy

- out of [one of two competing stockholder

groups], as the case may be, may be the best means of maximizing v alue for the

benefit of the stockholders.” 82

Stockholder consent has a significant effect on the extent to which a remedy

intrudes upon a corpo ration‟s business and affairs. T he existence of consent by

stockholders to a sale alters the dynamic with respect to the Court of Chancery‟s

exercise of its discretion in those cases. Almost by definition, if there is consent,

there is less “intrusion.” 83

Cases in which the Court of Chancery has appointed custodians for solvent

corporations support a narrowly tailored, incremental approach to the custodian‟s

power

. For example, i n Miller v. Miller

, 84 the Court of Chancery rejected a fifty

-

80 Id. at 2.

81 2015 WL 2455952 (Del. Ch. May 22, 2015) (ORDER).

82 Id. at *1.

83 See Intrusion

, B LACK ‟ S L AW D ICTIONARY (10th ed. 2014) (defining “intrusion” as “[a]

perso n‟s entering without permission”). In Nixon v. Blackwell , 626 A.2d 1366 (Del. 1993), this Court rejected the suggestion that there should be special, judicially

- created rules to “protect” minority stockholders of closely

- held Delaware corporations. There, we commented that, “[i]t would do violence to normal corporate practice and our corporation law to fashion an ad hoc ruling which would result in a c ourt

- imposed stockholder buy

- out for which the parties had not

contracted.” Nixon

, 626 A.2d at 1380. Elting and Shawe could have, but failed to negotiate an exit strategy. A sale of TransPerfect would give each stockholder a pro rata interest in the

con trol premium to which they otherwise would not be entitled.

84 2009 WL 554920

.28

percent stockholder‟s attempt to secure appointment of a custodian to divide or

liquidate a corporation , reasoning that “[t]he mere existence of an even stockholder

split does not, by itself, authorize dissolution of the corporation or the sale of its

only asset through the appointment of a custodian under 8 Del. C. § 226, at least

without more.” 85 Instead, the custod ian‟s “powers should be tailored as narrowly

as possible because judicially

- supervised interference with the ordinary operation

of a corporation should be kept to a minimum.” 86 T he court appointed a custodian

for a two

- year term to “break material deadlocks” between the two equal

stockholders , “resolve operational deadlocks[,]” and “seek to resolve the impasse

over the future of” the corporation

. 87 It explicitly instructed the custodian n ot to

“sell or divide” the corporation‟s assets. 88

The Court of Chancery‟s decisions i n Bentas 89 illustrate the principle that the

court should minimize its intrusion in the business of the corporation

— and actually

attempt (not merely consider and reject) less intrusive remedies. There, f our

stockholder

- directors, who owned the corporation in equal shares, were divided

into two factions

. After one faction sought appointment of a custodian, the Court

of Chancery initially declined to appoint a custodian, a nd instead ordered a

85 Id. at *5 (citing 8 Del. C. § 226).

86 Id. at *4.

87 Id. at *5.

88 Id. at *5 n.21.

89 See Bentas I , 1999 WL 1022112 ; Bentas II , 769 A.2d 70; Bentas III , 2003 WL 1711856

.29

stockholders‟ meeting pursuant to Section 211 to determine whether the

stockholders were deadlocked

. 90 As a result of the meeting, two family directors

were elected, and the remaining two family directors did not receive the requisite

votes and became holdover directors. 91 The court thereafter appointed a custodian

,

reasoning that the circumstances , inclu ding the holdover directors‟ history of

exercising “negative control” over the company by defeating quorum at board

meetings, 92 implicated a “concern that [Section] 226(a)(1) is designed to remedy,

namely, a stockholder deadlock that would „permit control o f the corporation to

remain indefinitely in the hands of a self

- perpetuating board of directors.‟” 93

As to the scope of the appointment, t he defendants sought authorization for

the custodian either to divide the company‟s assets into two corporations, “cause

the corporation to purchase the plaintiffs‟ interest in the [c]ompany[,]” or

, “ failing

either of the above described alternatives, sell the [ c ] ompany to a third party,

structured either as an asset or stock sale.” 94 The plaintiffs advocated a role i n

which the custodian w ould “investigate potential solutions to resolve the deadlock

among the stockholders; to recommend such solutions to the stockholders; and in

the event no proposal is acceptable to all of the stockholders, to recommend

90 Bentas I

, 1999 WL 1022112 , at *1.

91 Bentas II , 769 A.2d at 73.

92 Id. at 7 8

.

93 Id. (quoting Giuricich , 449 A.2d at 239 ) (alterations omitted).

94 Id. at 79.30

liquidation of the [c]ompany to the [c]ourt.” 95 T he court favored the plaintiffs ‟

approach and concluded that it was “more appropriate to empower the custodian to

explore any and all alternatives that might result in a mutually agreed solution to

the current shareholder deadlock.” 96

T hree years later, the custodian filed a report “concluding tha t liquidation

was necessary and desirable, and recommending an auction of the [c]ompany‟s

assets as a single package or as a series of asset packages.” 97 The parties submitted

competing proposals, with each side arguing that “its proposal for liquidating t he

[c]ompany is the best way to maximize stockholder value.” 98 T he defendants

sought division of the company‟s operating assets into two corporations

, with one

belonging to each of the two factions

, but the custodian and the plaintiffs favored

an auction. 99 “The [p]laintiffs prefer[red] to sell the entire [c]ompany as a means

of liquidation, but they also proposed a plan to partition the assets, since they knew

the defendants would oppose a sale.” 100 Because the parties did not desire a trial,

the court dete rmined that “only an auction [would] provide reliable information”

95 Id. at 80. The plaintiffs also questioned whether Section 226 permitted the court to “direct the custodian to employ one or more of [the defendants‟ proposed] measures.” Id. at 79. The court did not explicitly agree or disagree with this statement, but observed g enerally that the plaintiffs “have the better position.” Id. at 80.

96 Id. at 80.

97 Bentas III , 2003 WL 1711856, at * 2

.

98 Id.

99 Id.

100 Id.31

about the value of the company. 101 T he Court of Chancery ordered an auction “to

resolve the issues posed by the two pending motions” and determine “whether a

viable market for the [c]ompany (or any of its lines of business) exists, and

whether a sale of the entire [c]ompany will generate bids that reflect the

[c]ompany‟s intrinsic value.” 102 The court indicated that, should the auction “fail[]

to attract any bidders . . . , the [c]ourt is fre e to decline to approve any sale, and to

order a division of the assets according to the defendants‟ plan, or some other

plan.” 103 Thus, although the court ordered an auction of a solvent corporation in

Bentas

, it did so by degrees

, exhausting less intrusive remedies first

. Further, all

stockholders agree d that liquidation was necessary and that the Company could not

continue in its existing form

.

Th e case law applying Section 226 therefore supports the view that the sale

of the Company, absent stockholder co nsent, is too drastic a measure, and that the

trial court should consider implementation of remedies on an incremental basis. 104

101 Id. at *4.

102 Id.

103 Id.

104 The Majority suggests that “less

- intrusive measures” or “intermediate measures were attempted but failed.” Majority Op. at 2, 13

, 2 6 . This is perplexing. A mediation and settlement efforts occurred, but no intermediate measures were “attempted and fai led.”32 III.

In View of the Above, the Court of Chancery’s Remedy Here

Was , at a Minimum, Too Extreme and Was Not Authorized by

the Statute

In deciding whether to exercise its discretion to appoint a custodian and, if

so, for what purpose, the Court of Chancery believed it had three options. 105 First

,

it could deny Elting‟s request for a custodian altogeth er “and leave the parties to

their own devices.” 106 The court did not find this option viable, however, because

it found that TransPerfect‟s management was in a state of “complete and utter

dysfunction[,]” and “it would be unjust to leave Elting with no rec ourse except to

sell her 50% interest in the Company. ” 107 In particular, the court remarked that

Elting would have difficulty selling her shares for a “fair price” due to Shawe‟s

actions. 108

Second , the court recognized that it could “appoint a custodian to serve as a

third director or some form of tie

- breaking mechanism in the governance of the

Company .” 109 Such an appointment would complete the full board of directors as

contemplated by TransPerfect‟s bylaws, which provide for three directors. 110 The

105 In re Shawe & Elting LLC , 2015 WL 4874733, at *31.

106 Id.

107 Id.

108 Id.

109 Id.

110 See By

- Laws of TransPerfect Global, Inc. at Art. II, § 2(a), available at B2857

- 67.33

court b elieved, however, that doing so “would enmesh an outsider and, by

extension, the [c]ourt into matters of internal corporate governance for an

extensive period of time.” 111 Noting that Shawe and Elting are “relatively young”

and could continue in their posit ions with TransPerfect “for decades[,]” the court

felt that it was “not sensible for the [c]ourt to exercise essentially perpetual

oversight over the internal affairs of the Company.” 112

Third , the court considered appointing a custodian to sell the company, an

alternative that the court recognized was “unusual” but , in its view, not

unprecedented. 113 However, as noted above, the cases relied on by the Chancellor

in support of his decision were Bentas

, 114 in which the court ordered a sale only as

a last resort, and Fulk

, 115 a Section 273 case in which the parties “had come to

agree that the corporation needed to be dissolved.” 116

The Court of Chancery thus appointed a custodian who had previously

111 In re Shawe & Elting LLC , 2015 WL 4874733, at *31. The cases discussed above suggest that the Court of Chancery had involvement in them for extended periods of time.

112 Id.

113 Id. The Chancellor stated that the Court of Chancery “occasionally has appointed custodians to resolve deadlocks involving prof itable corporations and authorized them to conduct a sale of the corporation.” Id. (citing Bentas II , 769 A.2d at 73 n.3; Bentas III , 2003 WL 1711856; Fulk

, 2002 WL 1402273, at *2).

114 Bentas II , 769 A.2d at 73 n.3; Bentas III , 2003 WL 1711856.

115 2002 WL 1402273

.

116 In re Shawe & Elting LLC , 2015 WL 4874733, at *31 n.320 (citation omitted). Notably, Section 273 is not applicable here as there are three owners.34

served as mediator to the parties. 117 The court directed the cus todian to “oversee a

judicially ordered sale of the Company .” 118 The accompanying Order

demonstrates that any stockholder not purchasing the Company may be required to

sell his or her shares. 119 The court also directed the custodian

, “[i]n the interim

, ” to

“serve as a third director with the authority to vote on any matters on which Shawe

and Elting cannot agree and which rise to the level that [the C ustodian] deems to

be significant to managing the Company‟s business and affairs.” 120

In my view, the C ourt of Chancery failed to narrowly tailor the scope of the

custodian‟s authority

, which contemplates the possibility that each stockholder be a

seller . The court could have appointed a third director , as provided for in the

company‟s bylaws, similar to t he appointments made in Miller and Benta s

.

Although the Chancellor considered this option and appointed the custodian as an

“interim” tiebreaker until the Modified Auction could be completed, he rejected

this solution out of concern that the court would b e involved in TransPerfect‟s

117 Id. at *32.

118 Id.

119 See In re TransPerfect Global, Inc. , 2016 WL 3949840, at *2 (Del. Ch. Jul y 18, 2016) (ORDER) (stating that the sale “may involve, without limitation, the sale of 100 percent of the Company ‟ s stock to a third party, or the sale of one or more of the stockholders ‟ shares of stock in the Company to another stockholder and/or a third

- party investor who has bid for such shares in conjunction with an existing stockholder ”).

120 In re Shawe & Elting LLC , 2015 WL 4874733, at * 32 (citing Bentas II , 769 A.2d at 79).35

affairs for too long. 121 The Chancellor did not consider the possibility of

appointing a custodian for a period of time or expanding the Board to include

independent directors

. 122 If these less drastic remedies failed , the custodian could

petition the court for more drastic relief as in Benta s

. But absent consent, however,

I do not believe a forced sale is a statutorily authorized option.

IV.

In conclusion

, my construction of Section 226 takes account o f property

rights and due process protections because I believe these concepts are embedded

in the relevant statutory framework

. This is evident in Section 159 ‟s express

statement that stock is personal property

, and in the other provisions of our

statutory framewor k that provide clear and express notice in situations where

defeasance of that property right might occur. That is why

, in reading our statutory

scheme h armoniously

, it is compelling not to imply the power of the Court to issue

an order that can result in defeasance of these rights over the objections of the

owners. In cases where the stockholders do not object, then there is no such

121 Id. at *31, 32. Mr. Shawe suggests on appeal that the Court of Chancery could have ordered

amendment of the C ompany‟s bylaws “to expand the board by addition of independent directors” and that those directors could be delegated the responsibility of “elect[ing] successors and fill[ing] vacancies.” Opening Br. of Philip R. Shawe at 22 n.8. He contends that he “proposed additional alternatives before and during litigation.” Id. Mr. Shawe points to correspondence in which his lawyer made proposals on his behalf to counsel for Ms. Elting, including suggestions that Ms. Elting sell her stake in the company to a third party, offers for Mr. Shawe to purchase her shares, and a proposed shareholder agreement. See A3169

- 80; A3186

- 93; A3274

- 78;

A3329

- 65.

122 See In re Shawe & Elting LLC , 2015 WL 4874733, at *32; Miller , 2009 WL 554920, at *5.36

potential infringement and the court would not be so limited in fashioning a

remedy that invokes a sale or transfer of thei r shares. This reading of Section 226

is consistent with the long

- standing policy of strictly limiting the powers of court

appointed custodians

.

The Majority Opinion now puts stockholders on notice

, at least

prospectively, that in deadlock situations wher e a custodian is appointed pursuant

to Section 226, a sale to a third party over the objections of stockholders is a

potential permissible outcome

, even for a thriving business

. This “ judicially

created notice” now accomplishes what is expressly stated in other provisions of

the DGCL and other statutes where defeasance of property rights is possible.

These stockholders, however, appear to be stuck with this unanticipated

outcome. 123

123 Ms. Shawe, for example, suggests that her constitutional arguments were not raised prior to trial because of the unforeseeable nature of the Chancellor‟s unprecedented interpreta tion of

Section 226. See Reply Br. of Shirley Shawe at 5.