In re: TransPerfect Global, Inc. ( 2018 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
__________________________________________
)
In re: TRANSPERFECT GLOBAL, INC. ) C.A. No. 9700-CB
__________________________________________)
)
ELIZABETH ELTING, )
Petitioner, )
)
v. ) C.A. No. 10449-CB
)
PHILIP R. SHAWE and SHIRLEY SHAWE, )
Respondents, )
)
and )
)
TRANSPERFECT GLOBAL, INC. )
Nominal Party. )
__________________________________________)
MEMORANDUM OPINION
Date Submitted: January 30, 2018
Date Decided: February 15, 2018
Kevin R. Shannon, Berton W. Ashman, Jr., Christopher N. Kelly, Jaclyn C. Levy,
and Mathew A. Golden, POTTER ANDERSON & CORROON LLP, Wilmington,
Delaware; Philip S. Kaufman, Ronald S. Greenberg, Marjorie E. Sheldon, and Jared
I. Heller, KRAMER LEVIN NAFTALIS & FRANKEL LLP, New York, New York;
Attorneys for Elizabeth Elting.
David L. Finger, FINGER & SLANINA LLC, Wilmington, Delaware; Peter B.
Ladig and Brett M. McCartney, BAYARD, P.A., Wilmington, Delaware; David B.
Goldstein, RABINOWITZ, BOUDIN, STANDARD, KRINSKY & LIEBERMAN,
P.C., New York, New York; Attorneys for Philip R. Shawe.
Jeremy D. Eicher, EICHER LAW LLC, Wilmington, Delaware; Attorney for Shirley
Shawe.
Jennifer C. Voss and Elisa M.C. Klein, SKADDEN, ARPS, SLATE, MEAGHER &
FLOM LLP, Wilmington, Delaware; Attorneys for Custodian Robert B. Pincus.
BOUCHARD, C.
In this decision, the court accepts the recommendation of the court-appointed
Custodian to approve a transaction in which one of the co-founders of TransPerfect
Global, Inc. (Philip Shawe) will acquire the shares held by the other co-founder
(Elizabeth Elting) to finally resolve this litigation. I begin with a summary.
After forming what became TransPerfect over twenty years ago, Elting and
Shawe served as co-CEOs and the only two directors of the Company as it became
highly profitable. Over time, however, their relationship and management of the
Company devolved into a state of complete dysfunction, as manifested by
irretrievable deadlocks at both the board and stockholder levels. This situation
prompted Elting to file suit under 8 Del. C. § 226 to sell the Company in order to
implement, in effect, a business divorce.
On August 13, 2015, the court issued a post-trial decision granting Elting the
relief she requested and appointing a Custodian to sell the Company. The Custodian
was given a dual mandate: “to sell the Company with a view toward maintaining the
business as a going concern and maximizing value for the stockholders.”1
On July 18, 2016, after further proceedings to flesh out how the sale process
would work, the court entered an order adopting the Custodian’s recommendation
to conduct a “modified auction” in which Elting and Shawe could solicit investors
1
In re Shawe & Elting LLC, 2015 WL 4874733, at *32 (Del. Ch. Aug. 13, 2015), aff’d sub
nom. Shawe v. Elting, 157 A.3d 152 (Del. 2017).
1
to partner with them to acquire the Company and the Custodian could solicit bids
from third parties (the “Sale Order”). Elting fully supported all of the terms of the
Sale Order, which expressly provides that the Custodian’s decisions, including his
selection of the winning bidder, are governed by an abuse of discretion standard.
Shawe was irretrievably opposed to the Sale Order and commenced an aggressive
campaign of collateral litigation, the targets of which included Elting, her husband,
her advisors, and the Custodian, among others.
On February 13, 2017, the Delaware Supreme Court affirmed this court’s
August 2015 opinion and the Sale Order. Commenting on the dual mandate
underlying the Sale Order, the Supreme Court explained that “[b]y preserving the
Company as a whole,” the remedy “was well designed to protect the other
constituencies of the Company—notably its employees—by positioning the
Company to succeed and thus to secure the jobs of its workforce.”2
From March to November 2017, the Custodian, with the assistance of a
number of advisors, conducted an extensive sale process. Approximately 97
financial and strategic firms were solicited to participate, 65 of which entered into
confidentiality agreements. After three formal rounds of bidding and an informal
fourth round to elicit “final” bids, two leading bidders emerged: Shawe and H.I.G.
Middle Market, LLC, the owner of TransPerfect’s leading competitor. Between the
2
Shawe v. Elting, 157 A.3d at 167.
2
two, the Custodian believed that Shawe ultimately would offer greater consideration
than H.I.G. with fewer closing conditions and better terms (e.g., indemnification and
releases), while retaining virtually all of the Company’s employees—a particularly
important consideration given the Custodian’s dual mandate. Thus, despite Shawe’s
vigorous opposition to the sale process, the Custodian reached out to negotiate with
him in an effort to finalize a transaction.
On November 19, 2017, the Custodian executed a securities purchase
agreement and certain ancillary agreements that call for an entity owned by Shawe
to purchase Elting’s shares of the Company in a transaction that will yield Elting
approximately $287.2 million in net proceeds after tax (the “Sale Agreement”).
According to the Custodian, the aggregate implied enterprise value of the transaction
represents over ten times the Company’s adjusted EBITDA for the twelve-month
period ending September 30, 2017, and provides $20 million more in aggregate net
proceeds after tax than H.I.G.’s prior offer. The Sale Agreement contains an
exclusivity provision with no fiduciary out that is substantively identical to one that
was included in a draft sale agreement circulated to H.I.G. and other bidders before
the third round of the sale process, and to which H.I.G. expressed no opposition.
On November 22, 2017, after the auction had ended and despite the
exclusivity provision in the Sale Agreement, H.I.G. submitted an unsolicited bid that
would provide approximately $7.5 million of additional after-tax net proceeds to
3
Elting. Soon thereafter, Elting objected to the Custodian’s recommendation that the
court approve the Sale Agreement. She asks the Court to reject the Sale Agreement
and to direct the Custodian to negotiate a transaction with H.I.G.
In support of this request, Elting asserts essentially five objections that, in one
form or another, second-guess various judgments the Custodian made during the sale
process. Specifically, Elting asserts that the Custodian exercised poor judgment by
(i) failing to seek relief from the court to address misconduct by Shawe that allegedly
undermined the sale process, (ii) deciding to focus on negotiating with Shawe
instead of H.I.G. at the end of the process, (iii) making certain adjustments in valuing
H.I.G.’s bids relating to the litigation risk posed by Shawe, (iv) failing to include a
fiduciary out in the Sale Agreement, and (v) agreeing to releases that, among other
things, would bar Elting from asserting claims against Shawe regarding his alleged
misconduct during the sale process.
Despite advocating for the abuse of discretion standard in the Sale Order,
Elting now argues that the court should apply an entire fairness standard in
considering the Custodian’s recommendation. The theory for this reversal of
position is that the Custodian was conflicted when he entered into the Sale
Agreement because Shawe had sued him and attacked him in the media.
For the reasons detailed below, I conclude that the independence of the
Custodian, for whom the Sale Order provides judicial immunity and robust
4
indemnification and advancement rights, has not been compromised in any way that
would warrant deviating from the abuse of discretion standard in the Sale Order.
Applying that standard, I further conclude that each of Elting’s objections is without
merit and accept the Custodian’s recommendation to approve the Sale Agreement.
In reaching these conclusions, I note the irony of Elting’s opposition to the
court approving the outcome of an auction she sought in the first place. The
undercurrent of her opposition reflects an apparent, deep-seated frustration with the
fact that the winner of the auction was Shawe—who Elting has battled for years and
who seems to engage in litigation as a way of life. But Shawe also is the person
Elting chose to go into business with when she formed the Company and, as much
as Elting might wish it were otherwise, Shawe was a core part of TransPerfect’s
operative reality when Elting asked that the Company be sold. Beyond that, Elting
never sought relief from the court for conduct she claims after-the-fact to have
undermined the sale process and, despite proclaiming a desire to acquire the
Company herself, Elting never put together a bid approaching what Shawe was
willing to pay for the Company. Elting forged her own path.
No sale process is perfect, and this one certainly presented challenges.
Nonetheless, in my judgment, the Custodian deftly and firmly handled a challenging
assignment to create a competitive dynamic that maximized the value of Elting’s
shares while simultaneously preserving the Company as a going concern to the
5
fullest extent possible, consistent with his dual mandate. With that result having
been achieved, the court’s fervent hope is that Elting will accept the result of the
business divorce she sought almost four years ago, and that the litigation this dispute
has spawned will come to an end so that all concerned can move on with their lives.
I. BACKGROUND3
The factual background and procedural history of this extensive litigation are
discussed in detail in earlier opinions of the Delaware Supreme Court and this court.4
The court assumes the reader’s familiarity with those opinions and recites below
only those facts directly relevant to the court’s consideration of the Custodian’s
recommendation that the court approve the Sale Agreement in accordance with
Section 18(a) of the Sale Order.
A. Events Leading up to Entry of the Sale Order
On August 13, 2015, for the reasons explained in a post-trial memorandum
opinion of the same date, the court appointed Robert B. Pincus, Esquire as the
3
TransPerfect Global, Inc. is referred to herein interchangeably as “TransPerfect,” the
“Company,” or “TPG.” At the relevant times, the Company’s shares were held by Elting
(50%), Shawe (49%), and Shawe’s mother (1%), who is firmly aligned with her son.
Unless noted otherwise, the docket numbers cited herein refer to the docket entries in C.A.
9700-CB.
4
See In re TransPerfect Glob., Inc., 2017 WL 3499921 (Del. Ch. Aug. 4, 2017); In re
Shawe & Elting LLC, 2016 WL 3951339 (Del. Ch. July 20, 2016), aff’d sub nom Shawe v.
Elting, 157 A.3d 142 (Del. 2017); In re TransPerfect Glob., Inc., 2016 WL 3477217 (Del.
Ch. June 20, 2016) as revised (June 21, 2016); Shawe v. Elting, 2015 WL 5167835 (Del.
Ch. Sept. 2, 2015); Shawe & Elting LLC, 2015 WL 4874733.
6
Custodian to oversee a judicially ordered sale of the Company and to serve as a third
director of the Company in the interim.5 In doing so, the court rejected as “unduly
punitive” Elting’s request for “entry of an order that would preclude Shawe from
bidding to acquire the Company, impose on him a non-competition agreement if the
Company were sold to someone else, or afford Elting matching rights.”6
As explained in the August 2015 opinion, the dual mandate of the judicially-
ordered sale process was “to sell the Company with a view toward maintaining the
business as a going concern and maximizing value for the stockholders.”7 The
opinion directed the Custodian to recommend to the court a proposed plan of sale
with this dual mandate in mind and to:
. . . evaluate the viability and the pros and cons of conducting a sale of
the Company (a) in which the bidders would be limited to Shawe and
Elting (individually or as part of a group), such as in a “Texas shoot
out” or some other auction format, (b) in an open auction process that
would include any interested bidders, or (c) in any other format the
Custodian deems practicable in the circumstances of this case, which
could include conducting a public offering to afford stockholders
liquidity or dividing the operating assets of the Company along the
production divisions that Shawe and Elting have separately managed.8
After his appointment, the Custodian engaged several advisors to assist in the
performance of his duties, including Houlihan Lokey Capital Inc., which assisted in
5
Shawe & Elting LLC, 2015 WL 4874733, at *32.
6
Id.
7
Id.
8
Id.
7
identifying and analyzing certain sale alternatives, and Alvarez & Marsal, a
management advisory group, which provided financial and operational services to
the Company. Joel Mostrom, an employee of Alvarez & Marsal, came to serve as
the Company’s Corporate Development Officer. The Custodian also engaged Grant
Thornton LLP to perform an audit assessment and to audit consolidated financial
statements for the Company.
On February 8, 2016, the Custodian submitted a proposed plan of sale for the
Company (“Sale Report”) in which he identified five alternatives that he had
evaluated:
1. Division of Business. A division of the Company into distinct
business units, with those units to be divided between the two
stockholders in an appropriate manner.
2. Initial Public Offering. An initial public offering of TPG’s stock to
provide a liquid market for the sale of shares by current stockholders at
the time of the IPO and over time.
3. Sale to Existing Stockholder. The purchase by one stockholder of
the other stockholder’s shares in one of the formats detailed in
[Houlihan Lokey’s report].
4. Broad Auction. A customary broad auction process involving
potential bidders comprised of strategic bidders, as well as financial
bidders, such as private equity funds.
5. Modified Broad Auction Led by Existing Stockholders. A modified
auction where each stockholder could solicit third-party investors as
partners in an acquisition of TPG, and where the Custodian could work
with outside bidders who are interested in purchasing TPG, but not
8
necessarily interested in partnering with an existing stockholder in
connection with any acquisition.9
The Custodian concluded that, absent a consensual resolution, “the alternative
most likely to maximize stockholder value while continuing the business as a going
concern (and which can be accomplished in a reasonable time frame)” was the fifth
alternative, namely the “Modified Auction.”10 The Sale Report explained that the
Modified Auction had “the benefit of permitting each stockholder to bid for control
of the Company (alone or in partnership with a third party), as well as permitting
third parties (unaffiliated with the stockholders) to bid for the Company.” 11
The Sale Report further explained that “[i]n order to fulfill the Court’s
directive of running the sale process,” the Custodian “would need maximum
flexibility without interference from the stockholders, who may stand on both sides
of a transaction.”12 To that end, the Custodian requested entry of a sale order
implementing the Modified Auction that would authorize the Custodian, in his
discretion, to expand “each selling stockholder’s existing non-compete and non-
solicit arrangements, to include the entirety of TPG and its subsidiaries.”13
9
Dkt. 735 at 5-6.
10
Dkt. 735 at 7.
11
Dkt. 735 at 7.
12
Dkt. 735 at 10.
13
Dkt. 735 at 10-11.
9
The court afforded the parties the opportunity to submit objections to the Sale
Report and held a hearing to consider any objections. Shawe submitted a lengthy
objection to the Sale Report, which boiled down to two key points. First, Shawe
disagreed with the Custodian’s recommendation to pursue a Modified Auction that
would permit third parties to participate in the sale process from the outset. Shawe
argued that the bidders should be limited, at least in the first instance, to Elting and
himself.14 Second, Shawe opposed the Custodian’s request to authorize the
Custodian to impose non-compete or non-solicitation obligations on a selling
stockholder. Shawe contended that he and Elting were not contractually restricted
in their ability to compete with the Company after leaving its employ, and that the
sale process should reflect that operative reality.15
Elting did not object to any aspect of the Sale Report and requested that the
court adopt the Custodian’s recommendation. In response to Shawe’s argument that
the Custodian’s request for “complete power over the sale process” sought “an over-
broad and untethered delegation of authority,”16 Elting cited two recent orders of this
14
TransPerfect Glob., Inc., 2016 WL 3477217, at *3.
15
Id.
16
Dkt. 778 at 5, 16.
10
court in making the point that custodians in other cases “have been granted precisely
the same type of authority and discretion the Custodian requests here.”17
On June 20, 2016, the court issued a decision in which it accepted the
Custodian’s recommendation to proceed with the Modified Auction with certain
modifications.18 Although the court seriously considered limiting the bidders in the
sale process to Shawe and Elting (individually or as part of a group) given their
functional 50-50 ownership of the Company since its inception,19 the court was
persuaded by the Custodian’s well-reasoned recommendation to proceed with the
Modified Auction in order to maximize stockholder value, one of the objectives of
the dual mandate.
The court agreed with Shawe, however, that it would be inappropriate to
authorize the Custodian to impose non-compete or non-solicitation obligations on a
selling stockholder. It stood to reason that the Company would be worth more to a
buyer if Shawe and Elting were subject to post-employment restrictions on their
ability to compete or to solicit customers and employees than it would be without
those protections. But, as the court explained, “the purpose of the sale process is to
17
Dkt. 799 at 15-17 (citing In re Supreme Oil Co., Inc., 2015 WL 2455952 (Del. Ch. May
22, 2015) (ORDER); In re Carlisle Etcetera LLC, 2015 WL 10371435 (Del. Ch. May 4,
2015) (ORDER)).
18
TransPerfect Glob., Inc., 2016 WL 3477217, at *1.
19
Shawe & Elting LLC, 2015 WL 4874733, at *2.
11
maximize the value of the Company as it is and not to derive a hypothetically higher
value based on contractual protections the Company may not currently possess.”20
The court nonetheless made clear that “the Custodian or any party may seek the
implementation of non-competition or non-solicitation restrictions in the future upon
a showing of good cause to address wrongful conduct in the sale process.”21
B. The Sale Order
On July 1, 2016, the Custodian filed a proposed order to implement the court’s
rulings concerning the sale process.22 The parties again were afforded the
opportunity to submit objections.23 Shawe submitted numerous objections.24 Elting
requested entry of the Custodian’s proposed form of order as is.25
On July 18, 2016, the court issued a letter decision rejecting Shawe’s
objections and entered an order in the form the Custodian submitted.26 The Sale
Order recites the dual mandate of “maintaining the business as a going concern and
maximizing value for the stockholders,”27 and affords the Custodian “full and
20
TransPerfect Glob., Inc., 2016 WL 3477217, at *4.
21
Id.
22
Dkt. 833.
23
Dkt. 834.
24
Dkt. 837.
25
Dkt. 840.
26
Dkt. 848, 849.
27
Dkt. 848 at 2.
12
exclusive authority” to conduct all aspects of the sale process.28 It also affords the
Custodian the “full and exclusive authority to determine the winning bidder of the
Modified Auction” and enumerates various factors—including non-economic
terms—that the Custodian may take into account in making such determination:
Any offers from stockholders, as well as any offers from third-party
bidders, made pursuant to the established procedures and processes,
shall be evaluated by the Custodian, taking into account, among other
considerations, price, non-economic terms, generally anticipated U.S.
federal income tax consequences to the stockholders from the sale of
the Company, likelihood of consummation and other reasonable
factors. 29
Paragraph 9 of the Sale Order further provides that the Custodian is authorized to
execute and deliver a binding agreement on behalf of any of the stockholders (Elting,
Shawe, or Ms. Shawe) in order to effectuate a transaction with the winning bidder:
The Custodian is authorized to execute and deliver (or cause to be
executed and delivered) on behalf of the Company and its stockholders
(i) a definitive sale agreement, a merger agreement, a stock purchase
agreement or any other form of similar agreement, with such provisions
as the Custodian, in his sole discretion, deems necessary or appropriate
and reasonably customary given the circumstances of this transaction,
including, without limitation, representations and warranties,
covenants, provisions relating to indemnification, termination fees or
confidentiality, waiver of claim provisions, and other provisions that
are reasonably customary given the circumstances of this transaction (a
“Definitive Sale Agreement”).30
28
Dkt. 848 ¶¶ 1-2.
29
Dkt. 848 ¶ 3.
30
Dkt. 848 ¶ 9.
13
In accordance with the court’s June 20, 2016 decision, the Sale Order provides
that the Custodian or the parties can petition the court to impose sanctions, including
the imposition of post-employment non-competition restrictions, if a stockholder
takes action to impede the sale process or fails to comply with the Sale Order:
The Custodian or any party to the Actions may petition the Court to
impose sanctions on any director, officer, stockholder, employee or
consultant of the Company who (i) fails to cooperate fully with the
Custodian in connection with the performance of his duties under the
Order, (ii) takes or fails to take any action which impedes or
undermines, or intends to impede or undermine, the sale process or (iii)
otherwise fails to comply fully with the Order.
*****
The Custodian or any party to the Actions may petition the Court and
seek, upon a showing of good cause, the implementation of post-
employment restrictions (among other appropriate relief) on any of Ms.
Elting, Mr. Shawe or Ms. Shawe, including, without limitation, non-
competition and non-solicitation restrictions if Ms. Elting, Mr. Shawe
or Ms. Shawe (i) fails to cooperate fully with the Custodian in
connection with the performance of his duties under the Order, (ii) takes
or fails to take any action which impedes or undermines, or intends to
impede or undermine, the sale process or (iii) otherwise fails to comply
fully with the Order.31
The Sale Order makes clear that “[a]ll interim actions, recommendations and
decisions of the Custodian (taken prior to the consummation of the Sale Transaction)
shall be subject to review and reversal by the Court only upon a showing by a party
31
Dkt. 848 ¶¶ 12-13 (emphasis added).
14
to the Actions that the Custodian abused his discretion.”32 It further provides the
Custodian and his law firm (Skadden, Arps, Slate, Meagher & Flom LLP) with a
series of robust rights to protect against any attempt to second-guess or intimidate
the Custodian, including judicial immunity, indemnification, and advancement:
The Custodian, the Firm, and the Firm’s partners and employees
(together with the Firm, “Skadden”) are entitled to judicial immunity
and to be indemnified by the Company (or its successor in interest), in
each case, to the fullest extent permitted by law. Without limiting the
generality of the foregoing, fees and expenses incurred by the
Custodian or Skadden in defending or prosecuting any civil, criminal,
administrative or investigative claim, action, suit or proceeding
reasonably related to the Custodian’s responsibilities under the Order
shall be paid by the Company (or its successor in interest) in advance
of the final disposition of such claim, action, suit or proceeding within
15 days of receipt of a statement therefor.33
Finally, the Sale Order provides that “[t]he consummation of the transactions
contemplated by the Definitive Sale Agreement shall be expressly conditioned upon
and subject to the approval of the Court.”34 It further specifies that the court “shall
approve the Agreements, and the consummation of the transactions contemplated
therein . . . unless the objecting party shows an abuse of discretion by the Custodian
in connection with the sale process or the terms of the Agreements.”35
32
Dkt. 848 ¶ 15.
33
Dkt. 848 ¶ 16.
34
Dkt. 848 ¶ 18(a).
35
Dkt. 848 ¶ 18(d).
15
C. The Supreme Court’s Affirmance
On February 13, 2017, the Delaware Supreme Court affirmed this court’s
August 2015 opinion and the Sale Order. In its affirming opinion, the Supreme
Court explained that “[b]y preserving the Company as a whole,” the remedy “was
well designed to protect the other constituencies of the Company—notably its
employees—by positioning the company to succeed and thus to secure the jobs of
its workforce.”36 On May 16, 2017, Shawe filed a petition for a writ of certiorari in
the United States Supreme Court, which was denied on October 2, 2017.
Also on February 13, 2017, the Delaware Supreme Court affirmed this court’s
separate decision to sanction Shawe for $7,103,755 in attorneys’ fees and expenses
“based on a clear record of egregious misconduct and repeated falsehoods during the
litigation.”37
On February 21, 2017, in response to the Delaware Supreme Court’s
affirmances, Elting stated in an email to the Company’s employees, “I couldn’t be
more thrilled. The decisions grant everything I’ve requested over the last three years.
More importantly, they are the best possible outcome for TransPerfect and our
fabulous employees.”38
36
Shawe v. Elting, 157 A.3d at 167.
37
Shawe v. Elting, 157 A.3d at 152.
38
Dkt. 1227 (Ex. 1 at 1).
16
D. Pre-Sale Phase with the Co-Founders
The Custodian retained Credit Suisse Securities (USA) LLC as his exclusive
financial advisor for undertaking the sale process. He also selected Ernst & Young
LLP to prepare a number of reports, including a quality of earnings report, an IT
report, a market study, and a tax factbook with respect to the Company and its
subsidiaries.
From March to April 2017, the Custodian, with Credit Suisse’s assistance,
engaged exclusively with Shawe and Elting, giving them the opportunity to
comment on the proposed process and to submit the names of up to ten third parties
interested in participating in the sale process.39 Elting and Shawe provided the
names of various third parties to Credit Suisse. The Custodian and his legal advisors
negotiated and executed a number of confidentiality agreements to enable Elting and
Shawe to engage with those third parties.40 At the end of this process, Shawe and
Elting informed the Custodian and Credit Suisse that they intended to participate in
the auction as potential buyers.41
39
Dkt. 1185 (Pincus Ltr. Annex A at 4).
40
Id.
41
Id.
17
E. Initial Contacts with Potential Participants
In May 2017, Credit Suisse proposed a list of 92 potential participants for the
sale process.42 On and after May 22, 2017, Credit Suisse distributed a summary
highlighting the Company’s business and certain key financial information and a
confidentiality agreement to approximately 97 potential participants, which included
approximately 90 financial participants and seven strategic participants.43 Between
May 22 and September 7, 2017, Credit Suisse was contacted by an additional five
interested participants and sent them the summary and a confidentiality agreement.44
From May through July 2017, the Custodian’s legal advisors negotiated and
executed approximately 65 confidentiality agreements.45 Previously, the Company
had entered into confidentiality agreements with Elting and approximately seven
additional parties seeking to partner with her to acquire the Company. Credit Suisse
provided an information package to each participant who entered into a
confidentiality agreement.46 Potential bidders also were provided access to a market
42
Id.
43
Id. at 4-5.
44
Id. at 5.
45
Id.
46
Id. The package included (i) a confidential information presentation with detailed
financial and business information regarding the Company, (ii) the Company’s 2014 and
2015 audited financial statements, (iii) the Company’s 2016 draft unaudited financial
statements, and (iv) a litigation summary memorandum.
18
study Ernst & Young had prepared.47 After the distribution of these materials,
bidders performed due diligence related to the Company, and Credit Suisse
responded to inquiries from interested participants about the Company.48
On June 20, 2017, Credit Suisse sent a process letter to approximately 69
participants inviting each party to submit a preliminary non-binding indication of
interest for the acquisition of the Company.49 This process letter requested that
initial proposals and certain other information be submitted by July 13, 2017.50
Before July 13, Credit Suisse confirmed with Elting that she was formally aligning
with three bidders, including the Blackstone Group L.P.51
F. First Round of the Sale Process
On July 13, 2017, Credit Suisse received non-binding indications of interest
from approximately sixteen participants.52 Elting did not submit a specific
47
Id.
48
Id.
49
Id.
50
Id.
51
Id. at 6. Elting’s counsel described her relationship with Blackstone as follows: “Ms.
Elting and Blackstone intend for her to retain a 20% stake in the Company post-transaction.
She would have a senior management role in the Company and a leadership position on
the Board.” Dkt. 1236 (Ex. 1 at 1).
52
Dkt. 1185 (Pincus Ltr. Annex A at 6).
19
indication of interest but stated her interest in the Company through private equity
partners (including Blackstone) in a written letter to the Custodian.53
The proposals ranged in indicated enterprise value from $480 million to
$1,040 million.54 Fifty-five participants declined to submit an indication of interest
after reviewing the confidential information package. According to Credit Suisse,
the most common reasons for not submitting an indication of interest included “(i)
unwillingness to further engage in the Sale Process given the frequent and ongoing
litigation surrounding the Sale Process and the Company, (ii) the financial prospects
of the Company, (iii) concerns with respect to technology disintermediation and (iv)
lack of resources to fully pursue the opportunity.”55
On July 14, 2017, Credit Suisse provided the Custodian an analysis of the
indications of interest received on July 13, 2017, summarizing the price ranges and
certain relevant terms of each submission.56 The Custodian determined that ten
bidders would be asked to participate in the next round of the sale process, based on
the following criteria: “price range, perceived ability to obtain financing sources,
53
Id.
54
Id.
55
Id.
56
Id. at 7.
20
investment thesis and proven ability of the participant to consummate difficult
transactions.”57
G. Second Round of the Sale Process
On August 7, 2017, Credit Suisse provided the ten bidders selected from the
first round with access to a data room and invited them to meet with certain members
of senior management.58 The bidders also received more detailed financial and
business information concerning the Company (including a quality of earnings
report, IT report, and tax factbook) and access to selected senior management of the
Company to conduct business and financial due diligence.
On August 21, 2017, Credit Suisse sent a letter to the remaining bidders
requesting that they submit revised offers by September 7, 2017.59 “[B]idders were
directed to assume the purchase of 100% of the outstanding equity interests in the
Company on a debt-free, cash-free basis with normal levels of working capital and
that the transaction would not be conditioned on either (i) the existence of any non-
57
Id.
58
Id.
59
Credit Suisse requested that the bids include the following information: “(i) a non-
binding enterprise valuation, expressed as a single number together with any conditions or
qualifications attached to such value and any major assumptions underlying such value, (ii)
financing sources, (iii) investment thesis and plan, (iv) due diligence requirements, (v)
required contract terms, including the bidder’s position on certain key terms and conditions
to be included in a definitive agreement, (vi) required approvals, and (vii) any other
information the bidder deemed relevant.” Id. at 8.
21
competition obligations of the Company’s stockholders or (ii) the resolution of any
litigation involving the Company or the Custodian other than the approval of the
Court as required by the Sale Order and any appeal of that decision to the Supreme
Court of the State of Delaware.”60
On and after September 7, 2017, Credit Suisse received revised bids from
eight bidders that ranged in “headline” enterprise value from $650 million to $965
million.61 One of the bidders was H.I.G. Middle Market, LLC, which owns a
majority interest in Lionbridge Technologies, Inc., TransPerfect’s leading
competitor.62 Two bidders that participated in the second round declined to submit
revised bids.63 Elting did not submit a specific bid but, in a letter to the Custodian,
she stated her continued interest in the Company through a potential partnership with
Blackstone, which continued in the process.64
In consultation with Credit Suisse and his legal advisors, the Custodian
declined to continue discussions with one of the bidders because of the bidder’s
stated inability to consummate a transaction without certain conditions.65 Although
60
Id.
61
Id.
62
H.I.G.’s access to certain content in the data room was limited to protect competitively
sensitive information. Id. at 7.
63
Id. at 8.
64
Id. at 8.
65
Id. at 9.
22
this bidder submitted a bid providing for an indicated enterprise value of $965
million, the bidder indicated that any transaction would be subject to certain
conditions, including receipt of non-competition and non-solicitation agreements
from the Company’s stockholders and the resolution of certain litigation.66
The Custodian and Credit Suisse also considered eliminating H.I.G. in light
of the complications of including a strategic buyer in the process and the revised
offer’s low headline enterprise value of $750 million.67 With the Custodian’s
permission, however, H.I.G. submitted a revised bid providing for a headline
enterprise value of $900 million and received permission to remain in the sale
process.68
H. The Wordfast Controversy
As the sale process was unfolding, Shawe informed the Custodian and Grant
Thornton (in a draft management representation letter) that a large portion of the
Company’s business was dependent on software and/or source code owned by
Wordfast LLC, an entity Shawe and Elting owned on a 50-50 basis.69 According to
Shawe, “WordFast technology is used in over 70% of TransPerfect’s translation
66
Id.
67
Id.
68
Id.
69
Dkt. 1185 (Pincus Ltr. at 21).
23
jobs.”70 Shawe conceded that the Company had an implied license to use Wordfast’s
software but argued that the license was revocable and not royalty-free.71 Shawe
contended that the Company owed Wordfast a material amount of fees from 2006
forward and, upon a sale to a third party, likely would be facing annual fees of up to
$10 million to use Wordfast’s technology.72
Although Elting sought at the outset of this litigation (and ultimately
obtained) an order to dissolve another entity associated with TransPerfect’s business
that Shawe and Elting jointly owned (i.e., Shawe & Elting LLC), she failed to seek
any relief concerning Wordfast.73 Thus, Shawe’s contentions concerning Wordfast
remained an open issue in the sale process.
On September 27, 2017, the Custodian filed an application for a declaration
that the Company and/or its subsidiaries held a non-exclusive, irrevocable, and
royalty-free implied license to use any and all software and source code owned by
Wordfast.74 Although the Custodian sought this declaration on a paper record, the
court determined that there were factual issues about the nature and scope of the
70
Dkt. 1060 (Ex. G at 2).
71
Dkt. 1060 ¶ 2.
72
Dkt. 1024 ¶ 4.
73
Shawe & Elting LLC, 2015 WL 4874733, at *38-41.
74
Dkt. 1024 (Appl. for Decl. Relief).
24
implied license that necessitated an evidentiary hearing.75 In response to the
Custodian’s request for an expeditious resolution, the court scheduled the hearing to
begin on November 22, 2017. On November 15, 2017, the night before Shawe’s
deposition was scheduled to take place, Shawe and Ms. Shawe filed a notice of
removal of the Wordfast matter to the United States District Court for the District of
Delaware. This necessitated cancellation of the evidentiary hearing unless and until
the district court remanded the case.76
I. Third Round of the Sale Process
On October 16, 2017, Credit Suisse sent a process letter to four bidders,
including Blackstone, H.I.G., and Shawe, inviting each of them to provide a mark-
up of a draft sale agreement that the Custodian’s legal advisors had prepared (the
“Form Sale Agreement”) by October 30, 2017, and to submit a final bid by
November 8, 2017.77 The Form Sale Agreement provided to the bidders contained
an “exclusivity” provision with no fiduciary out and a release of claims relating to,
among other things, the selling stockholders’ ownership of shares of the Company
and the sale process.78 Credit Suisse also provided the bidders additional access to
selected senior management at the Company to conduct further business and
75
Tr. 58-59 (Oct. 25, 2017).
76
Dkt. 1173; Dkt. 1144.
77
Dkt. 1185 (Pincus Ltr. Annex A at 9).
78
Dkt. 1242 (Ex. 1 §§ 7.9, 8.2).
25
financial due diligence. Credit Suisse, the Custodian, and his legal advisors had
numerous telephone conversations with the bidders regarding due diligence issues,
litigation relating to the sale process, and draft mark-ups of the sale agreement.79
On October 30, 2017, H.I.G., Blackstone, and Shawe submitted mark-ups of
the Form Sale Agreement to the Custodian’s legal advisors.80 The fourth remaining
bidder informed Credit Suisse that it declined to continue in the sale process for
reasons that included: “(i) risks relating to the validity of a non-exclusive,
irrevocable, royalty-free implied license between Wordfast LLC and the Company
(ii) lack of infrastructure and (iii) recent departures of certain employees.”81
On November 8, 2017, H.I.G., Blackstone, and Shawe submitted their final
bids, which ranged in headline enterprise value from $700 million to $900 million.82
After receiving these bids, Credit Suisse worked with Mostrom and tax teams at
Ernst & Young and Skadden to prepare an analysis to compare the bids on an apples-
to-apples basis, going from enterprise value to net purchase price on a pre-tax and
post-tax basis.83 This bid analysis included adjusting for differences in transaction
79
Dkt. 1185 (Pincus Ltr. Annex A at 10).
80
Id.
81
Id. Toward the end of the bidding process, “there was an unusually timed wave of exits
from the technology division and other divisions overseen by Mr. Shawe, led in the first
instance by the Chief Technology Officer and the Chief Information Officer. . . A total of
more than 11 departures occurred during this time.” Dkt. 1185 (Pincus Ltr. at 20).
82
Dkt. 1229 (Pincus Aff. Ex. 1).
83
Dkt. 1185 (Pincus Ltr. Annex A at 11).
26
type (e.g., asset vs. stock transaction), definitions of cash, treatment of debt-like
items, treatment of certain company fees and expenses, and items subject to
escrows.84 The bid analysis showed that, after accounting for adjustments, the three
bids yielded aggregate after-tax net proceeds to the stockholders that ranged widely
from $130.3 million to $527.3 million, with Shawe’s bid yielding the highest amount
of after-tax net proceeds and Blackstone’s yielding the lowest.85
J. Submission of Final Bids
After receiving the three bids on November 8, 2017, Credit Suisse, at the
direction of the Custodian, pressed each bidder to improve his or its bid by increasing
the gross payment and/or decreasing proposed deductions, which Credit Suisse
discussed with the bidders on a line item basis.86 For Blackstone, the feedback
“focused on its lower relative headline enterprise value, its treatment of debt-like
items and company fees and expenses, the significant level of conditionality in its
bid, and large escrow amounts tied to the execution of non-compete and non-
solicitation agreements by each seller and to cover [litigation] costs.”87 For H.I.G.,
the feedback “focused primarily on its treatment of debt-like items, the inclusion of
a seller note as a portion of its purchase price, the impact of additional taxes related
84
Dkt. 1185 (Pincus Ltr. Annex A at 11).
85
Dkt. 1229 (Pincus Aff. Ex. 1).
86
Dkt. 1229 (Doolin Aff. ¶ 12); Dkt. 1185 (Pincus Ltr. at 40).
87
Dkt. 1185 (Pincus Ltr. Annex A at 11).
27
to an asset sale structure, and the level of conditionality.”88 For Shawe, “given the
construct of his bid,” which was the least conditional, “the feedback focused
primarily on price.”89
After these discussions, the Custodian permitted each of the bidders to make
a revised final offer on November 15, 2017. Neither the Custodian nor Credit Suisse
indicated to the bidders that they would have another opportunity to bid after
November 15.90 Credit Suisse, at the Custodian’s direction, affirmatively told H.I.G.
that it may not have another opportunity to bid.91
On or about November 15, H.I.G., Blackstone, and Shawe submitted revised
bids that the Custodian’s advisors valued in the manner depicted in Table 1 below:92
88
Dkt. 1185 (Pincus Ltr. Annex A at 11).
89
Id.
90
Dkt. 1229 (Pincus Aff. ¶ 8); Dkt. 1229 (Doolin Aff. ¶ 15).
91
Dkt. 1229 (Doolin Aff. ¶ 15).
92
Dkt. 1229 (Pincus Aff. Ex. 1).
28
Table 1 H.I.G. Blackstone Shawe
Cash at close 800 740 710
Face value of seller note 125 - -
Enterprise value 925 740 710
Discount to seller note (12.5) - -
Total included cash and cash 26.1 6.2 31.2
equivalents
Total indebtedness (43.4) (51) -
Total company fees and expenses (33.6) (28.1) (17.7)
Net purchase price (before escrow) 861.6 667 723.6
Total escrow amounts (53.5) (246.7) (9)
Net purchase price (after escrow) 808.1 420.4 714.6
Est. stock sale tax (223.9) (162.7) (180.5)
Est. asset deal tax implication (45.2) (39.7) -
Tax implication indemnification 15 - -
Proceeds to stockholders 554 218 534.1
In the Custodian’s judgment, the November 15 bids reflected only marginal
improvements over the November 8 bids, and Blackstone’s bid simply “was not
competitive.”93 Although Blackstone marginally increased its headline enterprise
value (from $725 million to $740 million) and reduced some of its deductions, it
93
Dkt. 1185 (Pincus Ltr. at 40).
29
continued to require a holdback of a substantial portion of the purchase price ($200
million) that would be released to the sellers only upon their execution of non-
compete and non-solicitation agreements. This was a non-starter because Shawe
had made clear that he would never agree to such restrictions.94
As for the remaining two bidders, the Custodian determined, after consulting
with his legal advisors and Credit Suisse, that “neither Mr. Shawe nor [H.I.G.] likely
would improve substantially their respective bids without being offered a definite
opportunity to buy the Company.”95 Thus, in order to obtain more value than what
was on the table, the Custodian had to decide whether to engage with Shawe or
H.I.G. After considering the discussions that had occurred “with the final three
bidders over the prior ten days” and consulting with his advisors, the Custodian
decided to engage with Shawe rather than H.I.G.96 As discussed below, the
Custodian made this decision, notwithstanding Shawe’s lack of cooperation during
the sale process, because he believed that Shawe would offer greater consideration
than H.I.G. could deliver with fewer closing conditions and other better terms while
retaining virtually all of the Company’s employees.97
94
Dkt. 1185 (Pincus Ltr. at 40); Dkt. 1185 (Pincus Ltr. Annex A at 12); Tr. 28 (Jan. 17,
2018). The $200 million holdback for restrictive covenants is included in Table 1 in the
line item for “total escrow amounts.”
95
Dkt. 1185 (Pincus Ltr. at 40).
96
Id. at 41.
97
See infra. III.B.2.
30
K. Execution of a Definitive Sale Agreement
On November 16, 2017, the Custodian and his corporate counsel met with
Shawe and his corporate counsel. The Custodian informed Shawe that, although the
Custodian “had received bids from third parties with higher ‘headline values’ for the
Company,” the Custodian was prepared to accept Shawe’s offer to acquire the
Company “if he agreed to increase its implied aggregate enterprise value to $775
million, which was approximately $70 million higher than his earlier non-binding
proposal.”98 After further discussions, the Custodian and Shawe agreed to a
proposed acquisition at a $770 million implied aggregate enterprise value, subject to
executing a mutually acceptable agreement before November 20, 2017.
On November 19, 2017, a securities purchase agreement and other ancillary
agreements (collectively, as defined above, the “Sale Agreement”) were executed.
In accordance with his authority under paragraph 9 of the Sale Order, the Custodian
executed the Sale Agreement on behalf of Elting as well as the Company.
In the Custodian’s opinion, the Sale Agreement offered the greatest amount
of after-tax net proceeds to stockholders than any other bid to date with the least
conditionality. A side-by-side comparison of the implied value of the economic
terms of the Sale Agreement and H.I.G.’s November 15 bid, which Credit Suisse
98
Dkt. 1185 (Pincus Ltr. at 43).
31
prepared before the Custodian signed the Sale Agreement,99 is set forth in Table 2
below:
Table 2 H.I.G. Shawe
Cash at close 800 770
Face value of seller note 125 -
Enterprise value 925 770
Discount to seller note (12.5) -
Total included cash and cash 26.1 31.2
equivalents
Total indebtedness (43.4) -
Total company fees and expenses (33.6) (18.7)
Net purchase price (before escrow) 861.6 782.6
Custodian escrow amount (35) (5)
Purchase price adjustment escrow (13.9) (4)
Indemnity escrow amount (4.6)
Total escrow amounts (53.5) (9)
Net purchase price (after escrow) 808.1 773.6
Est. stock sale tax (223.9) (199.1)
Est. asset deal tax implication (45.2) -
Tax implication indemnification 15 -
Proceeds to stockholders 554 574.5
99
Dkt. 1229 (Pincus Aff. ¶ 2).
32
The Sale Agreement provides that PRS Capital LLC, a New York limited
liability company of which Shawe is the sole and managing member, will purchase
all of Elting’s shares of TransPerfect common stock for $385 million cash, subject
to certain adjustments. The transaction is estimated to yield Elting approximately
$287.2 million in after-tax net proceeds. According to the Custodian, the aggregate
implied enterprise value of the transaction represents over ten times the Company’s
adjusted EBITDA for the twelve-month period ending September 30, 2017.100
The Sale Agreement contains an “exclusivity” provision with no fiduciary out
and reciprocal releases of claims that are substantively the same as the provisions
contained in the Form Sale Agreement that was distributed to the final bidders in
October 2017.101 The Sale Agreement also contains customary representations,
warranties, covenants, and conditions to closing, including the requirement that a
final, non-appealable court order approving the transaction be obtained prior to the
closing.102 Elting is required to indemnify PRS Capital LLC, its affiliates (including
Shawe), and their representatives only in the event of a breach of certain
100
Dkt. 1185 (Pincus Ltr. at 47).
101
Dkt. 1185 (Pincus Ltr. Annex C §§ 7.9, 8.2(a)-(b)). One difference between the Form
Sale Agreement and the final Sale Agreement is a carve-out in Elting’s release for certain
claims that are discussed below. See III.B.5.
102
Dkt. 1185 (Pincus Ltr. Annex C § 9.1(b)).
33
“fundamental” representations made by Elting or any covenant to be performed by
Elting after the closing of the transaction.103
L. H.I.G. Submits Another Bid After the Sale Process Ends
On November 22, 2017, after executing the Sale Agreement, the Custodian
received a revised, improved proposal from H.I.G., which provided for (i) an implied
aggregate enterprise value of the Company of $850 million, (ii) fewer deductions to
the purchase price than H.I.G.’s prior proposals, (iii) a tax indemnification and gross
up of the stockholders to accommodate the structure of the proposal, and (iv) fewer
conditions to closing (including no condition regarding the Wordfast license) than
H.I.G.’s prior proposals.104 Under the exclusivity provision in the Sale Agreement,
the Custodian and his advisors were prohibited from engaging in discussions or
negotiations with H.I.G.105
The Custodian internally reviewed H.I.G.’s proposal with Credit Suisse and
his legal advisors and determined that the bid likely would provide an aggregate of
approximately $15 million of additional after-tax net proceeds to all of the
Company’s stockholders, meaning that it would yield approximately $7.5 million of
additional after-tax net proceeds to Elting.106 According to the Custodian, however,
103
Dkt. 1185 (Pincus Ltr. Annex C § 10.2).
104
Dkt. 1185 (Pincus Ltr. at 48-49).
105
Id. at 49, Annex C § 7.9.
106
Dkt. 1185 (Pincus Ltr. at 49); Dkt. 1229 (Pincus Aff. Ex. 1).
34
H.I.G.’s proposal likely would be more difficult to close than the proposed sale to
Shawe and “would not provide the same level of finality as the Sale Agreement with
respect to the disputes between Ms. Elting and Mr. Shawe, and . . . could adversely
affect the Company’s ability to continue as a going concern (consistent with its
current state), particularly given that [H.I.G.] owns the Company’s largest
competitor.”107
II. PROCEDURAL POSTURE
On December 7, 2017, H.I.G. filed a motion to intervene for the purpose of
filing an objection to the Custodian’s execution of the Sale Agreement. On
December 19, 2017, the court denied that motion because (i) H.I.G., as a non-party,
lacked standing to assert such an objection under the Sale Order, which expressly
limits to the “parties” to these actions (C.A. Nos. 9700-CB and 10449-CB) the right
to submit “any objections to the sale process or the terms” of any agreements the
Custodian submits to the court for approval, and (ii) H.I.G. expressly waived any
claims relating to the sale process in a contract it entered into with TransPerfect as a
condition to participating in the sale process.108
107
Dkt. 1185 (Pincus Ltr. at 49).
108
Dkt. 1215. On November 2, 2017, the court denied a similar motion to intervene filed
by a TransPerfect employee (on behalf of a group of employees interested in making a bid)
for lack of standing under the Sale Order. Dkt. 1110.
35
On December 21, 2017, Elting filed a lengthy objection to the proposed sale.
The objection does not advocate that the Custodian should have closed a deal with
Blackstone, with whom Elting partnered and whose bid was clearly inferior to the
final bids submitted by H.I.G. and Shawe. Elting’s objection instead asks the court
to reject the proposed sale to Shawe and to direct the Custodian to negotiate a
transaction with H.I.G.
Shawe and Ms. Shawe filed responses to Elting’s objections supporting the
Custodian’s recommendation. After the parties were afforded the opportunity to
fully brief the issues, a hearing was held on January 17, 2018, and supplemental
submissions were filed thereafter.
The same day she filed her objection, Elting filed a new lawsuit against Shawe
in this court seeking damages. The complaint asserts that Shawe breached his
fiduciary duties and violated the Sale Order by “intentionally interfering with the
sale process” and “intentionally undermining the Custodian’s efforts to undertake a
fair auction to maximize stockholder value in accordance with the Sale Order.”109
According to the complaint, “Shawe’s misconduct depressed TPG’s sale price by
more than $200 million.”110
109
Dkt. 1 (C.A. 2017-907) ¶ 40.
110
Id. ¶ 6.
36
III. ANALYSIS
Elting asserts several objections to the proposed sale. Before turning to them,
I address the threshold issue of what standard of review applies to the court’s
consideration of Elting’s objections.
A. Standard of Review
The Sale Order expressly provides that the court “shall approve” any
definitive sale agreement and any related agreements the Custodian enters into
“unless the objecting party shows an abuse of discretion by the Custodian in
connection with the sale process or the terms of the Agreements.”111 The Sale Order
further provides that “[a]ll interim actions, recommendations and decisions of the
Custodian” are subject to court review under an abuse of discretion standard.112
This court has adopted an abuse of discretion standard in similar orders
involving the court-ordered sale of a corporation.113 Relying on those authorities,
Elting fully supported the inclusion of the abuse of discretion standard when the Sale
Order was under consideration. Elting explained at that time that, “to the extent
Shawe is lobbying for a more exacting standard of review than ‘abuse of discretion,’
111
Dkt. 848 ¶ 18(d).
112
Dkt. 848 ¶ 15.
113
See, e.g. Supreme Oil, 2015 WL 2455952, at *6 (abuse of discretion standard for interim
decisions); Carlisle Etcetera, 2015 WL 10371435, at *3 (same).
37
it is not warranted here, and the cases [Shawe] cites do not support it.”114 Elting also
argued that corporate law principles applicable to directors of Delaware corporations
should not govern the Custodian’s “actions in managing and effectuating the sale
process ordered by the Court.”115
Despite the inclusion of an abuse of discretion standard in the Sale Order and
Elting’s endorsement of the standard when the court entered the Sale Order, Elting
has reversed course. Unsatisfied with the outcome of the sale process, Elting now
argues that the court should apply an entire fairness standard in deciding whether or
not to approve the Sale Agreement. The theory for this reversal of position is that
the Custodian had a conflict of interest when he entered into the Sale Agreement
because Shawe “relentlessly attacked the Custodian and his law firm in the media
and sued the Custodian personally in multiple courts.”116 I find the argument
unpersuasive. Before explaining why, some further factual context is necessary.
During the sale process, Shawe filed two lawsuits against the Custodian. In
one action, filed after the Delaware Supreme Court rejected their appeal, Shawe and
his mother sued the Custodian and the Delaware Secretary of State in the United
States District Court for Delaware. The complaint advances claims under the
114
Dkt. 840 at 6 n.3.
115
See Dkt. 840 at 5 (arguing against application of the business judgment rule).
116
Objection 28.
38
Takings and Due Process Clauses of the Fifth and Fourteenth Amendments to the
United States Constitution. The Shawes never raised these claims at trial in this
action, and the Delaware Supreme Court deemed them waived when the Shawes
appealed the Sale Order.117 On September 26, 2017, the district court dismissed
Shawe’s constitutional claims, concluding that they were barred under the Rooker-
Feldman doctrine.118
In the second action, filed on September 1, 2017, Shawe sued the Custodian
in the United States District Court for the Southern District of New York. The
complaint there asserts putative constitutional claims that reflect, in my view,
Shawe’s displeasure with the Custodian’s steadfast refusal to bend to his will during
the sale process.119 The Custodian moved to dismiss that action, which was stayed
after the execution of the Sale Agreement was announced.
117
Shawe v. Elting, 157 A.3d at 169.
118
Shawe v. Pincus, 265 F. Supp.3d 480, 483 (D. Del. 2017). The Shawes filed an appeal
of the district court’s dismissal in the United States Court of Appeals for the Third Circuit
and sought expedition of that appeal. They also filed a motion in the district court to stay
the sale process. On October 27, 2017, the district court denied the Shawes’ motion to stay
the sale process. On November 6, 2017, the Third Circuit denied their motion to expedite,
and, on November 15, the Third Circuit ordered that the Shawes’ claims be submitted to
mediation. Dkt. 1185 (Pincus Ltr. at 24).
119
See Shawe v. Pincus, 17-cv-6673 (S.D.N.Y. 2017) (alleging that the Custodian violated
Shawe’s constitutional rights by threatening to seek sanctions against him for commencing
litigation and for failing to execute a management representation letter).
39
In addition to these two actions, Timothy Holland, a TransPerfect employee
who works exclusively for Shawe according to Elting,120 filed an action in the United
States District Court for the Southern District of New York against the Custodian
and the Chancellor, asserting that the Sale Order chilled his exercise of his First and
Fourth Amendment rights.121 On September 19, 2017, the district court dismissed
that action under the Younger abstention doctrine.122
Holland also is the incorporator of “Citizens for a Pro-Business Delaware,”123
an organization that ran ads criticizing the expenses that were incurred as a result of
the sale process, including fees paid to the Custodian’s law firm. 124 In that vein,
Shawe sent emails to the Custodian late in the sale process questioning Skadden’s
bills and intimating that he might seek to challenge them.125
In my opinion, the lawsuits filed against the Custodian and the media attention
he has received have not compromised his independence in any way that would
120
Appellee’s Answering Br. (No. 423, 2016) 43.
121
Holland v. Bouchard, 2017 WL 4180019, at *2 (S.D.N.Y. Sept. 19, 2017).
122
Id. at *1. An appeal of this dismissal is pending.
123
Appellee’s Answering Br. (No. 423, 2016), App. B3579.
124
Dkt. 1219 (Golden Aff. Exs. C-E).
125
Dkt. 1171 (Ex. A at 2); Dkt. 1219 (Golden Aff. Ex. F at 2-3). The court has received
monthly reports from the Custodian requesting approval of his fees and expenses since
April 2015, after the Custodian was first appointed as a mediator in March 2015. See Dkt
544, 515. Copies of these reports were served on the parties when they were filed with the
court. Shawe never questioned the Custodian’s expenses until late in the sale process. Dkt.
1088.
40
warrant deviating from the abuse of discretion standard in the Sale Order. Claims
for damages were not asserted in any of these cases. Each of them seeks solely
injunctive or declaratory relief. The Custodian views the claims asserted in these
cases as frivolous, an assessment with which Elting agrees.
Most importantly, irrespective of which bidder the Custodian selected as the
winner, the Custodian and his law firm have no appreciable risk of liability and are
be fully covered for the costs of defending against these lawsuits or any other
litigation relating to the sale process. The Custodian and his law firm are protected
by judicial immunity and robust indemnification and advancement rights set forth in
the Sale Order.126 Thus, even if one accepts that selecting Shawe as the winner of
the auction secured something that other bidders could not deliver (i.e., dismissal of
the lawsuits Shawe filed against the Custodian), the Custodian’s ability to exercise
disinterested and independent judgment in selecting the winning bid was not
compromised in my view.127 To repeat, no matter which of the final bids the
Custodian selected, he and his law firm are fully protected from any financial
exposure from an aggrieved bidder relating to the sale process.
126
Dkt. 848 ¶ 16.
127
See In re RJR Nabisco, Inc. S’holders Litig., 1989 WL 7036, at *14 (Del. Ch. Jan. 31,
1989) (refusing to apply entire fairness even though it was “less likely that the directors
would be exposed to personal liability . . . if [a certain bidder] prevailed in the auction”
because the special committee members enjoyed indemnification rights under either
scenario).
41
Insofar as media attention is concerned, it is telling that no one ever contacted
the Custodian to complain about the sale process as a result of any advertisements
that were run by the so-called “Citizens for a Pro-Business Delaware.”128 And the
notion that the Custodian’s independence was compromised as a result of such
attention runs counter to his professional reputation as a highly experienced
transactional lawyer and to the personal qualities that compelled the court to select
him for the position in the first place. Indeed, until the winning bidder was selected,
Elting’s team only had high praise for the Custodian’s performance, viewing him as
someone of “unquestionable honesty and integrity.”129 In short, the record is devoid
of any evidence to credibly suggest that Shawe’s litigiousness or the media attention
associated with this case created a disabling conflict of interest or compromised the
Custodian’s independence in any way that would warrant deviating from the abuse
of discretion standard in the Sale Order, for which Elting herself advocated.
Our Supreme Court has explained that a decision will not be overturned as an
abuse of discretion if the decision “was based upon conscience and reason, as
opposed to capriciousness or arbitrariness.”130 Stated another way, a court will
128
Dkt. 1229 (Pincus Aff. ¶ 21).
129
See, e.g., Tr. at 102 (Elting’s lead trial counsel) (Jan. 17, 2018).
130
Chavin v. Cope, 243 A.2d 694, 695 (Del. 1968).
42
overturn a decision for abuse of discretion only if it was “arbitrary or capricious”131
or “exceeds the bounds of reason in light of the circumstances.”132 This is the
standard I will apply in reviewing Elting’s objections.
B. Elting’s Objections
In support of her request that the court reject the Custodian’s recommendation
for approval of the Sale Agreement and direct the Custodian to reopen negotiations
with H.I.G., Elting advances essentially five objections. Specifically, Elting
contends that the Custodian abused his discretion by:
 failing to seek relief from the court to address misconduct by Shawe that
allegedly undermined the sale process;
 deciding to focus on negotiating a transaction with Shawe instead of H.I.G. at
the end of the sale process;
 making certain adjustments in valuing H.I.G.’s bids relating to the litigation
risk posed by Shawe;
 failing to include a fiduciary out provision in the Sale Agreement;
 agreeing to releases in the Sale Agreement that would (i) bar Elting from
asserting claims against Shawe regarding his alleged misconduct during the
sale process and (ii) treat differently the method for resolving certain claims
Shawe and/or his mother have asserted against Elting and others.
I address each objection in turn.
131
Lankford v. Lankford, 157 A.3d 1235, 1241 (Del. 2017) (citing Wright v. Wright,
49 A.3d 1147, 1150 (Del. 2012)).
132
Schultz v. Ginsburg, 965 A.2d 661, 667 (Del. 2009) (citing In re MCA, Inc., S’holder
Litig., 785 A.2d 625, 633–634 (Del. 2001)).
43
1. Failing to Seek Relief from the Court
Elting contends that “the Custodian abused his discretion when he continued
to refrain from seeking relief from the Court, even after realizing that Shawe’s
actions were undermining the sale process.”133 Deciding to seek judicial relief in the
midst of a court-ordered sale process is a classic matter of judgment. In my opinion,
the record does not support Elting’s assertions that the Custodian abused his
discretion in making the judgments he did with respect to seeking judicial recourse
against Shawe. To the contrary, the record convinces me that the Custodian deftly
handled a difficult situation that resulted in a highly favorable outcome for Elting.
To be sure, in recommending the Sale Agreement to the court for approval,
the Custodian candidly expressed his belief that Shawe’s litigiousness had caused
some potential third-party bidders not to participate in the sale process, and had
caused some who did participate to discount their proposals or to demand large
escrows for the litigation risk of dealing with Shawe.134 And, as Elting repeatedly
points out, the Custodian understandably came to have a dim view of Shawe’s
character, telling him in one heated email exchange: “You are the most dishonest
and dishonorable person I have ever met.”135 That said, the record reflects that
133
Objection 36.
134
Dkt. 1185 (Pincus Ltr. at 12).
135
Dkt. 1169 (Ex. A at 1).
44
“despite the litigations and Mr. Shawe’s litigious conduct (and that of his close
colleagues), [the Custodian and his advisors] were able to generate participation in
the Modified Auction by certain important strategic and private equity groups,”
which created a competitive dynamic to maximize the value of Elting’s shares.136
Contrary to the position Elting takes now, the Custodian did not cower to
Shawe’s antics. When Shawe and his putative confederate (Holland) sued him, the
Custodian defended the litigations vigorously, obtaining the dismissal of two of them
so far. When Shawe refused to sign a management representation letter that was
necessary for Grant Thornton to complete its audit, the Custodian threatened to
exclude Shawe from the sale process until Shawe backed down.137 And when
Wordfast became a point of controversy in the sale process—a controversy that
likely could have been avoided had Elting brought the issue up when this litigation
began—the Custodian promptly approached the court and requested an expedited
ruling to determine the scope of the Company’s implied license with Wordfast.
Also contrary to Elting’s position, the Custodian exercised prudence in not
acting precipitously with respect to a range of other matters involving Shawe. For
example, Elting accuses Shawe of orchestrating the resignation of senior IT
employees late in the sale process, but Elting herself stated publicly at the time that
136
Dkt. 1185 (Pincus Ltr. at 12).
137
Custodian’s Reply 27.
45
their departures were a positive development for the Company. 138 Elting also
accuses Shawe of masterminding a “phishing attack” and manipulating the EBITDA
of divisions under his control, but the evidence concerning these accusations is
speculative, circumstantial, and contested—so much so that Elting effectively
abandoned these charges at the court’s last hearing in this matter.139
As the Custodian recognized, running to court in reaction to each of Shawe’s
antics risked causing delay and confusion that not only could have undermined the
sale process, but also could have injured the Company, its employees, and its client
base.140 As importantly, as the Custodian also recognized, excluding Shawe from
the sale process or seeking to impose a noncompete on him would not necessarily
have benefitted the process. In the Custodian’s judgment, “Shawe’s participation
as a bidder (a widely known event) likely resulted in one of the bidders increasing
138
Dkt. 1229 (Klein Aff. Ex. B at 2) (October 25, 2017 article in Slator quoting Elting:
“[T]he recent departures of these few technology employees represent a very positive, not
negative, development at TransPerfect, as I have long regarded each of them as
underperformers.”).
139
Compare Dkt. 1219 (Elting Aff. ¶¶ 7-12) (describing “circumstantial evidence” of
Shawe’s involvement in phishing incident) with Dkt. 1227 (Finger Aff. Ex. 14) (email
summarizing investigation of the phishing incident, which suggests that the account
involved had been hacked) and Dkt. 1229 (Pincus Aff. ¶ 15) (“I am aware of no evidence
that Mr. Shawe directed a phishing incident at the Company.”); compare Dkt. 1219 (Pasko
Aff. ¶¶ 11-13) (accusing Shawe of depressing EBITDA in divisions under his control) with
Dkt. 1227 (Lee Aff. ¶¶ 6-9) (explaining the impact technology developed by Shawe’s
divisions had on Elting’s divisions and the enhancement of their profit margins).
140
Dkt. 1229 (Pincus Aff. ¶ 16).
46
its bid significantly and, in turn, causing Mr. Shawe to increase his bid.”141 In short,
the record reflects that the Custodian strategically addressed Shawe’s conduct while
minimizing delay and disruption to the sale process and maintaining a competitive
dynamic by keeping Shawe in the bidding process. This reflects sound judgment—
the antithesis of arbitrary or capricious decision-making.
Finally, if Shawe had taken actions that were so detrimental to the sale process
as to amount to an abuse of discretion by the Custodian for not seeking recourse
against Shawe, one must ask—where was Elting? She previously received
reimbursement of more than $7 million of her litigation expenses from Shawe and
knew that the court was prepared to impose sanctions when presented with a factual
record warranting judicial relief. And the Sale Order expressly provides that “any
party” may seek sanctions against the other, including the imposition of post-
employment restrictions, for impeding or undermining the sale process.142 Yet
Elting never moved for such relief. The fact that Elting failed to seek relief from the
court against Shawe during the sale process when she had every opportunity to do
so fundamentally belies her belated assertion that the Custodian acted arbitrarily or
capriciously for failing to seek further relief from the court against Shawe.
141
Dkt. 1185 (Pincus Ltr. at 11).
142
Dkt. 848 ¶¶ 12-13.
47
2. Focusing on Negotiating a Transaction with Shawe
Elting next contends that the Custodian abused his discretion by “opting, at
some point soon after November 8, 2017, to focus on negotiating a transaction with
Shawe to the exclusion of the other remaining bidders.”143 As discussed above, the
Custodian made the decision to negotiate directly with Shawe after receiving final
bids from Blackstone, H.I.G., and Shawe in mid-November. Blackstone’s bid was
not competitive. As to the two remaining bids, the headline enterprise value of the
bids from H.I.G. and Shawe was $925 million and $710 million, respectively. More
importantly, after accounting for certain adjustments and estimating the taxes that
would be incurred, their bids translated to aggregate, after-tax net proceeds to
stockholders of approximately $554 million (H.I.G.) and $534.1 million (Shawe).144
In my opinion, it was not an abuse of discretion for the Custodian to focus his
efforts at this point on negotiating a transaction with Shawe. To the contrary, the
Custodian had numerous sound reasons for pursuing that course.
First, the Custodian believed at the time “that no other bidder, including
[H.I.G.], likely would offer significantly greater consideration (net of required
deductions and escrows) compared to the amount [he] believed Mr. Shawe would
143
Objection 33.
144
During the hearing and in her supplemental submission, Elting asserted that, as of mid-
November, H.I.G.’s bid resulted in $65 million more in aggregate after-tax net proceeds to
stockholders because of how certain escrows concerning the litigation risk posed by Shawe
were treated. I address this issue in the next section.
48
pay.”145 This belief was informed by previous discussions with H.I.G. and Shawe
that indicated to the Custodian that H.I.G.’s November 15 bid was near its limit,
while Shawe could increase his offer significantly. As the Custodian explained in
an affidavit:
Early in the bidding process, HIG submitted a bid that provided for an
enterprise value, or “headline value,” of $750 million. Because of that
low bid and the fact that HIG was a strategic competitor of TPG, I
nearly informed HIG that it would not be permitted to move to the next
round of bidding but ultimately decided to allow it to revise its bid.
HIG submitted a revised bid providing for an enterprise value of $900
million. When discussing HIG’s initial mark-up of the draft securities
purchase agreement, my advisors and I suggested to HIG’s counsel that
the absence of a tax indemnification would affect the value of HIG’s
proposal. HIG’s counsel informed us that HIG would not provide the
indemnification, explaining that it was a stretch for HIG to get to $900
million. I understood this discussion to mean that HIG was at or near
the top of its price range, and that HIG was unlikely to agree to a
meaningful increase in its offer price. HIG’s admission helped to
inform my perspective on whether HIG would materially exceed the
economics of the final deal that I negotiated with Shawe. At the time I
learned that HIG’s $900 million bid was near its limit, I had reason to
believe (based on earlier discussions with Shawe and the range of his
second round bid) that Shawe could increase his offer to more than
$765 million.146
Second, the Custodian believed that H.I.G. could not provide the limited
conditionality and certainty of closing presented by Shawe’s proposal, which
included the fewest conditions to closing.147 For example, H.I.G.’s November 15
145
Dkt. 1185 (Pincus Ltr. at 41).
146
Dkt. 1229 (Pincus Aff. ¶ 6).
147
Dkt. 1185 (Pincus Ltr. at 41-42).
49
offer continued to condition closing on a favorable resolution of the Wordfast
licensing issue or some acceptable work around, and included a number of additional
seller and Company covenants that needed to be performed or complied with
between signing and closing.148 The Custodian also believed it was more likely that
H.I.G. (compared to Shawe) might try to claim a material adverse event between
signing and closing, given that H.I.G. narrowed the number of events that would not
constitute a material adverse event.149
Third, Shawe’s proposed mark-up of the Form Sale Agreement “provided for
almost no deductions from purchase price for ‘debt-like’ items or escrows for
indemnification (as the other bidders had proposed) and required indemnification by
Ms. Elting only for breach of certain ‘fundamental’ representations and
warranties.”150
Fourth, Shawe’s proposal offered a final and complete resolution of certain
outstanding claims and a dismissal of related litigation. In the Custodian’s view, this
would allow “the Company, its employees, its customers and other stakeholders to
move forward.”151 Shawe’s proposal also offered to indemnify Elting for any costs
148
Dkt. 1229 (Pincus Aff. ¶¶ 10(a)-(b)).
149
Id. ¶ 10(c).
150
Dkt. 1185 (Pincus Ltr. at 41-42).
151
Id. at 42.
50
or liabilities related to the equitable and legal claims asserted by a current senior
manager and a former senior manager.152
Finally, given H.I.G.’s status as a strategic competitor through its ownership
of Lionbridge, and the Custodian’s understanding that H.I.G. hoped to achieve up to
$40 million in synergies in a transaction with TransPerfect,153 the Custodian
understandably took into account the potential impact a transaction with H.I.G.
would have on the Company as a going concern:
When evaluating the bids, it was my belief, based on my professional
experience and consultations with my advisors, that a portion of the
synergies that HIG likely expected to realize as a result of any purchase
of the Company would come from reduced headcount at TransPerfect,
. . . that announcing a deal with HIG. . . would result in increased
concern among the Company’s employees and likely lead to further
employee departures, which could . . . negatively impact the
Company’s business between signing and closing or leave the
Company weakened if closing did not occur, . . . [and] that a deal with
HIG also would create uncertainty, both in terms of the employees’
questions about job security and a prolonged closing period, that . . .
152
Id.
153
Tr. 190 (Jan. 17, 2018); see also Objection 12 (noting that “a strategic acquiror could
(and likely would) pay more for TransPerfect . . . because a strategic acquiror could include
in its bid a portion of the value of synergies potentially accruing from a transaction” and
that H.I.G. “was just such a strategic acquiror”). The Custodian asked through Credit
Suisse and bid letters for post-closing plans from the bidders, “noting that he has an
obligation to maintain the business as a going concern.” Tr. 190-91 (Jan. 17, 2018). H.I.G.
did not provide any meaningful detail of its post-closing plans at that time. Id. Shawe
responded in writing as follows: “I plan to retain virtually all of the existing employees
across Executive Leadership, Sales, Production, Technology, and Shared Services units,
and not transfer jobs overseas or take other dramatic cost savings actions ….” Dkt. 1229
at 11.
51
could negatively impact the Company’s business and [the Custodian’s]
ability to deliver a healthy “going concern” to another bidder.154
By contrast, the Custodian believed that “Shawe’s proposal most likely would
maintain the Company as a going concern, without significant, if any, changes in the
Company’s operations and business, and with virtually no employee
terminations.”155
In sum, after receiving the final bids in mid-November, the Custodian had
valid reasons to believe that initiating a negotiation with Shawe to close a deal
offered the prospect of greater consideration than H.I.G. could deliver, fewer
conditions to closing, and better terms concerning indemnification and the resolution
of claims. Relevant to the court’s dual mandate, the Custodian also had good reason
to believe that negotiating with Shawe instead of the Company’s leading competitor
not only would maximize value for the stockholders, but also would retain virtually
all of the Company’s employees. Under these circumstances, I find that the
Custodian’s decision to engage with Shawe at this point was eminently reasonable
and plainly not an abuse of discretion.
154
Dkt. 1229 (Pincus Aff. ¶¶ 11-12).
155
Dkt. 1185 (Pincus Ltr. at 42).
52
3. Deducting Escrows and Accepting an Allegedly Lower Offer
As depicted in Table 2 above, the Custodian’s advisors estimated that the final
Sale Agreement would yield aggregate after-tax net proceeds to stockholders of
$574.5 million, or approximately $20 million more than H.I.G.’s November 15 bid.
Elting challenges this contention. She argues that the Custodian abused his
discretion by devaluing H.I.G.’s bid “by the amount of the reserves or escrows [it]
included to address Shawe’s misconduct and potential future wrongdoing,” which
caused the Custodian to sign “an agreement with Shawe at a price that was far less
than the highest offer then pending.”156 There are two aspects to this grievance: the
first concerns the decision to deduct the litigation escrows dollar-for-dollar in
determining the net amount of proceeds to stockholders; the second concerns the
calculation of estimated taxes on the transaction if one deducts those escrows from
the anticipated proceeds of the transaction.
Elting asserts that the Custodian should not have deducted from H.I.G.’s
November 15 bid the full amount of a $35 million escrow for potential litigation
expenses.157 This amount is the sum of three separate escrows: two that the
156
Objection 39-40.
157
The $35 million escrow is a line item in Table 2 entitled “Custodian escrow amount.”
For H.I.G.’s November 15 bid, Table 2 also includes a $13.9 million “Purchase price
adjustment escrow” and a $4.6 million “Indemnity escrow amount.” Thus, the total amount
of the escrows for H.I.G.’s November 15 bid was $53.5 million. Although Elting argued
at the hearing that it was an abuse of discretion to deduct the full $53.5 million in escrows
from H.I.G.’s November 15 bid, she focused her criticisms on the $35 million escrow and
53
Custodian’s advisors contractually required in their retention agreements ($15
million for Credit Suisse and $5 million for Alvarez & Marsal) and a third for the
Custodian ($15 million).158 Given his (eminently reasonable) belief that there would
be less litigation exposure if Shawe was the buyer, the Custodian deducted $5
million from Shawe’s bid for potential litigation expenses. Thus, the delta at issue
is $30 million.
Estimating that the litigation risk of entering into a transaction with H.I.G.
would be $30 million more than the litigation risk of entering into a transaction with
Shawe certainly was not an abuse of discretion. Shawe is a serial litigator.
According to the Custodian, Shawe and his close colleagues have filed over a dozen
lawsuits since April 2016 as part of an orchestrated campaign against the sale
process.159 Apart from the three federal cases discussed previously in which the
Custodian was named as a defendant, Shawe and/or his mother filed multiple cases
against Elting, Elting’s New York counsel, one of Elting’s financial advisors,
Elting’s husband and his employer, and Elting’s Delaware counsel.160 And Shawe
did not provide any substantive explanation for challenging the treatment of the other two
escrows. See Tr. 106-125 (Jan. 17, 2018). Accordingly, I focus on the $35 million escrow.
158
Custodian’s Reply at 17 n.9; Tr. 22-23 (Jan. 17, 2018).
159
Dkt. 1185 (Pincus Ltr. at 8).
160
See Shawe v. Potter Anderson & Corroon LLP, 2017 WL 6397342, at *2 (D. Del. Dec.
8, 2017) (asserting claim for prima facie tort against Potter Anderson & Corroon LLP
(Elting’s Delaware counsel) and one of its partners for allegedly misrepresenting certain
fees that were part of the sanctions order against Shawe); Shawe v. Kramer Levin Naftalis
54
indicated that more litigation was likely to come by, for example, questioning Credit
Suisse’s independence in court filings late in the sale process.161
The Custodian’s decision to deduct the full amount of the litigation escrows
also was not an abuse of discretion. Elting suggests that the Custodian could have
discounted those escrows based on the probability and timing of payment, but she
offers no methodology for doing so, and taking this approach would have been
speculative. The record of this case, on the other hand, bears out how expensive it
is to engage in hard-fought litigation with someone like Shawe. Filings from the
sanctions hearing against Shawe show that he and Elting together spent
approximately $27 million litigating against each other in less than two years,
& Frankel LLP, No. 151025 (Sup. Ct. N.Y. Cty. 2017) (asserting claims for defamation
and tortious interference with business advantage against Kramer Levin Naftalis & Frankel
LLP (Elting’s New York counsel), and two of its partners); Shawe v. Kidron Corporate
Advisors LLC, No. 652482 (Sup. Ct., N.Y. Cty. 2016) (asserting double derivative claims
for aiding and abetting breach of fiduciary duty against Kidron Corporate Advisors LLC
(Elting’s financial advisor) and one of its co-owners); Shawe v. Cushman & Wakefield, No.
652664 (Sup. Ct. N.Y. Cty. 2016) (asserting claims for breach of fiduciary duty, aiding and
abetting, and prima facie tort against Cushman & Wakefield and Michael Burlant (Elting’s
husband and an executive director at Cushman & Wakefield)); Shawe v. Elting, No. 153375
(Sup. Ct. N.Y. Cty. 2016) (asserting claims for deceit and collusion with the intent to
deceive a court and for malicious prosecution against Elting, Kramer Levin, and one of its
partners); Shawe v. Elting, No. 155890 (Sup. Ct. N.Y. Cty. 2014) (asserting claims for
assault, battery, intentional infliction of emotional distress, and punitive damages against
Elting arising out of an incident during which Elting allegedly kicked Shawe).
161
Dkt. 1051 at 2 (October 9, 2017 brief submitted by Shawe contending that Credit Suisse
“has an overwhelming financial incentive to allow Lionbridge to acquire TransPerfect at
the lowest price possible”).
55
between December 2014 and July 2016.162 It was not arbitrary or capricious for the
Custodian, who has over 35 years of experience in these matters, to deduct the full
amount of the litigation escrows.
Elting further suggests that the Custodian could have subtracted the estimated
litigation expenses from Shawe’s portion of the amount paid at closing and not from
Elting’s portion. But the obligation to indemnify the Custodian and his advisors for
litigation expenses associated with the sale process logically would be a corporate
expense of TransPerfect. Consistent with that logic, the Sale Order specifically
provides that the proceeds of the sale transaction would be distributed pro rata to
stockholders after deducting any escrows for indemnification or advancement
claims.163
In sum, perhaps a $30 million estimate to account for the difference in
litigation exposure between a transaction with H.I.G. and one with Shawe ultimately
would have proven to be too high or, given Shawe’s proclivity to litigate at the drop
162
See Dkt. 866 (Shannon Aff.); Dkt. 866 (Kaufman Aff.); Dkt. 866 (Stone Aff.); Dkt. 878
(Shane Aff.); Dkt. 878 (Finger Aff.); Dkt. 878 (Schmidt Aff.); Dkt. 878 (Goldstein Aff.);
Dkt. 878 (Matteo Aff.); Dkt. 878 (Minkoff Aff.); Dkt. 878 (Ladig Aff.).
163
See Dkt. 848 ¶ 14 (“In the event any fees and expenses of the Custodian or any counsel
or advisors retained by the Custodian or by the Company at the Custodian’s direction
remain unpaid at the closing of the Sale Transaction (or any claims for indemnification or
advancement remain outstanding), the Custodian may provide for the proceeds of the sale
to be paid into an escrow account and for the unpaid fees and expenses (and any claims for
indemnification or advancement) to be deducted from the proceeds, and then for the
proceeds to be distributed pro rata to the Company’s stockholders.”) (emphasis added).
56
of a hat, too low. It is impossible to know for sure. In my view, however, it is
obvious that the litigation expenses would have been substantial, and it was not an
abuse of discretion for the Custodian, acting in consultation with his advisors, to
make this assumption in valuing the bids under these circumstances.
The second aspect of Elting’s grievance with the treatment of the escrows
concerns a technical tax question. Based on consultations with his tax advisors, the
Custodian believed that “under the U.S. tax laws, funds that are placed into escrow
for the benefit of a seller, including amounts to secure the payment of liabilities of
the seller (even contingent liabilities), generally are treated as part of the taxable sale
proceeds on the disposition of the subject property (i.e., stock or assets) and are taxed
to the seller in the year of closing regardless of when the funds are paid out of
escrow.”164 Accordingly, for purposes of calculating the estimated taxes associated
with various bids, the total escrow amounts “were included as part of the taxable
sale proceeds in the relevant offers.”165
Although her position appears to have shifted, Elting offers a different
perspective on the tax treatment of the escrow amounts. According to Elting:
The IRS has consistently held that the portion of a purchase price
deposited in escrow to satisfy indemnity claims should be treated as an
installment obligation and reported by the seller under the installment
164
Dkt. 1235 at 2.
165
Id. (citing Treas. Reg. §§ 1.1001-1(a), 1.1001-1(g); Bittker & Eustice, Federal Income
Taxation of Corporations and Shareholders ¶ 10.31 (7th ed. 2000 & Supp. 2017-2)).
57
method pursuant to Internal Revenue Code Section 453. Under the
installment sale method, income is recognized on installment
obligations only as and when payments are received. No tax is payable
on the escrowed amounts in the year of closing unless the seller
affirmatively elects out of the installment method or is deemed to be in
“constructive receipt” of the funds. Because the Custodian has
characterized the escrowed amounts as “speculative and risky” . . . they
could not be deemed constructively received.166
Without any affidavits or testimony from tax experts, the court is not in a
position to reach any conclusions about this technical tax question. Nevertheless, it
is clear to the court that the Custodian did not abuse his discretion in following the
advice of his tax advisors, even if that advice was mistaken in some respect.
According to Elting, in mid-November, “when the Custodian chose to
negotiate exclusively with Shawe, H.I.G. had offered at least $65 million more in
after-tax proceeds than Shawe at that point.”167 As an initial matter, this $65 million
figure is significantly inflated in my view. It was reasonable, as discussed above,
for the Custodian to deduct the full amount of the litigation escrows, which forms a
substantial part (if not most) of this putative difference of $65 million.168 In any
166
Dkt. 1237 at 4 (citing Ginsburg, Levin & Rocap, Mergers, Acquisitions, and Buyouts,
Chapter 2 (2017); Bittker & Eustice, Federal Income Taxation of Corporations and
Shareholders, Chapter 10 (2015); I.R.S. Priv. Ltr. Rul., 200746004 (Aug. 10, 2007); I.R.S.
Priv. Ltr. Rul., 200521007 (Feb. 25, 2005); I.R.S. Priv. Ltr. Rul. 8629038 (Apr. 18, 1986)).
This installment sale argument is different from the simplistic argument that was made at
the hearing, where Elting’s counsel asserted that “it’s sort of self-evident [that] you don’t
get taxed on money that you don’t get.” Tr. 118 (Jan. 17, 2018).
167
Dkt. 1237 at 5.
168
Tr. 122 (Elting’s counsel explaining that, of the $65 million, the amount attributable to
the decision to deduct the escrows dollar-for-dollar versus the amount attributable to how
58
event, even if one assumes for the sake of argument a difference of $65 million
between the bids as of mid-November, Elting’s argument misses a critical point.
When deciding with whom to negotiate in mid-November and when deciding
with whom to execute a sale agreement, the Custodian had the express authority and
discretion under the Sale Order to take into account more than just price terms. In
particular, the Custodian had the authority and discretion to take into account non-
economic terms such as the conditionality of a proposal, the likelihood of closing (a
matter of great significance to the Company’s health), and the maintenance of the
business as a going concern—a key aspect of the dual mandate upon which the court
afforded Elting relief in the first place.169 The record reflects that the Custodian
carefully considered each of these important factors as he made his decisions, none
of which approaches being arbitrary or capricious.170 In doing so, the final
taxes are applied to the amount of the escrow “comes out to about 50-50” or maybe “a little
bit more on the tax mistake”) (Jan. 17, 2018).
169
See Dkt 848 ¶ 3 (“Any offers from stockholders, as well as any offers from third-party
bidders, made pursuant to the established procedures and processes, shall be evaluated by
the Custodian, taking into account, among other considerations, price, non-economic
terms, generally anticipated U.S. federal income tax consequences to the stockholders from
the sale of the Company, likelihood of consummation and other reasonable factors.”).
170
See Dkt. 1229 (Pincus Aff. ¶ 13) (“Even if one were to eliminate the $35 million
Custodian escrow amount from the HIG offer, the net proceeds, after tax, to the TPG
stockholders at closing from the HIG revised final offer of November 15, 2017, compared
to the Shawe deal value, would not have been sufficiently material to change my
recommendation in support of the SPA, particularly in light of the conditionality and other
terms of HIG’s proposal at the time I entered into the SPA with Shawe and my evaluation
of which proposal best maintains the business as a going concern.”).
59
transaction the Custodian secured with Shawe delivered approximately $40 million
more in aggregate after-tax net proceeds than his prior bid with fewer closing
conditions and better terms than H.I.G.’s prior bid, all while ensuring that virtually
all of the Company’s employees would be retained.171
4. Absence of a Fiduciary Out
Elting next contends that the Custodian “abused his discretion by . . . failing
to negotiate a fiduciary out” when entering into the Sale Agreement.172 In making
this argument, Elting relies on a controversial precedent, our Supreme Court’s 3-2
decision in Omnicare, Inc. v. NCS Healthcare, Inc.173 The argument is meritless.
To start, unlike in Omnicare, the Custodian was not engaged in the sale of a
public company, and his actions are not reviewable under traditional fiduciary
principles, as discussed above. Rather, the Custodian was negotiating the sale of a
private corporation, where fiduciary out provisions are not common.174 And his
171
Dkt. 1229 (Pincus Aff. Ex. 1) (the aggregate after-tax net proceeds of Shawe’s
November 15 bid and the final transaction were estimated to be $534.1 million and $574.5
million, respectively).
172
Objection 40.
173
818 A.2d 914, 938 (Del. 2003). Elting also cites a transcript ruling in In re Complete
Genomics S’holder Litig., C.A. No. 7888-VCL (Del. Ch. Nov. 27, 2012). That ruling
concerned the permissibility of a “Don’t Ask, Don’t Waive” provision in a standstill
agreement in the context of an acquisition of a public company. The court did not discuss
Omnicare and expressed no view on whether Delaware entities are free to enter into
exclusivity provisions without a fiduciary out.
174
See Jessica C. Pearlman, Private Target Mergers & Acquisitions Deal Point Study, Am.
Bar Ass’n, 48 (2017) (noting absence of fiduciary outs in private target deals); see also
John C. Coates, IV, The Powerful and Pervasive Effects of Ownership on M&A, 24-26
60
actions are governed by the terms of the Sale Order, including the abuse of discretion
standard expressly incorporated therein.
Under the Sale Order, the Custodian had the authority to include in a definitive
sale agreement “such provisions as the Custodian, in his sole discretion, deems
necessary or appropriate and reasonably customary given the circumstances of this
transaction.”175 As noted above, fiduciary out provisions are not reasonably
customary in private sale transactions, where it is common to deliver immediate
stockholder consent to a transaction. Elting does not contend otherwise.176 Thus,
(June 2, 2010) (comparing public and private targets of M&A deals and finding 85% of
public target bids include a fiduciary out, whereas only 10% of private target bids contain
a fiduciary out).
175
Dkt. 848 ¶ 9.
176
See Tr. 137-138 (Jan. 17, 2018) (“[M]any private company sales are sign-and-close
deals where a majority or even all of the stockholders affirmatively approve the sale in
advance of or even simultaneously with the execution of the agreement. A fiduciary out is
obviously unnecessary in that situation.”). Even when the sale of a public corporation is
at issue, it would be hazardous to construe Omnicare as mandating a fiduciary out. As
Chief Justice Strine, writing as a Vice Chancellor, explained after Omnicare was decided:
“it remains the case that Delaware entities are free to enter into binding contracts without
a fiduciary out so long as there was no breach of fiduciary duty involved when entering
into the contract in the first place.” WaveDivision Hldgs., LLC v. Millennium Digital
Media Sys., LLC., 2010 WL 3706624, at *17 (Del. Ch. Sept. 17, 2010). Vice Chancellor
Laster, who made the ruling in Complete Genomics on which Elting also relies, has
expressed the same view. See J. Travis Laster, Revlon is a Standard of Review: Why It’s
True and What It Means, 19 FORDHAM J. CORP. & FIN. L. 5, at 25 (2013) (“Under Van
Gorkom, ‘Delaware entities are free to enter into binding contracts without a fiduciary out
[allowing them to take a better offer] so long as there was no breach of fiduciary duty
involved when entering into the contract in the first place.’ There is no ‘Revlon duty’ that
compels a properly informed and motivated board of directors to act otherwise.”) (quoting
WaveDivision Hldgs., 2010 WL 3706624, at *17).
61
the Sale Order permitted the Custodian to omit a fiduciary out provision if, in his
sole discretion, he deemed it necessary or appropriate to do so.
Here, the Custodian has made a compelling case that offering to enter into a
definitive sale agreement with no fiduciary out at the end-stage of an extensive sale
process was the optimal strategy to obtain the best transaction available consistent
with the dual mandate of the Sale Order. The final three bidders from the third round
(Blackstone, H.I.G., and Shawe) were put on notice that this was the direction. They
each received the Form Sale Agreement, which contained an “exclusivity” provision
prohibiting the Company and the Custodian from pursuing any alternative
transaction with no fiduciary out.177 Blackstone, with whom Elting partnered,
expanded the exclusivity provision.178 And the three remaining bidders had been
given no indication by the Custodian or any of his advisors that they would have
another opportunity to bid after submitting their “final” bids on November 15. To
the contrary, H.I.G. had been told that it may not have such an opportunity.179
Most significantly, it was evident to the Custodian after the final bids were
received that Blackstone was not competitive and that the bids from H.I.G. and
177
Dkt. 1229 (Pincus Aff. ¶ 20).
178
Id.; see also Dkt. 1236, Ex. 1 (memo from Elting’s counsel to the Custodian
summarizing “certain significant issues for [Elting] as a Seller presented in the [Form Sale
Agreement]” without mentioning the exclusivity provision).
179
Dkt. 1229 (Pincus Aff. ¶ 8); Dkt. 1229 (Doolin Aff. ¶ 15).
62
Shawe reflected only marginal improvement over their previous bids. It was in this
context that the Custodian determined, in consultation with his legal advisors and
Credit Suisse, that “neither Mr. Shawe nor [H.I.G.] likely would improve
substantially their respective bids without being offered a definite opportunity to buy
the Company.”180 In other words, it was the Custodian’s judgment that the two
highest remaining bidders were essentially at a deadlock, that neither of them wanted
to serve as a stalking horse, and that the only viable strategy to achieve a significant
price move was to deliver the Company to one of them with no fiduciary out—
consistent with the exclusivity provision in the Form Sale Agreement that was
circulated to them. In my opinion, pursuit of this strategy was entirely sensible and
appropriate, and certainly was not an abuse of discretion.
The exclusivity provision in the Sale Agreement prohibits the Custodian from
participating in any discussions or negotiations with H.I.G. concerning the bid it
submitted on November 22, 2017, after the Sale Agreement had been executed.181
Given that the final bidders could not have had any legitimate reason to believe that
they would be afforded another opportunity to bid after November 15, 2017, and
consistent with the rationale for including the exclusivity provision in the Sale
180
Dkt. 1185 (Pincus Ltr. at 40).
181
Dkt. 1185 (Pincus Ltr. Annex C § 7.9).
63
Agreement,182 I view the bid H.I.G. submitted after the gavel had gone down on the
auction as irrelevant to deciding whether or not to approve the Custodian’s
recommendation.
5. The Scope of the Releases in the Sale Agreement
Elting’s final objection concerns the scope of the releases in Section 8.2 of the
Sale Agreement. Section 8.2(a) provides, in relevant part, that:
Effective upon the Closing, [Elting] and the Custodian, for and on
behalf of [Elting] . . . does, to the fullest extent permitted by Law,
hereby knowingly and voluntarily waive, fully release and forever
discharge and covenant not to sue, directly or indirectly or on behalf of
any third Person . . . the Company, the Company Subsidiaries, [PRS
Capital LLC], [Shawe], the Debt Financing Sources, the Custodian, his
advisors, agents and representatives . . . from [claims] in connection
with, arising out of, based upon or related to: (i) [Elting’s] employment
relationship, or termination thereof, with the Company or any other
Seller Released Party; (ii) [Elting’s] status as an employee, officer,
member, manager, partner, director, or stockholder of the Company or
any of its Affiliates; or (iii) any acts, events, facts, matters, transactions,
occurrences, statements or representations, or any other matter
whatsoever arising out of or related to the Order of the Court, dated
March 9, 2015, the Order of the Court, dated August 13, 2015, or the
Sale Order and any matters contemplated thereby.183
182
See Omnicare, 818 A.2d at 942 (“Certainty itself has value. The acquirer may pay a
higher price for the target if the acquirer is assured consummation of the transaction.”)
(Veasey, J., dissenting).
183
Dkt. 1185 (Pincus Ltr. Annex C § 8.2(a)).
64
Notably, the Form Sale Agreement that was circulated to the final three bidders
contained an essentially identical release, which Blackstone accepted184 and which
Elting did not question when providing comments on the Form Sale Agreement.185
Section 8.2(b) of the Sale Agreement contains a reciprocal release in Elting’s
favor from Shawe (as the Buyer) that tracks subsections (i)-(iii) of Section 8.2(a),
but carves out the claims asserted in seven pending lawsuits. Six of those lawsuits
involve claims Shawe and/or his mother filed against Elting, Elting’s New York
counsel, one of Elting’s financial advisors, Elting’s husband and his employer, and
Elting’s Delaware counsel, referenced above. The seventh lawsuit is one Elting filed
in New York in 2014, seeking to remove Shawe as a director and officer of the main
operating subsidiary of TransPerfect.186 I refer to these seven actions collectively as
the “Buyer Excluded Claims.”
The Sale Order specifically authorizes the Custodian to deliver a release on
behalf of any of the Company’s stockholders in connection with executing a
definitive sale agreement:
The Custodian is authorized to execute and deliver (or cause to be
executed and delivered) on behalf of the Company and its stockholders
(i) a definitive sale agreement . . . with such provisions as the Custodian,
184
Dkt. 1229 (Pincus Aff. ¶ 20); Dkt. 1242 (Ex. 1 § 8.2).
185
See Dkt. 1236, Ex. 1 (memo from Elting’s counsel to the Custodian summarizing
“certain significant issues for Elizabeth Elting . . . as a Seller presented in [the Form Sale
Agreement]”).
186
Elting v. Shawe, et al., No. 651423 (Sup. Ct. N.Y. Cty. 2014).
65
in his sole discretion, deems necessary or appropriate and reasonably
customary given the circumstances of this transaction, including,
without limitation, . . . waiver of claim provisions.187
No authority has been brought to the court’s attention concerning what form of
release would be “reasonably customary” in a court-ordered sale process under 8
Del. C. § 226. One authority the court found comes from Supreme Oil, where the
court appointed a custodian under 8 Del. C. § 226 to sell a company that had a
deadlocked board.188 The custodian in Supreme Oil executed a merger agreement
on behalf of the stockholders that included a release of all claims each of the
stockholders “has or may have against,” among others, “the Acquired Companies,
the Buyer, Merger Sub, the Custodian, [and the Custodian’s law firm] . . . in
connection with the Stockholder’s ownership of the Shares or in connection with the
Merger.”189 Similar to the release in Section 8.2(a) of the Sale Agreement here, the
release in Supreme Oil appears intended to put to rest any claims of stockholders
arising out of their ownership of shares of the acquired company and the sale process
that led to the acquisition of those shares.
As I understand it, Elting’s objection concerning the releases in the Sale
Agreement has two components. First, Elting objects to the release of her claim
187
Dkt. 848 ¶ 9 (emphasis added).
188
2015 WL 2455952, at *2.
189
Dkt. 161 (C.A. 10618-VCL), Ex. 1 § 9.14.
66
against Shawe for allegedly undermining the sale process, in particular the claim she
asserted against Shawe in a new action filed on December 21, 2017.190 Second,
Elting objects to the carve-out for the Buyer Excluded Claims in the reciprocal
release from Shawe in Section 8.2(b) of the Sale Agreement.
With respect to the first issue, it makes perfect sense that claims relating to
one’s ownership of shares in a corporation that is subject to a court-ordered sale
process and claims relating to the sale process itself would be released upon
consummation of a sale. If that were not the case, a selling stockholder would get
two bites at the apple in establishing the consideration for her shares—one from the
sale process itself and the second in the form of an option to re-litigate the sale
process.191 That makes no sense. The whole point of a court-ordered sale process
is to effectuate a business divorce by determining the amount of consideration to be
paid for the shares of a selling stockholder, period, and to put to rest the disputes
between the former business partners that necessitated the sale in the first place.
Relatedly, it is hard to imagine that any buyer in a court-ordered sale process would
accept the “two bites at the apple” approach Elting advocates, as the release in
Supreme Oil demonstrates.
190
Dkt. 1 (C.A. 2017-907).
191
Apart from being illogical, Elting’s position is inequitable given that she had every
opportunity to seek relief during the sale process if she truly believed the process was so
flawed as a result of Shawe’s conduct to warrant court intervention. It was incumbent on
Elting, however, to seek such relief in a timely fashion.
67
Here, given the extensive amount of litigation surrounding the sale process,
the need for a release of claims concerning the sale process is all the more evident.
“In the Custodian’s judgment, without such releases, no bidder would pay hundreds
of millions of dollars in these circumstances, and consummation of a sale would be
infeasible.”192 I agree with this assessment and find that the Custodian plainly did
not abuse his discretion in agreeing on Elting’s behalf to the release in Section 8.2(a)
of the Sale Agreement that would put to rest claims relating to the sale process.
With respect to the second issue, I appreciate Elting’s frustration that the
seven cases defined as the “Buyer Excluded Claims” do not go away automatically
upon consummation of the sale. Although most of these cases were filed as an
apparent response by Shawe to the court’s decision to undertake a sale process, they
do not relate to the sale process itself and thus are qualitatively different from the
case Elting recently filed in this court. These cases, moreover, involve other parties
and issues that complicate their resolution.
To be more specific, several of the Buyer Excluded Claims involve claims or
issues outside of Shawe’s control. For example, one case involves claims Elting
filed against Shawe in 2014 that are within her control. Another case (a tort action
arising out of an alleged kicking incident) includes a counterclaim Elting filed. In a
third case, the only open issue is defendants’ application for fees that was granted as
192
Dkt. 1229 at 33.
68
a sanction against Shawe.193 Elting is not even named as a party to three of the seven
cases, two of which (along with a third case in which Elting was named as party)
were dismissed in June 2017 with a stern warning from the trial court judge.194
Importantly, the Sale Agreement contains a covenant requiring Shawe and his
mother to use reasonable best efforts to settle the Buyer Excluded Claims without
the payment of any compensation:
[Shawe] and Shirley Shawe hereby agree that they . . . shall use
reasonable best efforts to obtain a mutual settlement, without the
exchange of monetary consideration, of the pending Litigations listed
in Section 8.2(b) of the Disclosure Letter [the Buyer Excluded Claims],
and to obtain a mutual release of all future Litigation between [Shawe],
[Elting] and their respective advisors, agents and representatives
relating to any event occurring prior to the Closing.195
Given the idiosyncratic issues entailed in resolving the Buyer Excluded Claims and
the inclusion of the foregoing covenant in the Sale Agreement, it was not an abuse
193
In the action filed against Delaware counsel, the district court dismissed the case sua
sponte and granted defendants’ motion for sanctions after concluding that the case “was
brought in bad faith” and was “frivolous” based on its finding that “Shawe’s purpose in
presenting the Court with the complaint and the amended complaint was to harass the
Defendants and to abuse the court system.” Shawe v. Potter Anderson & Corroon LLP,
2017 WL 6397342, at *4-5.
194
In dismissing actions brought against Elting’s New York counsel, financial advisor, and
her husband and his employer, the court stated: “given the borderline frivolity of these
lawsuits, Philip and Shirley Shawe are cautioned that the maintenance of future suits in this
court that are barred by the outcome of the Delaware action may result in sanctions and a
filing injunction.” Shawe v. Elting, Nos. 153375, 652482, 652664, 2017 WL 2882221, at
*28-29 (Sup. Ct. N.Y. Cty. 2016).
195
Dkt. 1185 (Pincus Ltr. Annex C § 8.2(d)).
69
of discretion for the Custodian to agree to the carve-out for the Buyer Excluded
Claims in the Section 8.2(b) of the Sale Agreement.
*****
Paragraph 18(d) of the Sale Order provides that the court “shall approve the
Agreements, and the consummation of the transactions contemplated therein . . .
unless the objecting party shows an abuse of discretion by the Custodian in
connection with the sale process or the terms of the Agreements.” For the reasons
explained above, Elting has not shown that the Custodian abused his discretion in
connection with the sale process or the terms of the Sale Agreement. Accordingly,
the court accepts the Custodian’s recommendation and hereby approves the Sale
Agreement.
IV. CONCLUSION
For the reasons explained, the court will enter the implementing order the
Custodian submitted approving the Sale Agreement.196
IT IS SO ORDERED.
196
The implementing order notes that Civil Action Nos. 9661 and 9686 “previously were
resolved by the Court and are no longer pending or ongoing matters, with the final
determinations of the Court in those Civil Actions no longer subject to appeal or
disturbance.” Dkt. 1185 (Proposed Order at 6). Accordingly, those actions will be closed.
70