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In re Transperfect Global, Inc.

Court of Chancery of Delaware

February 15, 2018

In re: TRANSPERFECT GLOBAL, INC.
v.
PHILIP R. SHAWE and SHIRLEY SHAWE, Respondents, ELIZABETH ELTING, Petitioner, and TRANSPERFECT GLOBAL, INC. Nominal Party.

          Submitted: January 30, 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.

          MEMORANDUM OPINION

          BOUCHARD, C. J.

         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 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 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 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 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 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. BACKGROUND[3]

         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 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 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 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]

         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 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 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 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]

         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, noncompetition 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 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]

         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]

         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]

         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 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 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, 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- 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 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 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 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 markup 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 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 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 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]

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 equivalents

26.1

6.2

31.2

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 increasedits headline enterprise value (from $725 million to $740 million) and reduced some of its deductions, it 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]

         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 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 equivalents

26.1

31.2

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

         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 "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, 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]

         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]

         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, ' 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 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.

         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 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.

         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 ...


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