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In re TransPerfect Global, Inc.

Court of Chancery of Delaware

October 17, 2019

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

          Date Submitted: October 10, 2019

          David L. Finger, FINGER & SLANINA, LLC, Wilmington, Delaware; David B. Goldstein, RABINOWITZ, BOUDIN, STANDARD, KRINSKY & LIEBERMAN, P.C., New York, New York; Alan M. Dershowitz, Cambridge, Massachusetts; Attorneys for Philip R. Shawe.

          Frank E. Noyes, II, and Charles A. McCauley, III, OFFIT KURMAN, P.A., Wilmington, Delaware; Attorneys for TransPerfect Global, Inc.

          Jennifer C. Voss and Elisa M.C. Klein, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Attorneys for Custodian Robert B. Pincus.

          Jeremy D. Eicher, EICHER LAW LLC, Wilmington, Delaware; Attorney for Shirley Shawe.

          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 and Jared I. Heller, KRAMER LEVIN NAFTALIS & FRANKEL LLP, New York, New York; Attorneys for Elizabeth Elting.

          MEMORANDUM OPINION

          BOUCHARD, C., JUDGE

         On August 26, 2019, Robert B. Pincus, in his capacity as a court-appointed custodian (the "Custodian), filed a motion for civil contempt and sanctions against TransPerfect Global, Inc. ("TransPerfect" or "TPG" or the "Company") and Philip R. Shawe ("Shawe") for violating three orders of this court. The first order, entered on February 15, 2018, approved a securities purchase agreement and related agreements whereby Shawe acquired Elizabeth Elting's 50% interest in the Company (the "Final Order"). The other two orders, entered on June 28, 2019 and July 17, 2019, granted fee petitions of the Custodian (the "Fee Orders").

         For the reasons explained below, the court grants the motion for contempt and imposes sanctions with respect to the Final Order. The court will address at a later time the motion for contempt insofar as it concerns the Fee Orders.

         I. Background[1]

         The factual and procedural background of these actions is discussed in detail in numerous opinions of this court and the Delaware Supreme Court.[2] This decision recites only those facts directly relevant to the contempt motion. TransPerfect and Shawe are referred to together at times as "Respondents."

         A. Appointment of the Custodian

         These actions began in May 2014 and were the subject of a six-day trial that ended on March 3, 2015. The core issue at trial was Elting's request under 8 Del. C. § 226 for the appointment of a custodian to sell the Company to resolve stockholder and board level deadlocks at the Company.[3]

         Shortly after trial, on March 9, 2015, the court entered an order appointing Pincus as "custodian of TPG . . . for the purpose of serving as a mediator to assist Elting and Shawe in negotiating a resolution of their disputes."[4] Paragraph 7 of that order provided that the Custodian would file a petition on a monthly basis for approval of his fees and expenses and that "[a]ny fees and expenses approved by the Court shall be paid promptly by TPG."[5]

         On August 13, 2015, after the parties failed to resolve their disputes through mediation with the Custodian, the court issued a post-trial opinion and implementing order (the "2015 Order"). The 2015 Order entered judgment in Elting's favor on her claims under Section 226 and appointed Pincus "as custodian of TPG . . . for the purposes set forth in the Opinion."[6] As explained in the accompanying opinion, those purposes included (i) "to oversee a judicially ordered sale of the Company" and (ii) in the interim before a sale was consummated, "to serve as a third director with the authority to vote on any matters on which Shawe and Elting cannot agree and which rise to the level that [the Custodian] deems to be significant to managing the Company's business and affairs."[7]

         The 2015 Order required the Custodian to "provide a report to the Court every thirty days after entry of this Order concerning the progress of his efforts."[8] It also afforded the Custodian and his law firm judicial immunity as well as indemnification and advancement rights:

The Custodian and the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, its partners and employees (collectively, "Skadden") are entitled to judicial immunity and to be indemnified by TPG, in each case, to the fullest extent permitted by law. Without limiting the generality of the foregoing, fees and expenses incurred by the Custodian and Skadden in defending any civil, criminal, administrative or investigative claim, action, suit or proceeding reasonably related to the Custodian's responsibilities under this order shall be paid by TPG in advance of the final disposition of such claim, action, suit or proceeding within 15 days of a statement therefor.[9]

         Additionally, the 2015 Order established procedures to compensate the Custodian and his advisors for the work they performed. Specifically, paragraphs 10 and 11 of the 2015 Order directed the Custodian to petition the court on a monthly basis for approval of his fees and expenses and the fees and expenses of advisors he retained to assist him in performing his duties, and obligated the Company to pay those fees and expenses "promptly" upon court approval:

10. The Custodian shall be compensated at the usual hourly rate he charges as a partner of Skadden. The Custodian also shall be reimbursed for reasonable travel and other expenses incurred in the performance of his duties. The Custodian shall petition the Court on a monthly basis, or such other interval as the Court may direct, for approval of fees and expenses. Any fees and expenses approved by the Court shall be paid promptly by TPG.
11. The Custodian may retain counsel (including Skadden) or other advisors to assist him in the performance of his duties under this Order. The fees of any counsel or advisors so retained shall be calculated on the same hourly rates charged by such counsel or advisors to clients represented outside this matter. The reasonable fees and expenses of such counsel or advisors shall be paid promptly by TPG.[10]

         B. The Director Indemnification Agreement

         On August 19, 2015, the Company and Pincus (as "Indemnitee") entered into a Director Indemnification Agreement (the "DIA"). The DIA affords the Custodian certain additional rights to indemnification and advancement but only in his capacity as a director of TPG.[11] The DIA expressly provides that these rights "shall be in addition to, but not exclusive of, any other rights which Indemnitee may have at any time under applicable law, the Certificate of Incorporation or Bylaws, any other agreement, vote of members or directors . . ., or otherwise."[12]

         To obtain indemnification or advancement under the DIA, the Indemnitee first must "submit to the Company a written request."[13] The DIA contains a nonexclusive forum provision in which the Company and the Indemnitee "consent to submit to the jurisdiction of the Delaware Court [of Chancery] for purposes of any action or proceeding arising out of or in connection with" the DIA.[14]

         C. The Sale Order

         On February 8, 2016, the Custodian submitted a proposed plan of sale for the Company that recommended holding a "modified auction."[15] After the Custodian submitted his proposal, the parties engaged in briefing and a hearing was held to address Shawe's objections to the Custodian's recommendation.[16]

         On July 18, 2016, the court entered an order implementing the Custodian's recommendation, with certain modifications (the "Sale Order"). Paragraph 14 of the Sale Order (i) reiterated the procedure set forth in paragraph 10 of the 2015 Order for the Custodian to petition the court on a monthly basis for approval of his fees and expenses, (ii) addressed the payment of fees and expenses of advisors, and (iii) added a new provision affording the Custodian the right to place some of the proceeds of a sale transaction into an escrow account to cover unpaid fees and expenses due to the Custodian and/or his advisors:

The Custodian shall be compensated at the usual hourly rate he charges as a partner of the Firm. The Custodian also shall be reimbursed for reasonable travel and other expenses incurred in the performance of his duties. The Custodian shall petition the Court on a monthly basis, or such other interval as the Court may direct, for approval of fees and expenses. Any fees and expenses approved by the Court shall be paid promptly by the Company. The fees of any counsel or advisors retained by the Custodian (i) shall be determined pursuant to the applicable agreement entered into pursuant to Paragraph 7 hereof or (ii) shall be calculated on the same hourly rates charged by such counsel or advisors to clients represented outside this matter. Such fees and expenses of such counsel or advisors shall be paid promptly by the Company upon approval of the Custodian. 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.[17]

         Although Shawe submitted a competing form of order that contained extensive revisions from the implementing order that the Custodian had proposed, Shawe did not propose any revisions to paragraph 14 of the Sale Order.[18]

         In addition to the provision in paragraph 14 governing compensation for the Custodian and his advisors, the Sale Order included a provision governing judicial immunity, indemnification, and advancement similar to the one in the 2015 Order.[19]

         On August 18, 2016, the court certified an interlocutory appeal of the August 2015 opinion, the 2015 Order, and the Sale Order.[20] On February 13, 2017, the Delaware Supreme Court affirmed the August 2015 opinion and both orders.[21]

         D. Consummation of the Sale

         After the Supreme Court's affirmance of the Sale Order, the Custodian oversaw a sale process that involved multiple rounds of bidding and resulted in execution of a securities purchase agreement on November 19, 2017 (the "Sale Agreement").[22] Pursuant to the Sale Agreement, Shawe acquired Elting's 50% of the Company for $385 million, subject to certain adjustments.[23] The transaction closed on May 7, 2018.

         The Sale Agreement set aside $5 million from the purchase price "as a nonexclusive source of funds for securing," among other things, "amounts payable to the Custodian or his advisors, including, without limitation, investment banking, legal and accounting fees and expenses for services performed prior to or after the Closing."[24] The $5 million was placed into an escrow account called the "Custodian Escrow Account." Any funds remaining in the Custodian Escrow Account when it is terminated are to be distributed to Shawe and Elting "in equal amounts."[25]

         Section 7.5 of the Sale Agreement requires Shawe to, among other things, "take all necessary actions to cause the Company and the Company Subsidiaries to continue to indemnify and hold harmless, to the fullest extent permitted by applicable Law, the Custodian and each of the Company's and Company Subsidiaries' present and former directors."[26] Section 12.18 of Sale Agreement provides that "the duties and responsibilities of all parties subject to the Sale Order and all other orders of the Court in Civil Action Nos. 9700-CB and 10449-CB shall remain in full force and effect in accordance with their terms."[27]

         On December 21, 2017, Elting filed a lengthy objection to the proposed sale of her interest in the Company under the Sale Agreement.[28] On February 15, 2018, after briefing and argument, the court issued an opinion rejecting Elting's objections and accepting the Custodian's recommendation to approve the transaction embodied in the Sale Agreement.[29] That same day, the court entered the Final Order approving the Sale Agreement.

         Similar to Section 12.18 of the Sale Agreement, quoted above, paragraph 8 of the Final Order provides for the continued validity of all orders entered in these actions:

The rights and authority granted to the Custodian and the duties and responsibilities of all parties to the Actions under the Sale Order and all other orders of the Court in Civil Action Nos. 9700-CB and 10449-CB shall remain in full force and effect in accordance with their terms until otherwise modified or discharged by the Court.[30]

         Most significantly for purposes of the Custodian's contempt motion, paragraph 10 of the Final Order provides that the court has exclusive jurisdiction over the parties to the actions "for all matters relating to the Actions:"

Without impacting the finality of this Order and judgment, the Court retains continuing and exclusive jurisdiction over the parties to the Actions for all matters relating to the Actions, including the administration, interpretation, effectuation or enforcement of the Sale Agreement and the Related Agreements, and all orders of the Court in Civil Action Nos. 9700-CB and 10449-CB, and further retains and reserves continuing jurisdiction to consider any applications that the Custodian may make for the Court's assistance in addressing any problems encountered by the Custodian in performing his duties under any order of the Court.[31]

         Finally, similar to the 2015 Order and the Sale Order, the Final Order includes a provision governing judicial immunity, indemnification, and advancement. Specifically, paragraph 7 of the Final Order states, in relevant part, that:

Without limitation, the Custodian and Skadden, Arps, Slate, Meagher & Flom LLP (and its partners and employees) 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 and notwithstanding anything that could be construed to the contrary in this Order or the Sale Agreement, fees and expenses incurred by the Custodian or Skadden, Arps, Slate, Meagher & Flom LLP (and its partners and employees) in defending or prosecuting any civil, criminal, administrative or investigative claim, action, suit or proceeding reasonably related to the Custodian's responsibilities under the Sale Order or this 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 thereof.[32]

         On May 3, 2018, the Delaware Supreme Court affirmed the Final Order.[33] On May 7, 2018, the sale transaction was consummated, which resulted in Shawe becoming the 99% owner of the Company and his mother, Shirley Shawe, owning the remaining 1%.[34]

         E. Fee Petitions from May 2018 to April 2019

         On May 10, 2018, the Custodian filed his monthly report in which he informed the court that he had resigned as a director of the Company but would continue to serve as Custodian for other purposes, with the expectation of filing a proposed order of discharge at a later date.[35] In the same letter, the Custodian petitioned the court under compensation provisions in paragraphs 10 and 11 of the 2015 Order to approve the fees and expenses he and his advisors had incurred and to require that they be paid by the Company.[36] The Custodian also advised the court of his intention to petition the court in the future for payment of his fees and expenses from the Custodian Escrow Account:

In connection with the Closing, and pursuant to the terms of the Securities Purchase Agreement, an escrow account was established and funded to serve as a non-exclusive source of funds to pay my fees and expenses and the fees and expenses of my agents and representatives after May 7, 2018. I intend to continue to petition the Court for approval of my fees and expenses before seeking any release of funds from the escrow in relation thereto.[37]

         From June 2018 to April 2019, the Custodian's monthly petitions for approval of fees and expenses explained that they would be paid from the Custodian Escrow Account.[38] In his January 2019 report, the Custodian informed the court and the parties that he had fully retired from Skadden as of December 31, 2018, and that future services he would be providing as Custodian would be charged at a reduced hourly rate of $950 per hour.[39]

         F. The May 2019 Fee Petition

         On May 8, 2019 the Custodian submitted his monthly report and petition for approval of fees and expenses.[40] In his May 2019 report, the Custodian advised the court and the parties that he expected his expenses would likely be higher in the coming months due two lawsuits involving TPG and Shawe: (i) an action Cypress Partners LLC had filed against Shawe in New York state court (the "Cypress action") and (ii) an action TransPerfect had filed against Lionbridge Technologies, Inc. and H.I.G. Middle Market LLC in the United States District Court for the Southern District of New York (the "Lionbridge action").

         According to the complaint in the Cypress action, Cypress had provided financial advisory services to Shawe in connection with the sale of the Company but Shawe refused to pay Cypress $800, 000 plus expenses that allegedly were owed under its engagement agreement with Shawe.[41] The Custodian explained in his May 2019 report that he had been informed that discovery, including a deposition, would be sought from him in connection with the Cypress action.[42]

         H.I.G., which held a majority interest in Lionbridge, was one of the three final bidders for the Company during the sale process. [43] In the Lionbridge action, which was filed on April 11, 2019, the Company is seeking "in excess of $300, 000, 000" against H.I.G. and Lionbridge for allegedly acquiring the Company's trade secrets and confidential information during the sale process and using its trade secrets to compete unfairly with the Company.[44] On April 25, 2019, the Custodian and several Skadden attorneys received individual litigation hold notices relating to the Lionbridge action that seek, among other documents, "all records relating to the forced sale of TPG through an auction contest."[45]

         In his May 2019 report, the Custodian explained that given the nature of the Cypress and Lionbridge actions, he intended in the future to seek payment for expenses incurred in connection with these actions under the court's orders, instead of using the Custodian Escrow Account for that purpose:

Given the circumstances, as well as the nature of the Southern District Complaint and the Cypress Complaint, and the scope of the Litigation Hold Notices relating to the Southern District Action, I anticipate expenses to be higher in future months and, in future applications, I intend to seek prompt payment, per Court order, directly from TransPerfect Global, Inc. for these expenses, while reserving all rights vis-a-vis the Escrow Fund, which is a 'non-exclusive source of funds' to pay my fees and expenses and the fees and expenses of my agents and representatives post-Closing (funded 50/50 by Mr. Shawe and Ms. Elting).[46]

         In a footnote, the report cited three provisions from prior court orders as support for seeking payment from the Company for time and expenses incurred in connection with the Cypress and Lionbridge actions: the indemnification provisions in (i) paragraph 7 of the Final Order and (ii) paragraph 16 of the Sale Order, and the (iii) compensation provision in paragraph 14 of the Sale Order.[47]

         The May 2019 report sought approval to pay from the Custodian Escrow Account $60, 104.70 in unbilled fees and expenses, which included $25, 784.70 of Skadden's fees and expenses and $30, 900 of Ernst & Young's fees and expenses "related to their work on pre-Closing tax periods."[48] On May 17, 2019, having heard no objection from any party, the court entered an order approving this request (the "May 2019 Order").[49]

         G. The June and July 2019 Fee Petitions

         On June 17, 2019, the Custodian filed his monthly report and fee petition, seeking court approval concerning $58, 767.71 in fees and expenses he had incurred that "primarily related to the two new lawsuits referred to in the May 8th Report," i.e., the Cypress and Lionbridge actions.[50] Referencing the explanation provided in his May report, the Custodian requested that these expenses "be paid directly by Transperfect Global, Inc., rather than from the Escrow Fund."[51] On June 28, 2019, having heard no objection from any party, the court entered an order approving this request (the "June 2019 Order").[52]

         On July 10, 2019, the Custodian filed his monthly report and fee petition, seeking court approval concerning $90, 089.14 of unbilled fees and expenses, "of which $83, 653 was incurred by Ernst & Young LLP in connection with its preparation of certain preclosing tax information."[53] Referencing the positions taken in his May and June reports, the Custodian requested "that the amounts billed by Ernst & Young LLP should be paid from the Escrow Fund, and the balance of $6, 436.14 should be paid directly by TPG."[54] On July 17, 2019, having heard no objection from any party, the court entered an order approving this request (the "July 2019 Order").[55]

         H. The Nevada Action

         On August 13, 2019, TransPerfect sued the Custodian in Nevada state court, asserting claims for breach of fiduciary duty and declaratory relief.[56] In a section entitled "The Indemnification Provisions in the Delaware Orders," the Nevada complaint specifically discusses in detail the indemnification provisions in the 2015 Order, the Sale Order, and the Final Order, and in the Sale Agreement.[57] In three other sections, the Nevada complaint discusses in detail the court's May 2019, June 2019, and July 2019 Orders.[58] Attached as exhibits to the Nevada complaint are copies of the 2015 Order, the Sale Order, the Fee Orders, and this court's opinions approving the 2015 and Sale Orders.[59]

         The Nevada complaint seeks damages against Pincus concerning the $65, 203.85 that the Company was ordered to pay him under the Fee Orders.[60] It also seeks a declaration that the Company has no duty to indemnify the Custodian for this amount.[61]

         I. The August and September 2019 Fee Petitions

         On August 20, 2019, the Custodian filed his monthly report and fee petition, seeking court approval concerning $3, 941.97 of unbilled fees and expenses he and his counsel had incurred relating to work "on certain post-Closing tax and escrow matters," to "be paid from the Escrow Fund."[62] The Custodian also sought approval concerning $3, 504.25 of unbilled fees and expenses he and his counsel had incurred for work related to the Cypress arbitration, to "be paid by the Company (for the reasons explained in [his] prior reports to the Court)."[63] Two days after the filing of the Custodian's August 2019 petition, Shawe's counsel informed the court that the petition was opposed.[64]

         On September 25, 2019, the Custodian filed his monthly report and fee petition, seeking court approval concerning $39, 102.46 of unbilled fees and expenses he and his counsel had incurred relating to work on post-closing tax matters that "should be paid from the Escrow Fund."[65] The Custodian also sought approval of $15, 115.70 in unbilled fees and expenses he and his counsel had incurred for "work related to the Cypress arbitration and the letter demands" that "should be paid by the Company (for the reasons explained in [his] prior reports to the Court."[66]

         On October 1, 2019, Respondents requested in a letter to the court "with regard to the September 25 Fee Petition and going forward, that when Petitions are filed (or even before they are filed), TPG and Shawe have a reasonable opportunity to review the basis for any amounts that the Custodian seeks to charge to TPG rather than the escrow account, by being provided with the billing records and supporting documentation, and then a reasonable period to submit objections."[67]

         J. The Contempt Motion and Developments in the Nevada Action

         On August 26, 2019, the Custodian filed its motion for contempt. On September 18, 2019, after holding a scheduling conference on September 13, the court entered an order establishing a briefing schedule and ...


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