Amid global challenges – pandemics, wars, and authoritarian regimes, accompanied by plummeting economies, bankrupt businesses, and fractured families – one certainty remains: lawyers profit. The legal system, once a societal safeguard for businesses, is now seen with growing cynicism. Critics argue that law has transformed into a self-serving enterprise, much like advocacy groups that perpetuate issues to sustain their existence. Big law firms, prioritizing profit over ethics, have found a comfortable haven in jurisdictions like Delaware, historically tailored to corporate interests.
Delaware’s Chancery Court, known for its autonomy and lack of checks and balances, operates without the restraints of precedent or constitutional law. Decisions are made by a select few judges, raising concerns about potential bias. Even Thomas Jefferson criticized such courts as institutions of inequality. This skewed system doesn’t just harm the marginalized; even the affluent face its consequences. While the wealthy can choose to challenge it, struggling companies often find themselves at the court’s mercy.
Equity courts, with origins in English law, initially offered flexibility alongside legal rigidity. Delaware’s decision to establish its Chancery Court as a separate entity was unconventional, yet it now serves as a cornerstone for corporate law, shaping nationwide precedents. However, this power is wielded by judges and an absence of rule of law to keep it in check, leading to subjective rulings.
Delaware’s allure as a corporate haven is undeniable, attracting giants like Google and Coca-Cola with its favorable tax laws and secretive regulations. Behind nondescript doors lie the echelons of corporate power, exploiting Delaware’s unique legal landscape for their benefit.
Recent legal battles, such as that of Elon Musk and Tesla’s pay package agreement, have cast a glaring spotlight on the Chancery Court’s flaws. Without a wheel spin, the head chancellor chose the case for herself and single handedly voided Musk’s compensation agreement that the entirety of shareholders voted on and approved, because a very small minority took issue. Then, in an embarrassing spectacle for the Chancellor, the Tesla shareholders once again voted to approve it. That Chancellor McCormick is still considering voiding the Tesla package again might be telling as to how deep the personal animus rules the court rather than anything equitable.
The questions remain as to what Chancellor Kathaleen Saint Jude McCormick was thinking. There is a opinion that it was done to bolster former chancellor Leo Strine, now at Wachtell, Lipton, Rosen & Katz, with whom Musk is litigating a $90 million “success fee” from Twitter to Strine’s firm.
It took the renown of Musk, one of the wealthiest men on earth, to finally shed light on this artful court Yet, the way was paved by the longest running case in the Chancery’s history; the case of TransPerfect.
Founding partners Philip Shawe and Elizabeth Elting found themselves at odds, resulting in a contentious court battle overseen by Chancellor Andre Bouchard. Elting, wanting to leave the company, would not accept Shawe’s offer that was based on the actual valuation of the company. She was seeking something more. Elting first went to a New York State Supreme Court judge who told the two to work it out themselves – the math does not lie. Not accepting that answer, it ended up in the Delaware Chancery Court where a string on bizarre events unfurled. The complainant was not only looking for a control premium, but to see Shawe lose the company.
To further drive the point of the Chancery Court’s failure here, the numbers must studied closely. This whole case was about money; money for the lawyers and consultants anointed by the Chancery Court to essentially act as racketeers.
In 2014, when Elting sought to exit, TransPerfect was valued at about $400 million dollars. By the time the case made it to the Chancery Court, the company was worth nearly $600 million. Shawe made an offer to Elting for $300 million, in writing and in a filed letter to then Chancellor Andre Bouchard. Still, Elting declined and Chancellor Bouchard allowed the farce to continue. Shawe later moved to $325 million, and then made a very public challenge to Elting, suggesting that she choose the price and Shawe will decide whether to buy or sell – considering at the time she was creating the illusion that she wanted to bid on the company for herself.
Elting’s lawyers proceeded to fashion a narrative that the company’s shareholders were hopelessly deadlocked and the firm was at risk of financial default and failure. Notwithstanding, the firm to that point was only rising in value, generating increased sales monthly, the Chancellor ruled that the company was hopelessly deadlocked and must be forced into a public auction. Part of the legal effort was to prohibit Shawe himself from bidding on the company he founded.
In April of 2016, former New York Mayor and US Attorney for the Southern District of New York, Rudolph Giuliani, commented on this case that had been making sensational tabloid headlines. He asserted, “The company is not at risk, its recent numbers show otherwise, and it is not in disarray, as its management teams have signed affidavits stating as much. The chancellor is either not paying attention to the facts that are public or he is taking one side over another. The Chancellor appears to want to not merely force the sale of the company, but to award the control premium to one party alone. That is not equitable, and this is an equity court.”
Despite the company’s ongoing success, the court’s intervention forced a sale, raising concerns about conflicts of interest and exorbitant legal fees.
Skadden, Arps, Slate, Meagher & Flom, a major law firm known for its controversial billing practices and political ties, was assigned to the case. Skadden partner and Chancellor Bouchard’s friend, Robert Pincus, was appointed as the court custodian. Over nearly four years of custodianship, Pincus and Skadden, along with their auditors, accountants, and consultants, invoiced TransPerfect approximately $50 million, primarily to assess value and oversee its sale.
During this period, numerous legal motions and hearings took place. Shawe challenged the oversight as excessive. The case alarmed employees who feared the company might be sold, potentially leaving them jobless and driving away clients, which would decrease the firm’s value—contrary to the Chancery and custodian’s responsibilities. About three dozen senior managers and salespeople resigned in protest to the new custodian’s management direction. TransPerfect and Shawe requested permission from the court to audit the invoices before payment. Chancellor Bouchard denied this request, requiring the company to pay without scrutiny. The Chancellor consistently ruled in favor of his appointed custodian, and the established process.
The complexity and volume of legal suits, motions, and personalities involved in the TransPerfect case are extensive and beyond the scope of a single article. However, in the end, Shawe emerged victorious in the auction, despite battling what appeared to be shill bidders aimed at inflating the price, possibly for corporate espionage purposes. Shawe ultimately bid $770 million, which included $385 million to Elting. This amount came after both parties had spent approximately $250 million on lawyers and consultants.
Analyzing the financial details, Shawe’s initial $300 million offer was within 5% of the final auction price paid two years later. In 2015, TransPerfect’s billed revenue was $505 million, rising to $615 million by 2017. Adjusting for this growth, Shawe’s $300 million offer would have amounted to over $365 million for Elting, excluding additional values like flip protection and break fees. In comparison, Elting received $385 million after the auction. However, when factoring in custodial and auction costs, along with legal fees, Elting lost significant shareholder value due to Pincus’ self-serving decisions.
Pincus even pressured Shawe to increase his bid with a misleading warning that he was not the highest bidder, when in fact he was. As a result, despite substantial payments for court oversight intended to maximize value, the expected higher valuation fell short, possibly leading the custodian to resort to deceptive practices.
In plain terms, the Chancery’s unique decision to sell a profitable, fully operational company that was not in financial distress brought no additional value to the complaining shareholder or the company. Instead, it cost the company and its owners over $300 million. That is $300 million paid to loyalists of the Delaware courts and Chancery devotees. The term “The Delaware Way”, became code for exploitation.
It is a compelling story with just this. However, the company and Shawe are still battling Delaware. Shawe reincorporated in Nevada and was threatened with sanctions and fines for taking his legal challenge out of jurisdiction. Skadden continued to invoice Shawe for years beyond the 2018 sale, and Shawe was fined and threatened whenever he would ask to be allowed to see the breakdown of those invoices. Skadden argued, and the court agreed, that it would compromise the integrity of the sales process should Shawe be able to see what he was paying for.
“Five years after Shawe bought it, the Chancery still claimed it would compromise the sale process”
In the ongoing saga of TransPerfect, Delaware state courts, along with the local Federal Court, have consistently upheld the Chancery Court’s rulings. Media coverage of these proceedings often reduces the narrative to a simplistic story of a wealthy individual disgruntled by the financial expenditure required to secure greater profits, overlooking the intricate legal battles that underpin the case.
As questions of accountability and justice persist, the challenge remains: who will step forward to ensure these institutions are held to the highest standards, preserving fairness and integrity within our legal system? Lawyers continue to make money, so they are likely not the solution, short of an altruistic effort. This pressing issue highlights the unsettling reality of corporate justice in America, where the quest for accountability remains an open, and deeply concerning, question.