Finance

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

(Corrected )

Some divorces are so rancorous that it takes a judge to sort out who gets what. So why should a nasty corporate breakup be any different?

That's the issue being raised in a three-and-a-half-year running case in Delaware that pits two former lovers who started a company together but now seemingly can't stand to be in the same room without a team of lawyers. At the heart of the matter is what role a court, and more broadly the government, should have when a business is deemed dysfunctional even if it's thriving financially. In other words, should owners be free to treat what they built however they want without government interference?  

The case involves TransPerfect, a New York company with more than $550 million in sales that translates documents for law firms, corporations and other clients in situations where lower-cost automated services can't be trusted. Phil Shawe and his girlfriend at the time, Elizabeth Elting, founded the company in his business school dorm room. The two divided ownership of the company with no provision for how to split it up in a dispute. That came back to haunt them. In 2014, Elting sued Shawe in Delaware, where the company is incorporated, contending that after years of disagreement and fighting -- including accusations of outlandish behavior on both sides -- they could no longer work together and that the court should appoint a custodian to dissolve the company. Shawe countersued that Elting had breached her fiduciary duty to the company. Last year, the court decided that the dysfunction was indeed harming the company and appointed a custodian who decided to put the company up for auction. Shawe is fighting the sale. But the Delaware Supreme Court upheld the ruling in February. In late September, a federal court dismissed a suit challenging the auction. Final bids are due on Wednesday.

Perfect Record
TransPerfect's co-founder says the court-ordered sale of the company is unfair given its success
Source: TransPerfect

Lawyer Alan Dershowitz, no stranger to big cases, is representing Shawe's mother, Shirley, and by extension Shawe, who together own 50 percent of the company. (Shawe and Elting originally gave 1 percent ownership to Shawe's mother so TransPerfect could qualify as a woman-owned business.) Dershowitz contends that by seizing a profitable private company and selling it to the highest bidder, the Delaware court is violating the constitution. He's hoping to take the case to the U.S. Supreme Court. "The Delaware court has proven to be very intrusive," Dershowitz said. "This case is wreaking havoc with the law of taking and in general corporate law."

The case has drawn attention not only because of how the unusual acrimony between former lovers has crossed into the boardroom but also because of its peculiarity. Courts manage the sales of companies all the time, but in nearly all those cases they are bankrupt. TransPerfect, on the other hand, has consistently rising sales and is solidly profitable.

Another reason is property rights, long a hot button issue in American politics. Economists generally believe strong property rights are essential to a working economy. Government seizures can remove the incentive of others to build a house or a company if they think it could be taken away. That's why eminent domain laws require a strong public interest and inspire fights anyway. But a lack of incentive or compensation is not the problem here. TransPerfect is worth more than $600 million. So Shawe stands to collect hundreds of millions of dollars in the auction, more than incentive enough for other aspiring entrepreneurs.

Still, Dershowitz argues Shawe is being forced to give up his right to dispose of his asset in the way he wants. What's more, the method the court has drawn up, Dershowitz says, defies the public interest. He says the auction will be won by a private equity "flipper" that will destroy American jobs either by shipping them overseas or slashing and burning the company to maximize short-term profits. But while private equity firms have had their share of blowups, Dershowitz seems to be painting PE firms with too broad a negative brush. On top of that, blocking the sale seems to infringe the property rights of Elting, who wants the sale to go through. 

And while Shawe maintains the dysfunction at the company is minimal, there is ample evidence to the contrary. Disagreements between Shawe and Elting have left key positions open and scuttled acquisitions and expansions, according to court records. Shawe disputes this. He says TransPerfect was operating fine before Elting began to force the sales process in the courts. "It's a dangerous precedent that will destroy 4,000 jobs," says Shawe, citing TransPerfect's workforce. Shawe contends that the sales process, which he says has been filled with unnecessary fees and leaks of private corporate information to competitors, has already damaged the company. "I fight this as an American," he says. Elting could not be reached for comment.

Delaware Supreme Court Justice Collins J. Seitz Jr., in his ruling upholding the sale, said there wasn't really a reason to be worried about the constitution or Delaware corporate law, which allows courts to sell off deadlocked businesses, even profitable ones. It's part of the trade-off of incorporating in Delaware, which has long attracted businesses because of its many legal advantages. What's more, Seitz says rules to ensure profitable companies don't spiral out of control are actually pro-business.

The idea is that a little government intervention can be a good thing. In a broader example, soon after the financial crisis, many homeowners owed more than their houses were worth. Some argued for so-called cramdowns, in which judges force banks to write down the value of a mortgage. Banks opposed cramdowns, contending they violated their property rights to both the debt that was owed them and the house that would soon been theirs in foreclosure. Judges and lawmakers, including the Obama administration, generally sided with the banks. But new research suggests the economy would have been better off if they hadn't. Amir Sufi and Atif Mian argued in their 2014 book "House of Debt," which re-examined the causes of the financial crisis, that cramdowns might have boosted consumer spending by more than $125 billion in 2009 alone and more later. It would have also lowered foreclosures that consumed housing markets, banks and the finances of many families for years after the financial crisis. Conservative economists Glen Hubbard of Columbia University and Martin Feldstein of Harvard University also ended up backing some sort of cramdown plan.

That's a bit of a detour to get back to TransPerfect, but it's an important one. In the end, the TransPerfect case boils down to a clash between the free market and an efficient one. Some will undoubtedly side with the idea that owners should be allowed to destroy their companies if they see fit, just as they should be allowed to build them, unaided or abetted by the courts and the hands of government. But it's not clear where that leaves TransPerfect's 4,000 workers, who have helped achieve the company's success and certainly have a stake in its future.

Freedom is good. So is responsibility. If TransPerfect is sold, it won't open the floodgates to the government seizure of companies. If bad blood has paralyzed the owners, a dispassionate party should be able to step in for the common good without threatening the future of capitalism. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects the spelling of the surname of a TransPerfect co-founder, Elizabeth Elting, throughout, and the spelling of the name of Delaware Supreme Court Justice Collins J. Seitz Jr. in the ninth paragraph.)

To contact the author of this story:
Stephen Gandel in New York at sgandel2@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net