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TransPerfect Case Shows Why Delaware No Longer Friendliest In Chamber Of Commerce Survey

Summary

Delaware is no longer friendliest state for business litigation

After 15 years in survey's top spot, it's tumbled to 11th place

Judge's action in TransPerfect lawsuit epitomize why state fell

After 15 years at the top spot, the state of Delaware tumbled from its perch for the first time in the history of the U.S. Chamber of Commerce's survey of friendliest states for business litigation according to corporate attorneys and executives, plummeting to 11th place.

And it may be because of cases like the battle between the co-chief executives of TransPerfect Translations, a New York translations company, in which the Chief Chancellor of the Delaware Chancery Court has been alleged to be blatantly biased toward one side of the case.

Since 2002, the U.S. Chamber of Commerce's Institute for Legal Reform (ILR) has been polling lawyers and executives about the "lawsuit climate" in U.S. states, and Delaware has taken the first place every year until now.

The "2017 Lawsuit Climate Survey: Ranking the States" released Monday and conducted by Harris Poll, surveyed more than 1,300 general counsel, senior litigators or attorneys, and other senior executives at companies with at least $100 million in annual revenue. States were ranked based on questions about impartiality and competence of judges, quality of appellate review and treatment of class action lawsuits, among other things.

South Dakota claimed the top spot in the survey, with the best litigation environment this year. Vermont and Idaho, came in second and third, respectively. Delaware's rankings took big hits in all areas except judges’ competence.

Despite Delaware's tiny size, more corporations, including a majority of Fortune 500 companies, are registered in the state than anywhere else in the U.S. A big reason is that its courts make it difficult for shareholders to sue corporate boards.

Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, told website Law360 that there has been a “sense of discontent” from respondents about where Delaware’s courts and Legislature have been headed on business law. “Delaware has been resting on their laurels and reputation as a business-friendly state,” she said. “Its reputation is clearly changing.”

Delaware took big hits on its rankings of trial judges' impartiality, which fell from a rank of 3 to 15, juries fairness, which fell from a rank of 3 to 18, proportional discovery, which fell from a rank of 3 to 23, and treatment of class actions and mass consolidations, which fell from a rank of 3 to 26.

One particular case of flagrant judge bias would be the case of TransPerfect Translations, a New York based company in which Co-CEO and co-founder Elizabeth Elting, who has no apparent role in the day-to-day functions of the company, sued the other co-founder/CEO, Philip Shawe. Claiming the two couldn't work together because of dysfunction in their personal relationship, she demanded that the company be sold at auction.

TransPerfect is the largest privately-held company in the $35 billion translation services industry.  With 4,000 employees in 100 cities on four continents, its clientele includes most Fortune 500 companies.

Elting and Shawe founded the company 25 years ago as graduated students at New York University. At the time, they were engaged to be married. Elting later broke off the engagement and married another man, and now she wants to leave the company. Shawe has offered her $300 million for her half of the company, but she has refused to negotiate and appears to believe that the Delaware Chancery Court will give her a better exit strategy by saying ruling it be sold to the highest bidder.

In a move criticized by many, Delaware Chief Chancellor Andre Bouchard sided with Elting and appointed a custodian to oversee a sale process that would for the first time in U.S. history, cause a private, profitable company that has not been accused of any wrongdoing to be placed on the auction block. The court has put a middleman in charge of the company for the purpose of having it dissolved and force-sold against the wishes of two out of three shareholders. Elting owns half, while Shawe and his mother own the other 50%.

Not only is Shawe, who has spent his life building a successful company, upset at the development, but also are the many TransPerfect employees whose jobs are at risk. More to point about a friendly environment, close to $100 million dollars has been spent on the lawsuit, due to the Chief Chancellor's actions, which is almost 20 percent of company's $550 million in revenue last year. 

It's obvious that decisions like this are behind Delaware's precipitous decline as the friendliest place for business litigation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.