In Shawe v. Elting, No. 423, 2016 (Del. Feb. 13, 2017), the Delaware Supreme Court affirmed the Court of Chancery’s unremarkable decision, pursuant to 8 Del. C. § 226, authorizing a custodian to sell a company when faced with deadlock. It is unremarkable in the sense that the Court of Chancery has exercised this authority in other cases with much less fanfare. Id. at 19, n.36.
The majority opinion, authored by Justice Seitz, affirmed the Court of Chancery. First, it rejected the Shawes’ attempts to raise issues for the first time on appeal as violative of Delaware Supreme Court Rule 8 and, therefore, waived. Those arguments were that (1) the Court of Chancery exceeded its statutory authority when it ordered the appointed custodian to sell the solvent Transperfect; (2) alternatively, the trial court should have considered less intrusive measures to deal with the deadlock; and (3) the sale of the Transperfect may result in an unconstitutional taking in violation of Takings and Due Process Clauses of the United States and Delaware Constitutions.
The Court of Chancery did not exceed its authority when it ordered the sale of the company, the Court found, because 8 Del. C. § 226 provides for the appointment of a custodian when the parties are unable to elect new directors to replace those directors whose terms have expired (to which these parties stipulated); the record below was replete with facts that the directors were deadlocked (to which the parties stipulated) and the business was suffering or threatened with irreparable injury; and the trial court attempted other possible intermediate measures (e.g., attempts to mediate resolution) before ordering the sale of the Company.
The Court further held that its long-standing rules prevented consideration of the issues raised by the Shawes for the first time on appeal. But, in an interesting move, the Court responded to the dissent’s contention that the statutory argument should be addressed for the first time on appeal. The majority disagreed with the dissent’s contention that the Court should engage in statutory interpretation when faced with a clear and unambiguous statute, requiring the plain meaning of the statute to control obviating the need for “judicial interpretation.” Id. at 21-28. The difference between these two approaches has far-reaching implications: engaging in statutory interpretation in the face of a clear and unambiguous statute would place the Court in the position of legislating from the bench, whereas allowing the plain meaning of the statute to control honors the separation between the legislative and judicial branches of government. As suggested by the majority, the Court should engage in statutory interpretation in situations where a statute is unclear and ambiguous.
The Court refused the invitation to address the constitutional issues raised for the first time on appeal. The Court reasoned that the Court of Chancery was not given an opportunity to develop the record and issue a ruling regarding these issues. Therefore, it was not plain error for the Court of Chancery to fail to rule on the takings issue. Id. at 28-31.
In a separate opinion issued the same day, the Supreme Court affirmed the Court of Chancery’s sanction award of $7.1M+ against Philip Shawe. It found that, on the record before it, the Court of Chancery committed no errors and acted within its discretion by awarding the sanction.