Shearman & Sterling LLP | M&A and Corporate Governance Litigation Blog | Delaware Court of Chancery Rejects the Imposition of Non-Competition Restrictions on Selling Shareholders in Context of a Forced Sale<br >  
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  • Delaware Court of Chancery Rejects the Imposition of Non-Competition Restrictions on Selling Shareholders in Context of a Forced Sale
     

    06/27/2016
    On June 21, 2016, Chancellor Andre G. Bouchard of the Delaware Court of Chancery accepted a custodian’s plan for a judicially ordered sale of a company over the objections of one of the three shareholders of the company, but rejected a proposal to impose expanded non-compete obligations on selling shareholders.  See In re TransPerfect Global, Inc, et al., C.A. Nos. 9700, 10449-CB, Letter Op. (Del. Ch. June 21, 2016).  Specifically, the Court held that the plan “address[ed] the dual goals of maintaining the Company as a going concern and maximizing stockholder value” but that “it would not be appropriate to impose non-competition or non-solicitation restrictions on a selling stockholder as a condition of the sale of the Company absent evidence of wrongdoing.” 
     
    On August 13, 2015, the Court appointed Robert B. Pincus as custodian to oversee a judicially ordered sale of TransPerfect Global, Inc. (“TPG”).  The sale had been ordered pursuant to Title 8, Section 226 of the Delaware Code because of the dysfunctional relationship between the major stockholders and their stipulated inability to elect successor directors.  The Court directed the custodian to present “a proposed plan to sell the Company with a view toward maintaining the business as a going concern and maximizing value for the stockholders.”  In re Shaw & Elting LLC, 2015 WL 4874733, at *32 (Del. Ch. Aug 13, 2015).  On February 8, 2016, the custodian submitted a proposed plan of sale that called for a modified auction led by existing stockholders that would include bids from third-party investors.  The proposed plan also contemplated the mandatory imposition of expanded non-compete and non-solicitation provisions for each selling stockholder. 
     
    Philip R. Shawe, who owned 49% of TPG’s shares, objected to the custodian’s recommendations for two reasons.  First, Shawe contended that the plan of sale should permit only Shawe and Elizabeth Elting, who owns 50% of TPG’s shares, to submit bids in the first instance.  The Court disagreed, finding that excluding third-party bidders in the initial round would reduce competition for the sale of TPG, and conflict with the goal of maximizing stockholder value.
     
    Separately, Shawe objected to the proposal to impose expanded non-compete provisions on the selling stockholders.  The Court sustained this objection, holding that it would be inappropriate to impose non-competition restrictions on a selling stockholder without evidence of wrongdoing (e.g., such as improper threats designed to chill bidding).  While Chancellor Bouchard acknowledged that the non-compete provision likely would make the company more valuable to a buyer, he nonetheless concluded that “the purpose of the sale is to maximize the value of [TPG] as it is and not to derive a hypothetically higher value based on contractual protections.” (emphasis in original). 
    CATEGORY: Injunctions