A business deadlock can cost owners control of a company that is making money. In 2015 a Delaware judge looked at TransPerfect, a translation company with more than $470 million in revenue, and appointed a custodian to sell it. The company wasn’t failing. Its two founders couldn’t agree on major decisions, and they had never signed the agreement that would have told them what to do when that happened.
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The 10-second version
- A Delaware court ordered a custodian to sell TransPerfect, a highly profitable company, because its two owners were deadlocked.
- They never signed a buy-sell agreement, and the tie-breaking third board seat sat empty from the start.
- This week: find your agreement and check what it says happens when the owners can’t agree.
How a business deadlock built up at TransPerfect
In 1992, Elizabeth Elting and Philip Shawe started a translation business in a dorm room while in business school at NYU. By 2014 it had 92 offices in 86 cities, more than 3,500 full-time employees, over $470 million in revenue, and $79.8 million in net income. It had grown profitably every year for two decades.
It was also split almost down the middle. Elting owned 50%. Shawe owned 49%. The last 1% belonged to Shawe’s mother, who the court said was “firmly aligned with him.” The two founders were co-CEOs and the only two directors. The bylaws called for three directors, but the third seat stayed vacant from the day the company was incorporated.
That empty seat is the whole story. A board of two with owners of 50 and 49 has no way to break a tie, which is exactly the structural problem a buy-sell agreement is supposed to solve before anyone needs it. They had tried several times to write down how they would run the company and deal with each other as owners. They never finished. In the court’s words, they “never entered into any written agreements governing the operations of the Company or their relationship as stockholders, such as a buy/sell agreement.”
When the relationship broke down, there was no rulebook to fall back on. The court found that Shawe had intercepted Elting’s mail, monitored her calls, read her email (including thousands of privileged messages with her lawyers), and entered her locked office. The owners deadlocked on major decisions and stipulated that they couldn’t elect directors.
What the court did about the deadlock
In August 2015, Chancellor Andre Bouchard found “complete dysfunction” and deadlocks that were “threatening the business with irreparable injury, notwithstanding its profitability.” He appointed a custodian to sell the company as a going concern. He called the relief “unusual” but necessary.
Deadlocks that were “threatening the business with irreparable injury, notwithstanding its profitability.”
In 2017 the Delaware Supreme Court affirmed 4 to 1. The dissent called a forced sale of a financially successful company “one of the most extreme remedies possible.”
The sale closed out the fight. In November 2017, the custodian agreed to sell all of Elting’s shares to a company owned by Shawe for $385 million, valuing the business at $770 million. The court approved the deal in February 2018, and the Delaware Supreme Court affirmed in May 2018.
This was Delaware law. Illinois has its own rules (see below).
What the business deadlock cost
- Four years in court, from 2014 to 2018.
- A judge decided who would own the company, through a court-appointed custodian.
- For her 50%: $385 million, or about $287.2 million after tax, at a price above ten times the company’s adjusted EBITDA.
- The court record we read doesn’t total the legal fees, so we won’t guess.
Read that third line again. Elting was paid a real price, above ten times adjusted EBITDA, by a process she did not control, on a timetable she did not set. A business deadlock does not always end in a bad number. It ends in somebody else’s number.
Business deadlock under Illinois law
For an Illinois corporation that isn’t publicly traded, a shareholder can ask a court for help when the directors are deadlocked, the shareholders can’t break the deadlock, and either the company is being hurt or it “can no longer be conducted to the general advantage of the shareholders” (805 ILCS 5/12.56).
The statute gives the judge a menu:
- a custodian
- a provisional director
- mediation
- a buyout of the shareholder who brought the case, at fair value
- dissolution, only if nothing else is enough.
A judge can’t refuse to dissolve a company just because it’s profitable, and can consider what the owners reasonably expected when they started. That last point is why the paper trail matters so much in a shareholder dispute: expectations that were never written down have to be proved from conduct, years later, in front of someone who wasn’t there.
For an Illinois LLC, a member can ask a court to step in when it’s “not otherwise reasonably practicable” to run the business under the operating agreement, or when the people in control act oppressively. The court can order a buyout instead of dissolution (805 ILCS 180/35-1). Which is one more reason that what your LLC operating agreement actually says about disagreement is not boilerplate.
More tools for the judge. It’s still the judge’s decision, not yours.
Three things to check this week
- ☐ Find your operating or shareholder agreement. Does it say what happens when the owners can’t agree?
- ☐ Look at your buy-sell. Does it cover a deadlock, or only death and disability?
- ☐ Name your tie-breaker: a third director, a neutral, a mediator, or a set process. If the answer is “nobody,” that’s the gap.
Can’t see your company’s numbers anymore?
Start with our free checklist, Show Me the Books: The Illinois Co-Owner’s Records Checklist. It covers what Illinois law generally lets a co-owner see, the 12 documents to gather, and six things not to do while you figure it out.
General information, not legal advice.
A sample deadlock clause
General illustration
Deadlock. If the owners can’t agree on a major decision after two meetings at least ten days apart, either owner may send the matter to mediation. If it isn’t resolved within 30 days, either owner may name a price for the whole company. The other owner then has 60 days to either sell at that price or buy at that price.
It forces a decision, with a fairness check built in: the owner who names the price doesn’t know which side of it they’ll end up on. The catch is that it favors whoever has the cash, so some owners add a financing window or a different tie-breaker.
For your CPA or banker
The red flag in the file: two owners, no written deadlock rule, and decisions starting to stall, such as a refinance that never closes, a hire nobody approved, or a document nobody signs. One question for your next client meeting: “If you two disagree on something big, what does your agreement say happens?”
If the stalling has already turned into accusations about how the company has been run, that is a different conversation, and it usually starts with fiduciary duty rather than with the deadlock itself.
Business deadlock FAQ
What is a business deadlock?
A business deadlock happens when owners or directors with equal voting power can’t agree on a decision the company needs, and nothing in their agreement breaks the tie. At TransPerfect, the two founders were the only directors, the third board seat stayed vacant, and they stipulated that they couldn’t elect directors.
Can a court order a profitable company sold because of a deadlock?
In Delaware, it did. The Court of Chancery appointed a custodian to sell TransPerfect even though it called the company “highly profitable,” and the Delaware Supreme Court affirmed 4 to 1 in 2017. That was Delaware law. In Illinois, the statute for corporations that aren’t publicly traded lists dissolution as a remedy only if no other remedy is sufficient, and it says a court may not refuse to dissolve a company solely because it has accumulated earnings or current operating profits (805 ILCS 5/12.56).
What can an Illinois court do when a corporation’s directors are deadlocked?
If the directors are deadlocked, the shareholders can’t break the deadlock, and the company is being harmed or can no longer be run to the shareholders’ general advantage, the court can choose from a list of remedies. They include appointing a custodian or a provisional director, sending the dispute to mediation, ordering a buyout of the shareholder who brought the case at fair value, and, if nothing else is sufficient, dissolution (805 ILCS 5/12.56).
What is a deadlock clause?
A deadlock clause is a term in an operating or shareholder agreement that says what happens when the owners can’t agree. Common versions use mediation, a tie-breaking director, or a buy-sell process in which one owner names a price and the other chooses to buy or sell at that price. The sample in this article is a general illustration. The right mechanism depends on the company.
Sources
- In re Shawe & Elting LLC (Del. Ch. Aug. 13, 2015): courtlistener.com
- Shawe v. Elting, 157 A.3d 152 (Del. 2017): courtlistener.com
- In re TransPerfect Global, Inc. (Del. Ch. Feb. 15, 2018): courtlistener.com
- Elting v. Shawe, 185 A.3d 694 (Del. 2018): courtlistener.com
- 805 ILCS 5/12.56: ilga.gov
- 805 ILCS 180/35-1: ilga.gov
Howard East handles co-owner and business deadlock matters for Illinois, Missouri, Wisconsin and New York businesses. Thomas Howard is the responsible attorney.
Can’t see your company’s numbers anymore?
Start with our free checklist, Show Me the Books: The Illinois Co-Owner’s Records Checklist. It covers what Illinois law generally lets a co-owner see, the 12 documents to gather, and six things not to do while you figure it out.
General information, not legal advice.
This article is for informational purposes only and does not constitute legal advice.
Attorney advertising. Howard East is a trade name of Howard Law Group, LLC, an Illinois limited liability company. 456 Fulton St., Ste. 404, Peoria, IL 61602 · (833) 952-3111 · howardeast.com. Responsible attorney: Thomas Howard. General information, not legal advice. Reading or replying does not create an attorney-client relationship. Please don’t send confidential details by email.
