Charlie Taylor

Response to Sherwin Pomerantz on Milim/TransPerfect and the Delaware business climate

As someone who has followed the issue closely for nearly two years now, I take issue with Sherwin Pomerantz’ assessment of the TransPerfect case and how it may affect the company’s Tel Aviv employees, inasmuch as he tells an unexacting tale of the situation.  His reply appears to come from quarters in Delaware where there is fear that their status as the “incorporation” capitol is being compromised, and perhaps for good reason.

It is true that the Delaware Chancery has been feted for so long that people might shudder to even think that there is a problem, but therein lies the rub.  There is a problem and it is creeping up slowly and may indeed cause an issue.  Israel startups looking to incorporate now may indeed, and maybe even should, go to Nevada, Wyoming or even the small state of Rhode Island.

Professor Alan Dershowitz, the attorney taking the case to the United States Supreme Court on behalf of one of the litigants, has commented, “I would never advise a client to incorporate in Delaware.”

Pomerantz suggest that the case is not controversial, but there have been no fewer than 57 articles on this TransPerfect case since it first appeared on the records.  That is a lot of print for a non-controversial case.  It is such that former New York mayor and Federal prosecutor Rudolph Giuliani even commented on the case saying, “It appears to be a very intrusive ruling in terms of the free market… I hate to see the government, including courts, sharing in the control of a private business.”

Indeed, the state’s largest newspaper, the Delaware News Journal, felt strongly enough that it asked legislators to take up the issue, and the bill now has nine sponsors in the legislature. It must be serious enough.

To the point of what Pomerantz describes as “[T]wo equal owners of a company systematically try[ing] to undermine each other’s management of the company, resulting in declining employee morale and losing employees and customers alike…” he is wrong.  There are no two equal owners here, but three unequal owners, at 50%, 49% and 1%, and the disagreements have not resulted in a loss of key employees, nor has business suffered.  That is the point – the courts overreached here, as the business has only done increasingly better over these past few years.  That the court chose to ignore the facts and force a sale is telling.

When he writes that the, “Delaware’s statutes enable the Court of Chancery to step in and grant a divorce,” he is also not telling the whole story.  The Chancery’s only mandate is to break deadlock and protect a company from falling into dissolution.  Here, also, the matter is glossed over, as the 1% owner has announced her desire to cast her voting rights with the 50% owner to break all deadlock now and going forward – making this even more of an overreach.  The response from the opposition to that 51% offer was a resounding “No!”, essentially saying that they want to see the company sold, and not deadlock broken.

The most difficult fact that Pomerantz writes is the matter of, “If and when that divorce happens, either side will be free to buy out the other; what matters is who’s willing to make the biggest investment to keep the company going.”  I say that because one side has consistently been vying to buy the other, 23 offers already, and there has been no effort from the other side to negotiate, set a price or make an offer of their own.  That only perpetrates the fear that the Delaware courts are not really looking out for the shareholders, but the whim of just one of them.  What further complicates matters, is the widely-known issue that the Delaware judge shares personal relationships with those who are financially benefiting from his decision – the custodian he installed is a former law partner and a friend of the judge.  Between him, the consultants, and the accountants he appointed, they have collectively billed the company more than $15M last year – just to set the company up for sale, not to enhance the business.

Finally, as it pertains to Israel and the employees, Pomerantz is right in that if the staff is doing well, and in the event of a sale, why let them go.  Let me leave you with this fact: In the history of M&A, there has not been an instance where the acquiring entity has not sought to bridge teams, cut expenses and streamline.  That could be good for TransPerfect’s firm, Milim, in Tel Aviv, or it could be bad.  We just do not know who is buying it and how it might be restructured once that happens.  If anyone working under similar circumstances were asked, many would admit to being nervous for their jobs.

The article was meant to assure tech firms and startups in the Startup Nation that Delaware is still strong for them, but Israelis are nothing if not demanding, and they would never want to yield control to someone’s whim.  Just because Delaware’s Chancery has enjoyed a sterling reputation, does not mean that there are no injustices to be found – it just, means few people have been willing to pay attention.  This is something businesses are paying attention to now.

About the Author
Formerly from Israel, now in Delaware, I have owned, run and worked with food, technology and politics, beginning with the MFA and several Knesset members.
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