This case stems from the proposed reincorporations of Tripadvisor, Inc. and Liberty TripAdvisor Holdings, Inc. from Delaware to Nevada, which were first presented to the corporations’ respective stockholders for approval in 2023. Among the reasons the corporations gave for the proposed reincorporations to Nevada is that Nevada law may provide greater legal protection to officers and directors than Delaware law.
The reincorporations were approved by each corporation’s whole board via unanimous written consent and by a majority of each corporation’s voting power at their respective annual meetings in June 2023. However, the reincorporations would not have received the necessary stockholder approvals without the votes of the corporations’ controlling stockholder, Gregory Maffei, a director of Tripadvisor and the CEO, President and Chairman of Liberty TripAdvisor. According to the plaintiffs, only 5.4% of Tripadvisor’s minority stockholders and 30.4% of Liberty TripAdvisor’s minority stockholders voted for the reincorporations.
On April 21, 2023, plaintiffs filed a verified complaint, motion for expedition, and motion for preliminary injunction seeking to enjoin the reincorporations, and in June 2023, plaintiffs filed a verified amended complaint, arguing that the proposed reincorporations were self-interested transactions and that defendants breached their fiduciary duties by entering into them. Citing the defendants’ proxy materials, plaintiffs argued that the proposed reincorporations were self-interested transactions aimed to benefit the corporations’ directors, officers, and controlling stockholder (Maffei) to the clear detriment of minority public stockholders, and that for these reasons the reincorporations should be subject to Delaware’s most burdensome standard of review—“entire fairness.”
The defendants filed a motion to dismiss arguing that the business judgment rule should apply because plaintiffs failed to plead a self-interested transaction, citing Delaware case law for the proposition that “Delaware courts have found directors to be interested only when approving a transaction that extinguishes existing potential liability” and that “allegations about protection from potential future litigation are insufficient to plead a self-interested transaction.”
The Delaware Court of Chancery ultimately sided with the plaintiffs, refusing to dismiss the case. The court first determined that the entire fairness test applies to any transaction between a corporation and a controlling stockholder in which the controlling stockholder receives a non-ratable benefit and no “cleansing actions” are taken (such as approval by an independent board committee and/or a majority of the disinterested minority stockholders). The court also found that the members of the companies’ boards of directors were similarly conflicted when approving the reincorporations.
The lower court found that the primary purpose of the reincorporations was to reduce the corporations’ fiduciaries’ exposure to stockholder litigation and that this reduced risk of liability bestowed a non-ratable benefit to the corporations’ fiduciaries. The court rejected defendants’ attempt to differentiate between existing potential liability and future potential liability, noting that such a distinction “would make Delaware law piteously naive” and concluding that a materiality determination of the benefit, not a temporal distinction, was required (and that such reduced litigation risk was necessarily material).
The lower court also rejected defendants’ argument that it was not feasible to apply the entire fairness standard of review, reasoning that “[t]he true ‘test of fairness’ is whether the minority stockholder receives at least ‘the substantial equivalent in value of what he had before.’” The court held that plaintiffs had pled sufficient facts to make it reasonably conceivable that the reincorporations were not entirely fair and that, therefore, the claims should survive and that the defendants had the burden of demonstrating entire fairness. Under the fair price prong of the entire fairness test, the court found that plaintiffs had pled sufficient facts showing that stockholders would not “receive the substantial equivalent of what they had before.” Under the fair dealing prong of the entire fairness test, the court determined that the allegations supported an inference that the reincorporations were not procedurally fair (i.e., no procedural protections were implemented). The court rejected defendants’ argument that other benefits of the reincorporations made the transactions fair.
However, the Court of Chancery denied the plaintiffs’ request for injunctive relief, finding that money damages would be an adequate remedy.
In April 2024, the Delaware Supreme Court accepted an interlocutory appeal of the Court of Chancery’s decision and held oral arguments on October 30, 2024.
In filings and at oral argument, defendants argued that the Court of Chancery erred in subjecting the reincorporations to the entire fairness standard of review, and that the lower court should have instead applied the business judgment rule because there is no pending or contemplated lawsuit and defendants, therefore, are not receiving a material, non-ratable benefit. Defendants also argued that the procedural safeguards of Kahn v. M&F Worldwide Corp. “[do] not afford a solution even if a fiduciary-favorable change to the liability framework on a litigation-clear day constitutes a material, non-ratable benefit to directors.” The defendants also raised a number of policy arguments against subjecting reincorporations to entire fairness review, including comity concerns in calling for Delaware courts to quantify the harm, if any, a move from Delaware to Nevada would impose on unaffiliated stockholders, as well as the difficulty of any such analysis.
In a highly anticipated ruling, the Delaware Supreme Court reversed the Court of Chancery’s decision to apply the “entire fairness” standard to the proposed reincorporations.
After determining that a proposed going-private transaction involving the corporations did not moot the case, the court proceeded to the merits and decided that the Court of Chancery erred in finding that the reincorporations may provide non-ratable benefits sufficient to trigger entire fairness, and that the more deferential business judgment rule is the appropriate standard of review.
The court reiterated that, in the director context, “in order to rebut the business judgment rule presumption, an interest must be subjectively material to the director. In other words, the alleged benefit must be significant enough as to make it improbable that the director could perform his fiduciary duties to the shareholders.”
The court also noted that “[e]ntire fairness is not triggered solely because a company has a controlling stockholder,” instead “[e]ntire fairness is the standard of review in transactions between a controlled corporation and a controlling stockholder when the controlling stockholder receives a non-ratable benefit.” The court indicated that where a controlling stockholder stands on both sides of a transaction and receives a non-ratable benefit, the controlling stockholder is a fiduciary and must be fair to the corporation and its minority stockholders.
The court then focused on defining “non-ratable benefit” and determined that, in the controlling stockholder context, a non-ratable benefit “exists when the controller receives a unique benefit by extracting something uniquely valuable to the controller, even if the controller nominally receives the same consideration as all other stockholders.” Further, the court noted that “the mere fact that a controller may be better positioned after a transaction does not necessarily mean that the controller received a non-ratable benefit.”
The court agreed with the lower court that a non-ratable benefit must be material to trigger entire fairness. However, the court disagreed with the Court of Chancery’s rejection of a temporal distinction between existing and future potential liability as “arbitrary” and “hard to follow,” and emphasized that “temporality is a key factor because it weighs heavily in determining materiality in this context.”
The court also rejected the lower court’s conclusion that applying temporal distinctions regarding speculative liability is “arbitrary” and “hard to follow,” citing numerous examples where Delaware courts have declined to find that directors lacked independence or disinterestedness because the corporation took some action that would reduce a director’s future liability exposures (e.g., adoption of exculpation provisions, advancement of legal fee provisions, indemnification benefits, and Directors and Officers policies) as well as other examples from ripeness and standing jurisprudence.
Focusing on this temporal distinction, the court concluded that “the hypothetical and contingent impact of Nevada law on unspecified corporate actions that may or may not occur in the future is too speculative to constitute a material, non-ratable benefit triggering entire fairness review [and that] given that [p]laintiffs have not alleged any past conduct that would lead to litigation, this case aligns with [Delaware] case law that applies the business judgment rule.”
Importantly, the court notes in a footnote to the opinion that if directors or controllers were to take articulable, material steps in furtherance of breaching their fiduciary duties prior to reincorporating, even if such transactions or conduct would not be consummated or take place until after the change in corporate domicile, the standard of review could be different.
Finally, the court asserts that while comity concerns are not independent grounds for reversal in this case, the court’s holding furthers the goals of comity by its declining to engage in cost-benefit analysis of the Delaware and Nevada’s corporate governance regimes. While taking the opportunity to comment on the numerous benefits of Delaware law (including the court system, the judges, the state of the development of the case law, the familiarity of market participants with the regime, the process by which corporate statutory amendments are proposed and adopted by the state legislature, the effectiveness of the state’s Secretary of State office in facilitating corporate filings, and the existence of a corporate Bar available, willing and able to handle disputes), the court concludes that any attempt to value competing corporate governance structures would be an “unacceptably speculative cost-benefit exercise” that “risks intruding on the value judgments of state legislatures and directors of corporations.”
The Delaware Supreme Court’s decision provides important guidance on when a reincorporation will trigger the entire fairness standard of review, and clarifies that a theoretical future advantage under another state’s corporate laws (such as a potential reduced risk of liability) will not be sufficient to trigger entire fairness in the absence of a material, uniquely valuable benefit to the controller or directors.
Companies considering a potential reincorporation should therefore consider both the nature of any potential benefit of a change to a new state’s corporate regime (i.e., whether it is concrete and material) and its temporal relationship to the reincorporation (i.e., whether it affects existing or purely prospective liabilities).
The court’s decision that the business judgment rule will apply to most reincorporation, including for companies with controlling stockholders, could make it easier for some companies to move out of Delaware, but boards will still need to analyze whether a controlling stockholder is receiving a material non-ratable benefit, along with the pros and cons of such a move.
The balance of considerations for a reincorporation will vary significantly by each company’s stage as well as its particular circumstances. Delaware’s governor recently commented on the need to address perceived issues in its corporate law (as well as his intention to draw recently departed corporations back to the state), and a number of efforts to do so are reported to be underway. Further, some of the most criticized Court of Chancery decisions remain subject to appeal to the Delaware Supreme Court. The outcome of those efforts and decisions on appeal may change the overall calculus in considering a reincorporation.