Delaware’s Appealing Interlocutory Review Regime

In a recent case, Palkon v. Maffei (TripAdvisor), the Delaware Supreme Court accepted an interlocutory appeal of the Court of Chancery’s denial of shareholders’ motion to dismiss. Such appeals are not common: Delaware Supreme Court Rule 42(b) expressly provides that “[i]nterlocutory appeals should be exceptional, not routine, because they disrupt the normal procession of litigation, cause delay, and can threaten to exhaust scarce party and judicial resources.” Even more unusually, the Delaware Supreme Court took this step over the Court of Chancery’s refusal to certify the appeal. This decision and others demonstrate the Delaware Supreme Court’s willingness to step in affirmatively, even mid-case, to ensure the coherence and predictability of corporate governance law — particularly when a matter of public concern is at stake.

Some background: TripAdvisor’s shareholders sued after the board of directors decided to relocate the corporation from Delaware to Nevada. The Court of Chancery denied defendant directors’ motion to dismiss, holding that the appropriate standard of review to apply to the relocation was “entire fairness,” not business judgment. The directors then sought interlocutory appeal to the Delaware Supreme Court. (Note that Delaware has a two-level system with no intermediate appellate courts). The issue of reincorporation outside Delaware had garnered significant media attention; the directors argued that thousands of other Delaware corporations would need certainty on the issue.

The Court of Chancery declined to certify the appeal after analyzing the factors laid out in Delaware Supreme Court Rule 42 governing interlocutory appeals. Under Rule 42, the trial court must consider 1) whether, as a threshold matter, the order decided “a substantial issue of material importance that merits appellate review before a final judgment,” and 2) if so, whether a set of eight factors counsels for appeal. The factors include, for example, whether the order involves a question of first impression, relates to the constitutionality of a state statute, or has been the subject of conflicting trial court decisions. In declining to certify the appeal, the Court of Chancery acknowledged that the issue of reincorporation had been subject to intense media scrutiny, but held Rule 42 did not allow it to consider that in certifying appeals. It noted, however, “[t]hat does not mean that the Delaware Supreme Court could not consider” the public importance of the issue. The Delaware Supreme Court took up the invitation, accepting the appeal because “[c]ertainty regarding the standard of review applicable to a decision to reincorporate in another jurisdiction would be beneficial.”

The case highlights two subtle features of Rule 42. First, the Rule allows the Delaware Supreme Court to accept or refuse the appeal regardless of the lower court’s determination. That is different than the federal rule under 28 U.S.C § 1292(b), which authorizes an appellate court to consider an interlocutory appeal only if the district court has first determined that it meets the criteria under the statute. Second, the Delaware Supreme Court is not bound by the factors that are enumerated under the rule — only the trial court is. While the issue(s) for appeal must be determined by both the trial court and the state supreme court to be substantial issues of material importance, beyond that threshold requirement, Rule 42 affords the Delaware Supreme Court substantial latitude to consider factors beyond the eight the trial court must analyze. It expressly provides that the Delaware Supreme Court “may consider all relevant factors,” including the decision of the trial court and the Rule 42(b) factors. See Del Sup. Ct. R. 42(d)(v) (emphasis added). While the Delaware Supreme Court in TripAdvisor did not specifically say it considered factors other than those set forth in Rule 42(b), its decision to accept the appeal in the light of the trial court’s specific comments about the amount of public attention to the case is notable.

In seeking certification of an interlocutory appeal pursuant to Rule 42, practitioners should be aware that the Delaware Supreme Court may be receptive to arguments from public importance beyond the four corners of the rule. Most appeals to the Delaware Supreme Court are generally appeals as of right, since, as noted, Delaware has a two-tier system with no intermediate appellate court. But interlocutory appeals are permissive, more akin to how the federal Supreme Court grants certiorari. Rule 42 affords the Delaware Supreme Court a measure of discretion to step in affirmatively, considering matters of public concern in corporate governance law.

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