“Clear Day” Corporate Travel Gets Green Light From Delaware Supreme Court
The Delaware Supreme Court’s February 4, 2024 decision in Maffei (TripAdvisor) v. Palkon has substantially reduced procedural friction for Delaware corporations considering reincorporation in other states. It reversed the Court of Chancery’s ruling that denied TripAdvisor’s motion to dismiss and comes nearly a year after TripAdvisor’s interlocutory appeal was accepted. As Sidley’s Jim Ducayet and Deepa Chari wrote last May, the appeal’s acceptance despite the Court of Chancery’s refusal to certify its ruling for interlocutory appeal demonstrated the Delaware Supreme Court’s “willingness to step in … to ensure the coherence and predictability of corporate governance.” This month’s decision affirms Delaware’s commitment to predictability and underscores that a clear day decision to reincorporate elsewhere should be protected by the business judgment rule.
Key Takeaways From the Case
Maffei v. Palkon started when minority stockholders brought a breach of fiduciary duty claim challenging the decision of TripAdvisor, a controlled Delaware corporation, to reincorporate under Nevada law. Plaintiffs argued that the move was motivated by the directors’, officers’, and controllers’ self-interested desire to “insulate [themselves] from almost any stockholder litigation, including claims that would be highly meritorious under Delaware law,” by moving to a state that had “been engaged in a project to craft a no-liability corporate safe haven.” Plaintiffs claimed that this insulation from “future liability” constituted a non-ratable benefit that triggered the “entire fairness” standard of review under Delaware law, i.e., corporate law’s highest standard of review that requires fiduciaries to prove their actions were entirely fair to stockholders. The trial court agreed.
The Delaware Supreme Court did not, reasoning that “entire fairness” was inappropriate because plaintiffs had failed to demonstrate that relocating to Nevada granted defendants a material, non-ratable benefit. Instead, it held that the much more lenient business judgment rule applied — a big win for TripAdvisor because, as the court observed, “the determination of the appropriate standard of judicial review frequently is determinative of the outcome of the litigation.”
The court’s rationale for ruling in favor of TripAdvisor boils down to timing and comity.
First, the decision emphasized that the “temporality” of litigation is key to determining the materiality of a relocation’s benefit and “whether a non-ratable benefit exists that triggers entire fairness review.” In other words, timing is key. The court suggested that higher scrutiny is not warranted if fiduciaries reincorporate in a different jurisdiction to reduce exposure to hypothetical future liability, but that the same decision may be subject to entire fairness if they are reincorporating across state lines to gain advantage in an existing or impending lawsuit. In the court’s words: “the hypothetical and contingent impact of” a new jurisdiction’s 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,” especially since “Delaware policy has long recognized the values of flexibility and private ordering.”
Second, the Delaware Supreme Court cautioned that “courts are ill-equipped to quantify the costs and benefits of one state’s corporate governance regime over another’s.” In doing so, it signaled that — while not outcome-determinative — courts should be sensitive to comity arguments and slow to proclaim the superiority of any one state’s laws. It warned that where directors have “considered a number of factors in their weighing of the costs and benefits of” reincorporation, courts should “be cautious about second-guessing” their decision.
Business and Practice Implications
Increased certainty. Consistent with our colleagues’ writing last year, Maffei underscores that entire fairness review is reserved for circumstances with extant conflicts, not hypothetical conflicts. The Delaware Supreme Court’s ruling thus serves the goals of coherence and predictability in Delaware law.
Increased corporate mobility. Maffei is also a win for corporate mobility. It reduces procedural inertia by decreasing the likelihood that courts second-guess decisions to reincorporate, a development that may encourage more corporations to actively consider alternative jurisdictions.
Holistic decision-making. Attorneys who advise Delaware corporations may receive an increase in inquiries about the pros and cons of relocating to other states. While insulation from hypothetical future liability has now been blessed as a legitimate reason to relocate, it remains best practice for directors to consider a full range of relevant factors in exercising their duties. The Delaware Supreme Court took solace — as reinforced by multiple references throughout the opinion — from the fact that TripAdvisor’s board weighed a variety of factors before deciding to relocate, including: investor perceptions of the new jurisdiction, the relative experience of each jurisdiction’s judges, public relations, respective case law developments and statutory frameworks, and prior litigation history.
Strategic stockholder litigation. It is also worth noting that while Maffei increases corporate flexibility it is not a get-out-of-liability-free card. TripAdvisor emerged victorious in large part because plaintiffs only alleged “future,” “hypothetical” litigation that the directors and officers might escape under Nevada law. Thus, the opinion tells plaintiffs opposing a relocation to allege specific, impending liabilities. One possible consequence of this instruction may be an uptick in strategic litigation designed to trigger the entire fairness standard in subsequent conversion challenges. Fiduciaries considering a relocation to avoid or while facing a known, existent liability or litigation should consult with counsel to evaluate the litigation risk concerning any such move, which may be subject to the heightened entire fairness standard.
Evolving debates surrounding shareholder rights. In closing, we want to note that directors, stockholders, and corporate lawyers are not the only groups interested in the long-term effects of this month’s decision. The relative merit of different corporate legal protections and frameworks offered by various jurisdictions has been a subject of national debate for decades — and Maffei is just one piece of that discussion. For many, the decision is a welcome catalyst for greater innovation among states seeking to attract businesses with laws that promote predictability, improve efficiency, decrease corporate taxes, and reduce the frequency of litigation. For others, the decision is a bang from the starting gun that initiates a “race to the bottom” of shareholder rights. Businesses and their advisors will benefit by keeping tabs on both sides of the debate as they contemplate plotting a course into the years ahead.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
