Delaware is a small state but recent decisions by Delaware courts have made it difficult to leave - if you are a company incorporated in Delaware who wants to reincorporate in another state. But the Delaware Supreme Court, in reversing a Chancery Court decision, has removed at least one major obstacle to reincorporation by holding that the entire fairness doctrine did not apply to the efforts of two affiliated companies to change their corporate domiciles from Delaware to Nevada. If the entire fairness doctrine had applied, as one commentator observed, incorporating in Delaware would be like the Hotel California – you could check in but you could never leave.
In Maffei v. Palkon, 2025 WL 384054 (Del. Feb. 4, 2025), Gregory Maffei owned 43% of the voting power of Liberty Tripadvisor Holdings, Inc., which in turn held 56% of the voting power of Tripadvisor, Inc, which operates online travel agencies and comparison-shopping website. Maffei and the other defendants did not dispute that Maffei controlled both companies.
The boards of Tripadvisor and Liberty Tripadvisor voted to reincorporate from Delaware to Nevada, because, among other things, the latter’s corporate law appeared to provide better protection from liability for companies and their officers and directors. Stockholder votes approved the reincorporation, but there was substantial opposition from minority stockholders of Tripadvisor and the reincorporation would not have been ratified if not for the votes of Maffei and Liberty Tripadvisor. Subsequently, a stockholder of Tripadvisor and another of Liberty Tripadvisor filed an action in Delaware Chancery Court against Maffei and the companies’ directors that challenged the reincorporation, arguing that it was unfair to the minority stockholders.
Vice Chancellor Travis Laster had to consider which standard under Delaware law applied in reviewing the transaction – the business judgment rule, enhanced scrutiny, or the most onerous standard, entire fairness, in which the board must show that the transaction was entirely fair to the company and its stockholders. In denying the defendants’ motion to dismiss, the Vice Chancellor agreed with plaintiffs that entire fairness applied because Maffei, as the controlling stockholder, would receive a material “non-ratable benefit,” meaning a benefit that was not shared by all the stockholders. The Vice Chancellor held that defendants had not satisfied the entire fairness standard. The Delaware Supreme Court then granted interlocutory appeal.
Reversing the lower court’s analysis, the Supreme Court held that the proper standard of review was the business judgment rule, under which there is a presumption that the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was in the best interests of the corporation. Unless a plaintiff can rebut this presumption, a court will not second-guess the decisions of the board. Only if the presumption is successfully rebutted by a preponderance of the evidence, does the burden shift to the directors to show that the transaction was entirely fair.
The court held that the entire fairness standard was not triggered merely because a company has a controlling stockholder. There must be a showing that the control person derived a benefit that was not shared with other stockholders. Here, there was no showing that Maffei and the directors would derive a material non-ratable benefit, because there were no allegations that any particular litigation claims would be impaired or that any particular transaction would be consummated by the reincorporation in Nevada. Plaintiffs’ claims were based on nothing more than speculation concerning potential future liabilities and courts should not decide cases based on speculative litigation. Also, the principles of comity were furthered by declining to engage in a cost-benefit analysis of corporate governance in Delaware and Nevada.
Key takeaway: The Delaware Supreme Court made clear that reincorporation to another state will not be blocked merely because the other state’s law might provide greater protection from liability for a control person and the directors in potential litigation. However, reincorporation still could be prohibited if it appears that the control person and board are seeking to escape tangible actual or threatened liability or effect a specific transaction that would be unfair to minority shareholders.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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