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E-MailAmy Simmerman, Brad Sorrels, and David Berger are Partners at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini memorandum by Ms. Simmerman, Mr. Sorrels, Mr. Berger, Joe Slights, and Tiphanie Cascella and is part of the Delaware Law series; links to other posts in the series are available here.
On February 20, 2024, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued an opinion refusing to dismiss stockholder claims challenging the reincorporation of TripAdvisor from Delaware to Nevada and determining that the entire fairness standard of judicial review, rather than the business judgment rule, applied to the decision to reincorporate. The essence of the court’s determination was that the purpose of the reincorporation was to reduce stockholder litigation risks for its fiduciaries and that a reduction in the litigation rights of stockholders in a controlled company creates a non-ratable benefit for the controller. Accordingly, the standard of review governing the transaction is entire fairness unless the company uses some type of procedural protections, such as approval by an independent board committee and/or minority stockholders, to lower the standard of review by simulating an arm’s-length negotiation. Because no such steps were taken here, the court denied the defendants’ motion to dismiss and allowed the case to proceed under the entire fairness standard.
The facts relevant to the court’s decision at this stage are not disputed. Gregory Maffei is the controlling stockholder and a board member of TripAdvisor—a Liberty Media-affiliated company with a dual-class structure—and possesses voting control of TripAdvisor. The TripAdvisor board considered the reincorporation over three board meetings and ultimately approved the reincorporation. The board considered, among other things, the belief that recent case law developments in Delaware have emboldened plaintiffs’ attorneys to bring claims against directors, officers, and controlling stockholders in controlled companies and conflicted situations and that Nevada law has more protective standards and rules for defendants in breach of fiduciary duty claims. The board also considered that since 2012, eight companies affiliated with Liberty Media had been the subject of stockholder lawsuits in Delaware, with five of those lawsuits occurring in the preceding five years. TripAdvisor’s reincorporation required stockholder approval, which the controlling stockholder delivered at a stockholder meeting. A majority of the public stock voted against the reincorporation.
The plaintiffs sued, asserting that the approval of the reincorporation, which was accomplished by way of a conversion, was a breach of fiduciary duties and a conflicted transaction with a controlling stockholder and should be enjoined. The defendants moved to dismiss the claim and agreed not to effect the reincorporation until the court rendered a decision.
The court concluded that the reincorporation would result in a non-ratable benefit to a controlling stockholder and therefore triggered the entire fairness standard of judicial review. That standard is exacting, requiring a court to determine whether a transaction involved fair dealing and fair terms and whether a remedy—such as damages or rescission of the transaction—should be available. (This was the standard under which Elon Musk’s compensation package at Tesla was recently rescinded.) The court noted that the company had not used the sorts of procedural protections, such as approval by a special board committee and/or minority stockholders, that can cleanse controlling stockholder transactions. The court also determined that for purposes of a motion to dismiss, the plaintiffs had alleged facts sufficient to show a lack of fairness, particularly given the different suite of litigation rights that public stockholders would have post-reincorporation.
At the same time, the court refused to enjoin the reincorporation, reasoning that an appropriate remedy (damages) was available and could be fashioned following a reincorporation. Interestingly, the court noted that whether the company’s stock traded at a different price post-reincorporation could help the court assess damages. The court additionally provided some guidance for reincorporations in other contexts, noting that for Delaware corporations that do not have controlling stockholders, a fully informed vote by disinterested stockholders approving a reincorporation should ensure the protections of the business judgment rule.
The case is a noteworthy development for a number of reasons. For one, the case reflects the ongoing proliferation of stockholder litigation in Delaware over controlling stockholder transactions and benefits. Indeed, in the next several weeks, the Delaware Supreme Court is expected to issue an important decision addressing precisely how such conflicts of interest can be cleansed so that companies can regain the protection of the business judgment rule. In addition, as some voices call for a reexamination of whether corporations should be moved outside of Delaware, the case provides important guidance for fiduciary duty considerations in the reincorporation context. We will monitor any appeal activity in the case.
