Delaware Supreme Court Overturns Tripadvisor Decision, Providing a Clearer Path for Reincorporation

In a much-anticipated decision, Maffei v. Palkon (“Tripadvisor”) (Feb.  4, 2025), the Delaware Supreme Court held that the Tripadvisor, Inc. board’s decision to reincorporate the company from Delaware to Nevada is subject to the deferential business judgment rule standard of review—and not the significantly more onerous entire fairness standard.

The decision reverses the Court of Chancery’s holding that Tripadvisor’s reincorporation was subject to entire fairness review because the company’s directors and controller may have received a material, non-ratable benefit from the transaction—namely, reduced exposure to litigation liability, as Nevada law may provide lower standards for fiduciaries as compared to Delaware law. The Court of Chancery also had suggested that, for the reincorporation to have been entirely fair, it may be that some form of consideration had to be paid to the minority stockholders to compensate them for the reduction in their “litigation rights” under Nevada law. Under business judgment review, however, the claims against the directors and the controller for breaches of fiduciary duty in approving the reincorporation almost certainly will be dismissed.

Key Points

• A Delaware corporation’s reincorporation to another state generally will be subject to judicial deference under the business judgment rule. However, it may be subject to entire fairness review instead if the decision was not made on a “clear day”—that is, was made at a time that there was pending or threatened litigation against the directors or a controller or a specific transaction was contemplated.

• The decision may stimulate further interest in considering reincorporation from Delaware. While the Supreme Court’s TripAdvisor decision facilitates reincorporation from Delaware, we continue to believe that the number of reincorporations will remain small and will continue to involve, primarily, controlled companies.

Background. In early 2023, the Tripadvisor board decided to reincorporate the company from Delaware to Nevada. The company disclosed to stockholders before the stockholder vote that the purposes of the reincorporation were to obtain the benefit of: lower fiduciary standards under Nevada law for directors and controllers; lower annual franchise fees; and improved conditions for recruiting corporate managers. Gregory Maffei owned 43% of the voting power of Tripadvisor, through his ownership of super-voting stock (and, for purposes of this case, he did not dispute that he controlled Tripadvisor). The stockholders approved the reincorporation—but only due to Maffei’s vote, as very few minority stockholders voted in favor. Certain minority stockholders brought suit, claiming breach of fiduciary duties by the directors and Maffei in approving the reincorporation. At the pleading stage, the Court of Chancery held that the entire fairness standard of review presumptively applied and the reincorporation may not have been entirely fair.

The defendants sought, and in a rare move the Delaware Supreme Court agreed to hear, an interlocutory appeal. After briefing and oral argument, the defendants announced a proposed transaction that would simplify Tripadvisor’s capital structure into a single class of shares with no controlling stockholder. The plaintiffs then moved to dismiss the appeal as moot, given the elimination of the controller. The Supreme Court held that the appeal was not moot; and, on the merits, that the applicable standard of judicial review was the business judgment rule rather than entire fairness.

Discussion

Court of Chancery ruling below. The Court of Chancery, at the pleading stage, based on the plaintiffs’ allegations, ruled that: (i) it was reasonably conceivable that Nevada law imposes lower fiduciary standards for controllers and directors than Delaware; (ii) therefore, it was reasonably conceivable that Tripadvisor’s proposed reincorporation would provide a material, non-ratable benefit to Tripadvisor’s controller and directors, as they would be subject to lower fiduciary standards going forward, which would reduce their potential exposure to personal liability for their future actions; and (iii) therefore, the reincorporation was a conflicted transaction to which entire fairness presumptively applied.

Further, the Court of Chancery held that it was reasonably conceivable that the reincorporation was not entirely fair. With respect to the price prong of the entire fairness test, Vice Chancellor J. Travis Laster concluded that, after the reincorporation, the stockholders may not have “substantially the equivalent of what they had before”—specifically, they might have lesser “litigation rights” given the possibility that Nevada law imposes lower fiduciary standards for controllers and directors. With respect to the process prong, the Vice Chancellor noted that no procedural protections had been put in place for the minority stockholders, and that “the controller delivered the vote as the unaffiliated stockholders resoundingly rejected the [reincorporation].” Further, the Vice Chancellor suggested that, to meet entire fairness, a reincorporation might have to include payment of some kind of consideration to the minority stockholders to compensate them for the diminution of their litigation rights.

Appeal was not moot. The plaintiffs argued that, as Tripadvisor reported that it intended to engage in a transaction that would result in there being no controlling stockholder, the appeal was moot and the case should be dismissed. The Supreme Court held that the appeal was not moot—first, because the proposed transaction was “merely proposed and remain[ed] subject to conditions, including a stockholder vote”; and, second, because, even if the controller-related issues with respect to the reincorporation were eliminated, the issues as to the directors’ conflicts remained.

No “material, non-ratable benefit” to the directors. The Supreme Court concluded that the directors did not obtain a material, non-ratable benefit from the reincorporation. Under existing law, the Supreme Court stated, 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 Supreme Court reasoned that providing protection to directors that would extinguish existing or threatened litigation against them, or that is provided in contemplation of a particular transaction, could provide a material, non-ratable benefit—but that, with respect to Tripadvisor, there was no litigation pending or threatened, and no transaction contemplated, as to which potential liability exposure would be affected by the reincorporation. The Supreme Court reasoned that the reincorporation’s providing protection against future liability exposure was too “speculative and hypothetical” automatically to cast doubt on the directors’ independence in deciding whether to reincorporate.

No “material, non-ratable benefit” to the controller. The Supreme Court concluded that the controller also did not obtain a material, non-ratable benefit from the reincorporation. Under existing law, the Supreme Court stated, in the controller context, “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 noted Williams v. Geier (Del. 1996)—where a recapitalization involved a charter amendment that provided for a form of tenure voting. While the controlling stockholders in that case reaped a benefit from the charter amendment, the Supreme Court affirmed application of business judgment review—as no non-ratable benefit had accrued to the controlling stockholders “on the face of the Recapitalization.” In other words, the controlling stockholders received the same benefit as the other stockholders, “although the dynamics of how the Plan would work in practice had the effect of strengthening the [controller’s] control.”

Approval on a “clear day.” The Supreme Court emphasized that Tripadvisor approved the reincorporation at a time there were no claims against the controller or the directors—the proverbial “clear day.” The court emphasized: “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.” The plaintiffs had not “alleged anything more than speculation about what potential liabilities Defendants may face in the future.” The court observed that boards routinely obtain D&O insurance, provide directors with rights to indemnification and advancement of expenses, and provide for director exculpation under DGCL Section 102(b)(7)—each of which reduces the risk of directors liability exposure in future litigation for future conduct, but none of which have been viewed by Delaware courts as providing a material, non-ratable benefit invoking entire fairness review (so long as the action did not limit directors’ liability for past conduct).

Comity issue. The Supreme Court stated that comity concerns were not “an independent ground” for reversing the Court of Chancery’s Tripadvisor decision, but that reversal “furthers the goals of comity by declining to engage in a cost-benefit analysis of the Delaware and Nevada corporate governance regimes.” The Supreme Court stressed that, although the lower court focused on a possible diminution of minority stockholders’ “litigation rights” under Nevada law as compared to Delaware law, “the overall integrated corporate governance structure” would be relevant in evaluating the impact of reincorporation of the stockholders. The Supreme Court wrote: “[C]ourts are ill-equipped to quantify the costs and benefits of one state’s corporate governance regime over another’s” and “should be cautious about second-guessing the judgments of the directors as to how best to evaluate and weigh the various competing considerations as such factors might apply to a specific corporation…[particularly] given that none of these features is static, including the statutory schemes at issue and their related case law developments.”

Our Observations:

• Controlled companies. To date, all of the corporations that have actually reincorporated from Delaware, citing Delaware law issues as the reason, have been controlled companies. Discussion about potential reincorporation also has occurred at noncontrolled companies. However, controllers have been most focused on the issue—due to Delaware decisions they have viewed as reflecting heightened judicial skepticism of their role and expanded potential liability for them. (In addition, of course, controlled companies do not face the same issues as non-controlled companies in obtaining the stockholder approval needed for a reincorporation.) We expect that it will continue to be primarily controlled companies that seriously consider reincorporation, or actually reincorporate, from Delaware.

• Small number of reincorporations from Delaware. Our research indicates that, from 2021 through November 2024, only eight Delaware corporations, citing concerns about Delaware law, reincorporated to other states—four to Nevada (including Tripadvisor) and two to Texas. Each of these was a controlled company. In recent days, two controlled companies have reported intentions to reincorporate from Delaware—Meta (to Texas) and Pershing Square (to Nevada).

• Facts and circumstances. While Tripadvisor generally establishes that the court will defer to a board’s business judgment in deciding where the corporation should be incorporated, a reincorporation still could be subject to entire fairness review—if it would restrict liability for directors or a controller with respect to their past conduct or a contemplated transaction; or if there are other duty of loyalty issues with respect to the directors or a controller. It remains to be seen, under Tripadvisor, to what extent, before a reincorporation, a claim would have to have been already actually and explicitly threatened, or a post-reincorporation transaction would have to have been actually and explicitly proposed or contemplated, for the court to view the reincorporation as having not been adopted on a “clear day” and therefore subject to entire fairness review.

• Comparisons with Delaware law. Most reincorporations from Delaware have been to Nevada, with Texas a distant second. Nevada law, while still evolving and subject to judicial interpretation, on its face appears to (i) impose no Revlon duties on sale of a company, impose no heightened duties with respect to the adoption of defensive tactics, and largely reject the concept of entire fairness in conflicted controller transactions; (ii) exculpate directors and officers for any breach of fiduciary duty (including the duty of loyalty), excepting only breaches involving “intentional misconduct, fraud or a knowing violation of law”; and (iii) provide stockholders with relatively limited access to corporate books and records (even when corporate wrongdoing is suspected). It is also to be noted that Nevada judges are elected; and jury trials are available for business cases. We note that Texas law appears to be more similar to Delaware law, albeit far less developed.

Practice Points

• Establishing there is no material, non-ratable benefit. For directors and controllers to establish that they are not obtaining a material, non-ratable benefit in a reincorporation from Delaware, they should approve the reincorporation on a “clear day” (i.e., when there is no litigation pending or threatened against them, and no specific post-reincorporation transaction contemplated). Also, they could consider (i) committing to have claims relating to past conduct decided under Delaware law; and/or (ii) arguing that the new state does not have materially lower fiduciary standards (or other legal principles) such that potential liability for past conduct would be affected.

• Disclosure to stockholders in connection with a reincorporation. (i) Generally, where applicable, a company should consider disclosing that lower fiduciary standards may be applicable in the new state—so that stockholders are armed with this potential disadvantage to them when voting. (ii) A company should consider disclosing, where possible, the ways in which the corporation and its stockholders as a whole may benefit from the reincorporation—for example, the company may be less vulnerable to product liability suits under the legal regime in the new state; the move may bring the corporation to the state where its operations are located; or the new state’s political and cultural environment may align better with the corporation’s core values. (iii) We note that certain typically-cited purposes for reincorporation may not be convincing to the court. In Tripadvisor, the Court of Chancery stated that the purported benefit of lower franchise fees in the new state was likely not material given the size of the company; and that the purported benefit in recruiting directors and management was not a separate benefit from obtaining lower fiduciary standards as it was simply a product of the lower litigation exposure. (iv) Where accurate, a company should state that there is no existing litigation or threatened claims, and no transaction contemplated, that would be affected by the reincorporation.
• Key considerations when reincorporating. (i) The likely reaction of institutional investors and proxy firms, as well as any possible impact on the stock (or an IPO) price, should be considered. (ii) A company going public could consider including in its organizational documents provisions supporting an ability to reincorporate to a different state in the future. (iii) A controlled company should consider possible process protections for the minority stockholders, such as utilizing a special committee of independent directors. (iv) Consideration could be given to obtaining expert advice with respect to the legal, financial, or other effects of the reincorporation. (v) In all cases, the board should consider not only the potential for reduced liability exposure, but the new state’s overall legal and governance structure—including the structure of the court system; the development of the body of law respecting corporate matters; the predictability of judicial decisions with respect to corporate matters; judges’, and the corporate bar’s, expertise in handling corporate disputes; investors’ familiarity with and confidence in the legal and corporate governance regimes; the process for proposal and adoption of legislative changes; and the secretary of state’s track record in facilitating corporate filings.