There’s been a lot of noise in the media recently about some well-known companies deciding to change, or at least considering changing, their states of incorporation from Delaware to Texas, Nevada or another state. According to the WSJ, “[a]bout two-thirds of S&P 500 companies—regardless of where they are actually based—are incorporated in Delaware, largely because the tiny state has specialized courts that handle business matters and stacks of legal precedents for addressing disputes.” However, the WSJ continued, “[e]xecutives and controlling shareholders of public companies have long expressed frustration with the Delaware Court of Chancery, which has become home to a thriving shareholder plaintiffs’ bar.” To entice companies to reincorporate elsewhere, some states have made special efforts to establish “dedicated business courts, including four since 2019.” However, it remains to be seen whether, in the absence of Delaware’s legal expertise addressing business issues and the volume of important precedents that help to bolster predictability, these other states can match the influence of the Delaware courts. Nevertheless, in an interview with Business Insider, the new Governor of Delaware said that the state remained a “‘competitive environment’” and that “his state needed to take challenge seriously,” including addressing “issues such as the balance of shareholder and management rights….I think within the coming weeks, you’re going to see some things rolled out that will help move our state forward and bring us into 2025 and beyond to make sure we’re protecting and growing the corporate franchise….It certainly beats going to Vegas and rolling the dice.” As discussed in this excellent new Cooley Alert, Delaware Supreme Court Reverses Chancery Court, Holds Business Judgment Review Applicable to TripAdvisor’s Decision to Reincorporate in Nevada, from our Commercial Litigation Group and Securities Litigation + Enforcement Groups, the Delaware Supreme Court has just injected into the mix a new decision that could factor into the decision-making process for Delaware companies considering reincorporation in other states.
In Maffei v. Palkon, directors, officers and stockholders of TripAdvisor, Inc. decided to change the company’s state of incorporation from Delaware to Nevada. But, as the Delaware Supreme Court described the facts, the transaction would have been voted down without the vote of the controlling stockholder. Plaintiff stockholders sued, and Defendants—the controlling stockholder and the directors of the company and its parent—moved to dismiss. Plaintiffs contended that the reincorporation would “provide non-ratable benefits in the form of reduced liability exposure” to the Defendants, warranting review under the stringent entire fairness standard, which would have imposed a relatively high bar for dismissal. Defendants denied that they would receive a non-ratable benefit; rather, they argued, any non-ratable benefit Plaintiffs alleged was purely speculative and not material. As a result, Defendants contended, the business judgment rule should apply. The Chancery Court agreed with Plaintiffs’ arguments and denied Defendants’ motion to dismiss.
As discussed in the Alert, the Delaware Supreme Court reversed, holding that, where the non-ratable benefit from the reincorporation was not material and the decision to reincorporate was made on a “clear day” (i.e., there was no pending or threatened litigation), the business judgment rule applied. According to the Alert, critical to the Court’s decision was the concept of “temporality”: in the Court’s view, “the temporal distinction between existing and future potential liability” weighed “heavily in determining materiality” of the “alleged non-ratable benefit (i.e., reduced litigation exposure).” As explained in the Court’s Order, Plaintiffs had “not alleged anything more than speculation about what potential liabilities Defendants may face in the future.” Accordingly, the Court held that “the absence of any allegations that any particular litigation claims will be impaired or that any particular transaction will be consummated post-conversion[] weighs heavily against finding that the alleged reduction in liability exposure under Nevada’s corporate law regime is material and, ultimately, whether a non-ratable benefit exists that triggers entire fairness review.” In addition, the Court observed that there were no allegations that the reincorporation decision was “made in contemplation of any particular transaction”; the Court concluded that “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 Alert highlights and analyzes in depth key points in the Court’s decision and offers important advice for companies in light of this decision, including considerations for directors when evaluating whether to reincorporate in another state.
Be sure to check out the new Alert!
