In Palkon v. Maffei, the Delaware Court of Chancery denied a motion to dismiss a stockholder action against TripAdvisor, Inc.’s board of directors and Gregory B. Maffei, the CEO and controlling stockholder of TripAdvisor. In November 2022, TripAdvisor began to consider converting into a Nevada corporation (the Redomestication). Management made several presentations that highlighted the benefits of the Redomestication, including greater protections against liability for officers and directors and lower franchise taxes and fees. Ultimately, in April 2023, the board approved the Redomestication and solicited a stockholder vote, with Maffei “provid[ing] the decisive votes” in support of the move. No majority-of-the-minority vote was held.
The plaintiffs, two minority shareholders, filed suit shortly after, alleging that the Redomestication constituted self-interested transactions in breach of the directors’ and CEO’s fiduciary duties. The plaintiffs argued that the move to Nevada was intended to reduce the risk of litigation against the company’s directors and officers – a benefit to the controlling stockholder that was not cleansed by any procedural safeguards – while minority shareholders lost litigation rights.
In analyzing the claim for breach of fiduciary duty, the court first considered what standard to apply. The court concluded that the entire fairness standard was appropriate because, by virtue of the Redomestication, the controlling stockholder and directors received a “non-ratable benefit:” a material reduction or elimination of a fiduciary liability. The court found it was “reasonable to infer at the pleading stage” that Nevada law provides greater litigation protection to fiduciaries based on TripAdvisor’s board materials and proxy statements touting the benefits of the Redomestication, not on a comparative analysis of Nevada and Delaware law. In fact, the court specifically stated that, at a later stage of the case, defendants could attempt to prove immateriality of the conversion by showing “that Delaware law and Nevada law are equivalent.”
Under the entire fairness standard, a transaction must be substantively and procedurally fair. Here, the court found that the plaintiffs adequately pled that the Redomestication was not fair based in large part on TripAdvisor’s board materials, which suggested that it would be an advantage to become a Nevada corporation so that certain Delaware legal principles would not apply, such as Revlon duties or entire fairness review. Therefore, the stockholders’ rights, including litigation rights, in the new Nevada corporation would not be “substantially equivalent in value” as their rights in the Delaware corporation. The Court noted that this decision did not discriminate against Nevada entities, as the same reasoning would apply if, for example, a Delaware corporation converted into a Delaware LLC that eliminated all fiduciary duties.
Regarding procedural fairness, the Court found that the defendants “did not make any effort to replicate arm’s length bargaining” because management proposed the conversions, the Board recommended them, and the controlling stockholder cast the decisive votes. There was no special committee approval or majority-of-the-minority vote. Furthermore, unaffiliated stockholders “resoundingly” voted against the transaction, which the Court considered to be further evidence of unfairness.
While permitting the claims to go forward, the court denied plaintiffs’ request to enjoin the Redomestication, finding that the court could fashion an adequate monetary remedy. The court then endorsed a potential method for doing so, which involved comparing the company’s publicly traded stock price before and after the change to the company’s state of incorporation. Vice Chancellor Laster predicted being able to discern a “relatively clean price impact.”
In reaching its conclusion, the Court emphasized that the decision does not make it impossible for a company to leave Delaware without litigation risk. The court hypothesized that if a board proposed a similar conversion (i) without a stockholder controller, and (ii) with full disclosure to stockholders of the effects of the conversion on their rights, then stockholder approval would be dispositive and trigger an “irrebuttable version of the business judgment rule.” Similarly, a company could retain business judgment rule review if they proposed a similar conversion (i) with a stockholder controller, and (ii) with the use of a special committee and a majority-of-the-minority vote, per Kahn v. M&F Worldwide Corp. (MFW), 88 A.3d 635 (Del. 2014).
Authored by Allison M. Wuertz, Jordan Teti, Sean MacDonald, and Mickaela Fouad
