Last week, in Maffei v. Palkon, the Delaware Supreme Court held that the decision to change the corporate domicile of a Delaware corporation with a controlling stockholder to Nevada is subject to the business judgment rule, making stockholder challenges to such conversions unlikely to succeed if done on a “clear day” when defendants face no claimed or threatened liability or other material risks that the conversion will relieve.[1]
Reversing the Court of Chancery after accepting a rare interlocutory appeal, the Court clarified that a transaction in which a controller receives a non-ratable benefit will trigger “entire fairness” review, Delaware’s most intensive standard of scrutiny, only if the benefit is “material.” The Court further held that, where no specific post-conversion transaction was contemplated, “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.”[2] Imbued with policy-based reasoning, the decision suggests a reluctance by the Delaware Supreme Court to engage in a cost-benefit analysis of Delaware corporations’ conversion to competing jurisdictions. Palkon also provides important guidance as to what kinds of transactions involving controllers more generally should be subject to judicial intervention.
Background and Procedural Posture:As discussed in our prior alert memo, the stockholders of TripAdvisor, Inc. (“TripAdvisor”) challenged a proposed conversion by TripAdvisor and its parent company (“Holdings”) into Nevada corporations on the grounds that Gregory B. Maffei, the undisputed beneficial owner of the majority of voting power in both entities, as well as their directors, approved the conversion to limit future liability for fiduciary misconduct. While the Court of Chancery declined to enjoin the conversion, the Court held that (1) it was “reasonably conceivable ” for purposes of a motion to dismiss that Nevada law offers greater protection to corporate fiduciaries and (2) that additional protections constitute a non-ratable benefit that requires the controlling stockholder to demonstrate the conversion was entirely fair.[3]
After the Court of Chancery issued its decision on February 20, 2024, defendants sought interlocutory review by the Delaware Supreme Court. The Delaware Supreme Court took the unusual step of granting interlocutory review after the Court of Chancery declined to certify the appeal. The high court’s intervention is also noteworthy given that the stockholder plaintiffs-appellees moved to dismiss the case voluntarily on mootness grounds. The case was moot, plaintiffs-appellees argued, because, following the conversion, Holdings had merged with and into Tripadvisor, leaving Tripadvisor with a simplified capital structure and no controlling stockholder.[4] On appeal, the Delaware Supreme Court held that the case was not moot in light of TripAdvisor’s capital restructuring, noting that plaintiffs-appellees still maintained claims against the directors and that the issues on appeal will have “significant impact in future cases.”[5]
Holding and Reasoning:- The Delaware Supreme Court held that the business judgment rule is the applicable standard of review to a conversion of a controlled Delaware corporation into a Nevada corporation “in the absence of any allegations” that, as a result of the conversion, “any particular litigation claims [against the fiduciaries] will be impaired or that any particular transaction”—presumably, one that would give rise to liability under Delaware law, but not under Nevada law—“will be consummated post-conversion.”[6]
- The application of the business judgment rule is appropriate in this context, the Court reasoned, because Delaware courts “should be cautious about second-guessing the judgments of the directors as to how best evaluate and weigh the various competing considerations as such factors might apply to a specific corporation.”[7] Nodding towards an amicus brief filed by the state of Nevada, the Court also stressed that its decision “furthers the goals of comity by our declining to engage in a cost-benefit analysis of the Delaware and Nevada corporate governance...
