On February 4, 2025, the Delaware Supreme Court issued its much-anticipated decision in the TripAdvisor1 litigation addressing the standard of review that applies to a board’s decision to reincorporate from Delaware to another jurisdiction. The court determined that TripAdvisor’s proposed reincorporation from Delaware to Nevada should be reviewed under the business judgment standard of review, under which courts will defer to the judgment of boards and dismiss ensuing fiduciary duty claims from stockholders.
In reaching its decision, the Delaware Supreme Court reversed the trial court’s opinion applying the more onerous entire fairness standard of review to TripAdvisor’s proposed reincorporation. The Delaware Court of Chancery had held that it was reasonable to infer from the complaint’s allegations, and TripAdvisor’s disclosures to stockholders and its board deliberations, that Nevada law provides greater protection to fiduciaries than Delaware law and that TripAdvisor’s controlling stockholder and directors would obtain a material, non-ratable benefit from the reincorporation as a result. The Court of Chancery premised its holding that the controlling stockholder and directors conceivably breached their fiduciary duty of loyalty on other Delaware cases providing that when a controlling stockholder or half or more of the board receives non-ratable benefits, the entire fairness standard of review applies, absent the use of certain procedural mechanisms such as approval by an independent board committee and disinterested stockholder vote, depending on the facts.
The Delaware Supreme Court, by contrast, determined that the reincorporation at issue did not provide an actionable non-ratable benefit. In particular, the court reasoned that, because the complaint lacked any allegations that TripAdvisor’s fiduciaries pursued the reincorporation in order to avoid existing or threatened litigation, or that the defendants pursued the reincorporation in contemplation of a particular transaction, the plaintiffs failed to adequately allege facts showing that the defendants received a material, non-ratable benefit. The court held that the alleged reduction in liability exposure for fiduciaries under Nevada’s corporate law regime was too speculative to constitute a material, non-ratable benefit to the defendants.
In recent months, many companies have been reevaluating their state of incorporation, and some have considered whether reincorporation in another jurisdiction may be advisable. We have discussed these issues with many of our clients, and this Delaware Supreme Court decision provides important guidance regarding fiduciary duties in this context. We also believe the ongoing dialogue regarding corporate domiciliation is being taken seriously in Delaware. We will provide further updates as appropriate.
[1] Maffei v. Palkon, C.A. No. 125, 2024 (Del. Feb. 4, 2025).
