- Delaware Supreme Court holds business judgment rule applies to decision to reincorporate a company out of Delaware made on a “clear day.”
- For a non-ratable benefit to give rise to a conflict and trigger entire fairness, such benefit must be of “sufficiently material importance” to influence the director or a controller with an overriding personal interest.
- Reducing the risk of speculative, future legal liability does not create a disabling interest when deciding to reincorporate.
- A decision to reincorporate made in the face of “existing or threatened litigation” or “in contemplation of [a] potential transaction” could trigger increased court scrutiny.
As we wrote last year, the Delaware Supreme Court took the extraordinary step of reviewing through an interlocutory appeal a decision by the Court of Chancery to review under entire fairness, the highest standard of review for corporate action under Delaware law, the decision by the boards of directors and the controller of TripAdvisor, Inc. (“TripAdvisor”) and Liberty TripAdvisor Holdings, Inc. (“Liberty”) to reincorporate from Delaware to Nevada. On February 4, 2025, the Supreme Court issued its decision, reversing the Court of Chancery and holding that the reincorporation decisions were owed deference under the business judgment rule.1
The Supreme Court’s decision comes amid an ongoing debate over Delaware’s status as the preferred domicile for incorporation triggered, in part, by a perception of increasing litigation risk in Delaware. The Supreme Court’s decision fits within a series of recent decisions by the Court limiting efforts to expand liability for fiduciaries and other corporate parties. Moreover, on February 17, 2025, legislation sponsored by the Democrat and Republican leaders in the Delaware General Assembly was introduced in the Delaware Senate, which if adopted will address many of the concerns prompting the debate about Delaware’s dominance. Time will tell if these efforts will sufficiently address the concerns that have motivated the reincorporation debate and the redomestication of certain companies.
Background
Our previous OnPoint provides a summary of the facts giving rise to the appeal, the Court of Chancery’s holding subjecting the decision to reincorporate TripAdvisor and Liberty to Nevada to entire fairness review, the Court of Chancery’s rejection of defendants’ request to certify the matter for an interlocutory appeal, and the Supreme Court’s extraordinary decision to grant that appeal. We do not repeat those details here, other than to observe that the most significant factor “weighing heavily” on the Supreme Court’s analysis was that the decisions to approve the TripAdvisor and Liberty reincorporations were made on a “clear day”, when there were no “particular litigation claims” that would be impaired by the change in corporate domicile or no allegations that “any particular transaction will be consummated post-conversion.”2
The Supreme Court’s Analysis
The Supreme Court begins its substantive analysis by describing the significance of deciding whether the business judgment rule or entire fairness applies to a reincorporation, where “the determination of the appropriate standard of judicial review frequently is determinative of the outcome of the litigation.”3 Indeed, imposing entire fairness review would likely place a litigation and liability tax on a reincorporation. Applying the business judgment rule would shield a reincorporation from litigation and protect the freedom of directors and stockholders to decide for themselves the place of incorporation.
Going to first principles, the Supreme Court notes that, in the director context, entire fairness review is warranted when a director receives a non-ratable benefit of “sufficiently material importance” making it “improbable that the director could perform her duties without being influenced by her overriding personal interest.”4 Whereas, in the context of controllers, entire fairness review is warranted when the controller receives something uniquely valuable that the other stockholders do not receive, “even if the controller nominally receives the same consideration as all other stockholders.”5 In either case, the Supreme Court agreed with the Court of Chancery that it is “appropriate” to anchor the analysis on the materiality of the benefit.6
Where the Supreme Court diverged from the Court of Chancery is over the temporality of the alleged benefit of reincorporating from Delaware to Nevada and, therefore, the materiality of the alleged benefit. For the Court of Chancery, the decision to reincorporate to Nevada from Delaware provides an immediately material, non-ratable benefit because Nevada law is allegedly more favorable to a controller or director by “materially reduc[ing] or eliminat[ing] the fiduciary’s risk of liability.”7 The Supreme Court disagreed, drawing a temporal distinction between existing or threatened legal liability and potential future legal liability, and noting precedent finding directors did not lack independence for approving indemnification and advancement provisions, procuring D&O policies, and approving Section 102(b)(7) provisions exculpating directors from monetary liability for a breach of the duty of care.8 While each such action would protect fiduciaries from future legal liability, such action alone “does not automatically convey a non-ratable benefit.”9 The Supreme Court thus holds that shielding from liability “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.”10 Instead, the proper standard of review for such action is the business judgment rule.11
On the other hand, the Supreme Court noted that director action that curtails existing or identifiable legal liability (in contrast to director action that merely protects from future, speculative legal liability) could be subject to entire fairness review.12 As the Court summarized, caselaw has applied entire fairness review to actions that “limit[] liability for existing potential liabilities stemming from past conduct,” thereby “convey[ing] a non-ratable benefit on fiduciaries.”13 Consistent with this caselaw, the Supreme Court warned that Delaware law and a heightened standard of review could apply if defendants take “articulable, material steps in connection with any post-conversion transaction” prior to redomesticating, “even though such transactions or conduct would not be consummated or take place until after the change of corporate domicile.”14
The Supreme Court also noted comity principles would be implicated if a reincorporation decision was subject to enhanced judicial review and legal liability.15 States have taken different positions on the standards of review and conduct for directors, officers and controlling stockholders.16 The Supreme Court observed that courts are “ill-equipped to quantify the costs and benefits of one state’s corporate governance regime over another’s,” and that such a comparison “would be an unacceptably speculative cost-benefit exercise.”17
Takeaways
After this decision, a board’s decision to reincorporate a company out of Delaware made on a “clear day” should be subject to a deferential, rather than exacting, standard of review. Regardless of the standard of review, the Supreme Court’s decision provides guidance for directors as to what factors to weigh in evaluating a reincorporation, including:
- Each state’s respective court system;
- The predictability of the courts with respect to corporate matters;
- The judges’ expertise in handling such disputes;
- The development and body of judicial decisions;
- The familiarity of market participants with the corporate governance regime;
- The process by which corporate statutory amendments are proposed and adopted by the state legislatures;
- The effectiveness of the state’s Secretary of State office in facilitating corporate filings; and,
- The existence of a corporate bar available, willing and able to handle disputes.18
In so guiding, the Supreme Court highlights factors that have supported Delaware’s historic dominance as the forum for incorporation.
Nonetheless, companies and stockholders have expressed concerns over a perception of increased scrutiny by the Delaware courts and a lack of deference to director and stockholder action. The Supreme Court offers a response to these concerns. The Supreme Court states that its decision to decline “to second-guess directors’ decisions to redomesticate where there are no well-pled allegations of a material, non-ratable benefit” furthers Delaware policy favoring “the values of flexibility and private ordering” and “director[] flexibility.”19 The Supreme Court’s emphasis on private ordering and deference to director discretion could be taken as a signal to the broader market that its concerns are heard and are being addressed.20
Likewise, as noted above, the Delaware General Assembly has proposed legislation to address these concerns. On February 17, 2025, SB 21 was introduced in the Delaware Senate. SB 21 would amend Sections 144 and 220 of the Delaware General Corporation Law to provide safe harbors for interested director and controlling stockholder transactions and limitations on the rights of stockholders to inspect corporate books and records. SCR 17 also was introduced, which calls for a report from the Council of the Corporation Law Section of the Delaware State Bar Association on potential changes to the rules governing awards of plaintiff attorney’s fees in stockholder litigation. An OnPoint discussing this legislation is forthcoming.
Time will tell how the market responds to these efforts.
1 Maffei v. Palkon, No. 125, 2024 (Del. Feb. 4, 2025).
2 Id. at 45.
3 Id. at 38 (cleaned up).
4 Id. at 41 (cleaned up).
5 Id.
6 Id. at 43.
7 Id. at 19. The State of Nevada disputed the Court of Chancery’s pleading stage description of Nevada’s corporate law. Id. at 31-32.
8 Id. at 44-45.
9 Id. at 44.
10 Id. at 54.
11 Id.
12 Id. at 46-55.
13 Id. at 54.
14 Id. at 60, n.249. Likewise, the Supreme Court noted the absence of allegations that there had been “past conduct that would lead to litigation” which could be impacted by the redomestication. Id. at 54-55.
15 Id. at 60-63.
16 Id.
17 Id. at 63-64.
18 Id. at 61-62.
19 Id. at 64.
20 On this, we refer to the Supreme Court’s recent affirmance in In re Oracle Corporation Derivative Litigation, No. 139, 2024 (Del. Jan. 21, 2025), that the proper operation of a fully empowered special committee negated plaintiffs’ efforts to prove an influential minority stockholder controlled an interested transaction, and the Supreme Court’s partial reversal in In re Mindbody, Inc. Stockholder Litigation, No. 484, 2023 (Del. Dec. 2, 2024), where the Supreme Court held that the plaintiffs failed to meet the high burden of proving an acquirer aided and abetted breaches of fiduciary duty by the target corporation’s fiduciaries.
