Recent decisions in the Delaware courts have prompted many corporate groups to re-evaluate if Delaware is the best domicile for their operations. Delaware has been the first choice US jurisdiction for incorporating corporate entities for the last two decades; however a number of Delaware court decisions over the past year have undermined the predictability and consistency corporations seek when choosing a jurisdiction in which to operate. More generally, a perception that the Delaware courts are taking a hard line against corporations with controlling stockholders has led a number of corporate groups to consider relocating from the jurisdiction.
Paramount for corporate groups is that they operate in a reliable legal environment with a flexible and established legal system. These requirements are so fundamental that groups will consider changing jurisdictions in order to ensure such certainty. This article explores recent developments in Delaware and explains why many corporations which are considering redomiciling from Delaware find Bermuda a compelling strategic option.
Significant Delaware court decisions in 2024
While the decision in the Delaware courts to rescind the Tesla CEO’s US$50 billion compensation package attracted significant press coverage in 2024, other notable Delaware decisions have also caused consternation in the corporate world. The decision by the Delaware Court of Chancery in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co held that provisions in Moelis & Co’s stockholders’ agreement imposing a pre-approval requirement from a shareholder for certain actions of the board of directors were invalid.
In Sjunde AP-fonden v. Activision Blizzard, Inc. the court held that the Activision board had approved a merger agreement which was not sufficiently complete. Both the Moelis and Activision cases operated as a check on market practice in favour of the terms of the statute at the time.
In a further blow to convention and controlling shareholders, in the In re Match.com Derivative Litigation in the context of “conflicted controller” transactions the Delaware Supreme Court found that the only way to lower the standard of review for such transactions from “entire fairness” to the less stringent “business judgment rule” is for the transaction to be approved by both an independent committee, and a majority of the minority stockholders of the relevant corporation.
The “entire fairness” rule requires the corporation to prove that both the process and the outcome of the transaction is fair to shareholders, and is typically used when there is a potential conflict of interest involving directors or controlling shareholders; whereas the more deferential “business judgment rule” standard presumes directors acted in good faith, on an informed basis, and in the best interests of the company.
Delaware Supreme Court Reversal: Opening the Doors to ‘Dexit’
Until earlier this year, even the act of relocating from Delaware to another jurisdiction presented a challenge to certain corporate groups. In the 2024 Palkon v. Maffei case (the “TripAdvisor Case”), the Delaware Chancery Court decided that the decision to discontinue from Delaware was also a decision which should be reviewed under the stringent “entire fairness test”.
At first instance, TripAdvisor’s relocation faced shareholder opposition over concerns about potential reductions in their litigation rights. Shareholders filed a lawsuit alleging the move disproportionately benefited the company’s directors and controlling shareholders by limiting their exposure to litigation, given Nevada’s more lenient corporate laws.
The Delaware Court of Chancery initially applied the “entire fairness standard”. However, on 4 February 2025 the Delaware Supreme Court overturned the Court of Chancery’s decision in the TripAdvisor Case, applying the more favourable “business judgment rule”.
Advantages of Redomiciling to Bermuda
Bermuda offers several compelling advantages that make it an attractive destination for companies considering redomiciliation:
- Robust Legal Framework: Bermuda boasts a stable and transparent legal system rooted in English common law with independent courts. Multinational corporations and investors can have confidence in fair, consistent and impartial legal decisions.
- Legal Certainty and Corporate Governance: Bermuda provides a high degree of legal certainty and flexibility in respect of corporate governance. The business friendly legal framework features specialised laws, regulations, and expertise tailored for global transactions and investment, offering companies the ability to adapt their governance structures to best suit their strategic goals while ensuring compliance with international legal standards. Rooted in deference to majority shareholder power, Bermuda’s company law does not feature a ‘majority of the minority’ rule or an ‘entire fairness’ standard.
- Ease of Incorporation/redomestication: Incorporating a company in, or relocating a company to Bermuda is a straightforward process, with efficient registration procedures that allow for easy entity formations and cross-border continuations.
- Flexible Corporate Structures: Bermuda offers flexible corporate structures that can be tailored to meet the specific needs of businesses, allowing companies to optimise their operations and governance. The business-friendly framework enables entities to choose between corporations, partnerships and limited liability companies, offering adaptable solutions for corporate structuring.
- Strategic Geographic Location: Bermuda’s proximity to key markets in North America and Europe provides strategic advantages for companies looking to expand their global footprint. The island’s time zone advantage and connectivity further enhance its appeal.
- Reputation in International Finance: The jurisdiction’s reputation of financial stability, expertise, and thriving financial services attracts companies seeking a reliable and supportive business environment.
- Capital Markets Access: Bermuda is a primary jurisdiction for cross-border capital markets transactions, including IPOs and asset-backed securitizations. With strong global ties to equity and debt markets, the jurisdiction offers businesses tax-neutral access to international capital.
Conclusion
In light of recent decisions in the Delaware Supreme Court, and the February 2025 ruling in Palkon v. Maffei which has made it easier relocating from Delaware, now is a good time for Delaware-based groups to consider their domicile of incorporation. With a predictable and company-friendly legal regime, a favourable regulatory framework, flexible corporate governance, and a stable business environment, Bermuda is an ideal jurisdiction for optimising a group’s operations and governance.
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