The Delaware Supreme Court recently reversed a Chancery decision to let shareholders of TripAdvisor Inc. and its parent continue their suit against their directors over their boards’ reincorporation of the world’s largest travel guidance purveyor in Nevada—which offers directors a higher level of protection from investor suits than Delaware, in Maffei et al.v. Palkon, et al., Del. Supr., No. 125, 2024 (Feb. 4, 2025).

Justice Karen Valihura, writing for the en banc high court, said the increased protection from breach-of-duty charges the directors and officers received through the conversion’s charter change did not give them a unique ’non-ratable’ benefit that could have skewed their objective judgment and made the board’s decision reviewable under the enhanced scrutiny of entre fairness — as the Chancery Court had ruled in allowing the plaintiffs to press their suit. 

“Plaintiffs’ allegations have not satisfied the requirement of pleading a material benefit because they have not alleged anything more than speculation about what potential liabilities Defendants may face in the future,” the Justice wrote in explaining why Nevada’s more expansive business judgment rule was not a non-ratable benefit. ‘’If one focuses more broadly on the corporate governance regime beyond just litigation rights alone, then it becomes even more apparent that courts are ill-equipped to quantify the costs and benefits of one state’s corporate governance regime over another’s.”

Charter move roadmap

The high court’s ruling will be closely examined In corporate law offices and boardrooms nationwide—especially where directors are contemplating a charter change—because it effectively presents a roadmap of how directors of a Delaware corporation could reincorporate in another state while staying under the protection of Delaware’s business judgment rule.

Background

TripAdvisor, headquartered in Massachusetts and parent Liberty TripAdvisor, headquartered in Colorado, which holds a 56 percent voting interest in TripAdvisor, in 2023 considered changing their charters from Delaware to Nevada for the increased liability protection it would provide for directors and officers.

In particular, they were attracted to the higher level of D&O liability protection that Nevada’s business judgment statute provided compared to Delaware’s version. In addition they found research that indicated Nevada’s business courts would “minimize the time, cost and risks of commercial litigation” and that Nevada has ”lower taxes and fees.”

The directors and officers of TripAdvisor and its parent approved the charter changes but stockholders were almost evenly divided on the issue and Justice Valihura noted that regarding the conversion of TripAdvisor the transactions designed to effectuate this change in June 2023 would have been voted down without the defendant-Controller/CEO Gregory Maffei’s votes. The result was a shareholder suit claiming the charter change was a breach of duty because it gave the directors and officers a unique “non-ratable benefit” through the higher liability protection.

Not entirely fair?

On defendants’ motion to dismiss, the Court of Chancery held that Plaintiffs adequately alleged that Defendants will receive a non-ratable benefit in the form of reduced liability exposure and that the Complaint alleged facts supporting a reasonable inference that the Conversions were not entirely fair.

Chancery observed that “[u]nder Delaware law, a controller or other fiduciary obtains a non-ratable benefit when a transaction materially reduces or eliminates the fiduciary’s risk of liability.” It turned down the defendants’ move for an interlocutory appeal.

The appeal

On appeal, the defendants contended that the business judgment rule applies because there is no pending or contemplated lawsuit and, therefore, Defendants are not receiving a material, non-ratable benefit. Defendants argued for a materiality requirement because “[t]he speculative benefits afforded to fiduciaries from risk mitigation do not constitute material benefits requiring entire fairness review.”

The State of Nevada filed an amicus brief generally supporting Defendants’ position. Nevada argued that the Conversions do not confer a non-ratable benefit that would trigger entire fairness.

The high court’s opinion

 “This Court has noted that “[t]he entire fairness standard applies only if the presumption of the business judgment rule is defeated,” Justice Valihura wrote. In the director context, “in order to rebut the business judgment rule presumption, an interest must be subjectively material to the director. In other words, the alleged benefit must be significant enough as to make it improbable that the director could perform his fiduciary duties to the shareholders.”

She noted that entire fairness is not triggered solely because a company has a controlling stockholder like Maffei . “We conclude that, based on the pleaded allegations, Defendants will not receive a non-ratable benefit from the Conversions and, accordingly, the entire fairness standard of review does not apply, she wrote.

“In the controller context, the plaintiffs must plead that [the controller] had a conflicting interest in the Merger in the sense that he derived a personal financial benefit ‘to the exclusion of, and detriment to, the minority stockholder,” the high court ruled.

The justices’ conclusion 

Finally, the Court of Chancery rejected the idea that Delaware precedent has a temporal distinction that distinguishes between cases based on existing versus future potential liability. But the justices ruled that: “Rather, our reading of Delaware precedent persuades us that temporality is a key factor because it weighs heavily in determining materiality in this context. And there was no pending judgment against the defendants nor any “cloud of litigation’” on the horizon where a new, stronger level of liability protection could change the future.

Justice Valihura noted that the Court of Chancery cited several cases to support the principle that “[u]nder Delaware law, a controller or other fiduciary obtains a non-ratable benefit when a transaction materially reduces or eliminates the fiduciary’s risk”, but she wrote: “we note that these cases all involved existing potential liabilities from past conduct that the litigated transactions may have extinguished.”

“Delaware policy has long recognized the values of flexibility and private ordering,” the high court concluded. “Allowing directors flexibility in determining an entity’s state of incorporation is consistent with this Delaware policy.”