GREGORY B. MAFFEI, ALBERT E. ROSENTHALER, MATT GOLDBERG, JAY C. HOAG, BETSY MORGAN, GREG O‘HARA, JEREMY PHILIPS, TRYNKA SHINEMAN BLAKE, JANE JIE SUN, ROBERT S. WIESENTHAL, LARRY E. ROMRELL, J. DAVID WARGO, MICHAEL J. MALONE, CHRIS MUELLER, and CHRISTY HAUBEGGER, Defendants Below, Appellants, and TRIPADVISOR, INC. and LIBERTY TRIPADVISOR HOLDINGS, INC., Nominal Defendants Below, Appellants, v. DENNIS PALKON and HERBERT WILLIAMSON, Plaintiffs Below, Appellees.
No. 125, 2024
IN THE SUPREME COURT OF THE STATE OF DELAWARE
Submitted: January 13, 2025; Decided: February 4, 2025
Before SEITZ, Chief Justice; VALIHURA, TRAYNOR, LEGROW, and GRIFFITHS, Justices, constituting the Court en Banc.
Upon appeal from the Court of Chancery. REVERSED.
Kevin R. Shannon, Esquire, J. Matthew Belger, Esquire, Jaclyn C. Levy, Esquire, Christopher D. Renaud, Esquire, Justin T. Hymes, Esquire, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware, for Appellants Gregory B. Maffei, Albert E. Rosenthaler, Larry E. Romrell, J. David Wargo, Michael J. Malone, Chris Mueller, and Christy Haubegger and Nominal Appellant Liberty TripAdvisor Holdings, Inc.
Matthew W. Close, Esquire (argued), Jonathan B. Waxman, Esquire, O‘MELVENY & MYERS LLP, Los Angeles, California, Abby F. Rudzin, Esquire, Asher Rivner, Esquire, O‘MELVENY & MYERS LLP, New York, New York, Of Counsel for Appellants Gregory B. Maffei, Albert E. Rosenthaler, Larry E. Romrell, J. David Wargo, Michael J. Malone, Chris
Bradley R. Aronstam, S. Michael Sirkin, ROSS ARONSTAM & MORITZ LLP, for Appellants Matt Goldberg, Jay C. Hoag, Betsy L. Morgan, Greg O‘Hara, Jeremy Philips, Trynka Shineman Blake, Jane Jie Sun, and Robert S. Wiesenthal, and Nominal Defendant-Below/Appellant Tripadvisor, Inc.
John A. Neuwirth, Esquire, Evert J. Christensen, Jr., Esquire, Stefania D. Venezia, Esquire, WEIL, GOTSHAL & MANGES LLP, New York, New York, Of Counsel for Appellants Matt Goldberg, Jay C. Hoag, Betsy L. Morgan, Greg O‘Hara, Jeremy Philips, Trynka Shineman Blake, Jane Jie Sun, and Robert S. Wiesenthal, and Nominal Defendant-Below/Appellant Tripadvisor, Inc.
Gregory V. Varallo, Esquire, Andrew E. Blumberg, Esquire (argued), Mae Oberste, Esquire, Daniel E. Meyer, Esquire, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware, Kimberly A. Evans, Esquire, Lindsay K. Faccenda, Esquire, Robert Erikson, Esquire, BLOCK & LEVITON LLP, Wilmington, Delaware, for Appellees Dennis Palkon and Herbert Williamson.
Jeroen van Kwawegen, Esquire, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York, Jeremy Friedman, Esquire, David Tejtel, Esquire, Christopher Windover, Esquire, Lindsay La Marca, FRIEDMAN OSTER & TEJTEL PLLC, Bedford Hills, New York, Jason Leviton, Esquire, Nathan Abelman, Esquire, BLOCK & LEVITON LLP, Boston, MA, D. Seamus Kaskela, Esquire, Adrienne Bell, Esquire, KASKELA LAW LLC, Newtown Square, Pennsylvania, Of Counsel for Appellees Dennis Palkon and Herbert Williamson.
VALIHURA, J.:
Introduction
Delaware is privileged to serve as the domicile for many of our nation‘s corporations and other business entities. But other states are eager to compete by promoting their respective corporate governance regimes. Nevada is one such state and has developed its own business court and statutes.
Here, directors, officers, and stockholders of Tripadvisor, Inc. (“Tripadvisor“) and Liberty TripAdvisor Holdings, Inc. (“Liberty TripAdvisor“) have determined to change their corporate dоmiciles from Delaware to Nevada. But not all stockholders supported this decision - in fact, the transactions designed to effectuate this change (the “Conversions“) would have been voted down without the Defendant-Controller Gregory Maffei‘s votes. Plaintiffs are stockholders who argue that the Conversions will provide non-ratable benefits in the form of reduced liability exposure to Defendants - a group comprised of Maffei, who is effectively the controller of Tripadvisor and Liberty TripAdvisor, as well as members of the boards of directors of both corporations. Accordingly, Plaintiffs argue
We granted interlocutory review following the Court of Chancery‘s denial of 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. Defendants dispute this conclusion and argue that they will not receive a non-ratable benefit and, accordingly, the business judgment rule applies. Thus, despite the vigorous debate about whether the variation of state corporate laws is vibrant competition among laboratories of democracy or a race-to-the-bottom of stockholder protections, the issue before us is a narrow one - which standard of review governs the decisions to approve the Conversions?
Approximately two months after oral argument before this Court, Plaintiffs filed a motion to dismiss this case as moot arguing that a transaction recently announced by Defendants, if consummated, would eliminate Maffei‘s controlling interest in Tripadvisor and Liberty TripAdvisor. Defendants opposed dismissal arguing, among other things, that the proposed transaction has not yet occurred and remains subject to conditions, including approval by the stockholders.
We agree with Defеndants that the subsequent events have not rendered this interlocutory appeal moot. As to the merits, we hold that the Court of Chancery erred in determining that Plaintiffs had alleged facts supporting a reasonable inference that the Conversions were subject to entire fairness review. Instead, we hold that the business judgment rule applies.
I. RELEVANT FACTUAL AND PROECEDURAL BACKGROUND
A. The Parties
Plaintiffs Below, Appellees, are Dennis Palkon and Herbert Williamson. Palkon is a purported stockholder of Tripadvisor, Inc., and Williamson is a purported stockholder of Liberty TripAdvisor Holdings, Inc.1
Defendants Below, Appellants, are Gregory B. Maffei, Albert E. Rosenthaler, Matt Goldberg, Jay C. Hoag, Betsy Morgan, Greg O‘Hara, Jeremy Philips, Trynka Shineman Blake, Jane Jie Sun, Robert S. Wisenthal, Larry E. Romrell, J. David Wargo, Michael J. Malone, Chris Mueller, and Christy Haubegger. Maffei serves on the board of Tripadvisor and is the CEO, President, and Chairman of Liberty TripAdvisor. The other defendants are members of either Tripadvisor‘s board of directors or Liberty TripAdvisor‘s board of directors. When Plaintiffs filed the action below, Maffei beneficially owned super-voting Series B common stock of Liberty TripAdvisor, constituting 43 percent of Liberty TripAdvisor‘s voting power.2 For
Nominal defendants below, Tripadvisor, Inc. and Liberty TripAdvisor Holdings, Inc., are Delaware corporations. Tripadvisor is headquartered in Massachusetts and operates the world‘s largest travel guidance platform. Liberty TripAdvisor is headquartered in Colorado and holds an approximately 21 percent economic interest and a 56 percent voting interest in Tripadvisor.
B. The Conversion Transactions
1. Director Approval of Tripadvisor‘s Conversion
The Tripadvisor directors first discussed “reincorporating from Delaware to Nevada” in November 2022.4 Management materials circulated to the Board in advance of the meeting presented purported advantages of a conversion “including, but not limited to the following: Directors and officers of [Nevada corporations] may enjoy a higher level of protection against personal liability; Nevada has business cоurts that minimize the time, cost and risks of commercial litigation; and Nevada has lower taxes and fees.”5 Management also noted that “Legal is evaluating the benefits against any potential issues or risks and the potential cost savings against the anticipated cost to re-incorporate and will report back to the Board.”6
The Board revisited the proposed Conversion in February 2023 as management emphasized the same purported legal advantages.7 Materials for the meeting included a presentation noting, among other things, that:
- “[T]he laws of Nevada would generally permit the Company to offer greater protection to its directors and officers.”8
- Even “in connection with a challenge to an interested party transaction with a controlling shareholder . . . [t]he Nevada . . . statutory business judgment rule, not the entire fairness standard, is the sole standard for any analysis involving fiduciary duty claims against corporate directors and officers in Nevada.”9
- “Delaware courts have significant expertise in dealing with corporate matters and have developed a substantial body of case law interpreting Delaware corporation law. In addition, the Delaware courts have a limited number of judges that hear corporate cases who are all well experienced in corporate law matters. Because Nevada case law concerning the effects of its statutes and regulations is more limited, and Nevada judges may have less experience in corporate law, the Company and its stockholders may experience less predictability
in Nevada courts with respect to corporate matters.”10 - “[M]arket participants are familiar with the Delaware corporate law regime and may perceive Nevada laws as less developed or predictable.”11
- “Investors may perceive Nevada corporate law as less responsive to stockholder rights, which may deter certain investors from investing in a Nevada corporation and/or could lead to negative PR.”12
The Tripadvisor directors met again on March 23, 2023 to approve the Cоnversion.13 There, the Board reviewed a management presentation including the following points:
- The Conversion would “[r]educe the risk of expensive and time consuming litigation against the Company and its directors and officers[.]”14
- “Nevada statute-focused law may be less developed and less predictable than the law in Delaware that has been developed by extensive judicial decisions by experienced judges and provides a well-established legal framework.”15
- “Investors may perceive Nevada corporate law as less responsive to stockholder rights, which may deter certain investors from investing in a Nevada corporation and/or hostile takeover attempts, which may be beneficial to shareholders.”16
- “Reincorporation by Tripadvisor - simultaneously with an [Liberty TripAdvisor] reincorporation - could cause speculation about future transactions involving Tripadvisor, create uncertainty and lead to negative PR.”17
The Tripadvisor Board approved the Conversion in substance following the discussion.18
2. Director Approval of Liberty TripAdvisor‘s Conversion
The Liberty TripAdvisor directors considered similar factors. Management‘s March 7, 2023 presentation to the directors included the following purported legal advantages of converting to a Nevada corporation:
- “Recent case law developments in Delaware, in particular with respect to conflicted controller and ‘change of control’ transactions, have increasingly emboldened plaintiffs’ law firms to bring claims against directors and officers, significant stockholders and the company and have increased potential exposure for these parties“;19
- “Under Delaware law director liability cannot be eliminated if the court
finds a breach of duty of loyalty and D&O carriers often argue duty of loyalty claims are not insured“;20 - “Cases that are subject to ‘entire fairness’ review in Delaware (which requires the defendants to demonstrate that the price and process in a transaction were entirely fair) present a high bar and, because of the factual issues involved, it is often difficult for defendants to prevail in the preliminary stagеs of litigation“;21
- “Liberty Media [an affiliated public company for which Maffei serves as CEO], its service companies and certain of their portfolio companies have experienced these developments, having been involved in at least 8 stockholder lawsuits in Delaware since 2012 (5 of which were brought in the last 5 years) which have resulted in substantial time and expense to defend and resolve“;22
- “Management believes Nevada law generally provides greater protection from liability to the Company and its D&Os than Delaware law“;23
- “Nevada law eliminates the individual liability of both officers and directors to the company, its stockholders or its creditors for damages as a result of a breach of fiduciary duty unless the breach involved intentional misconduct, fraud or a knowing violation of law and unless a company‘s articles of incorporation provide for greater liability“;24
- “Nevada does not follow Revlon duties (duty to get the best price reasonably available in a sale), and instead permits consideration of ‘other constituencies’ by statute[.]”25
The presentation acknowledged the potential litigation risk of pursuing this Conversion. The materials noted that Delaware plaintiffs may sue Liberty TripAdvisor‘s directors for “breach of fiduciary duty for allowing alleged controlling shareholder misconduct to take advantage of Nevada legal framework for self-interest[.]”26 The presentation also noted uncertainty regarding “Post-Reincorporation Nevada Litigation,” stating that “notwithstanding that it is contemplated that the Nevada charter will require that ‘internal actions’ be brought exclusively in Nevada state courts, there is uncertainty as to whether Delaware and federal courts would enforce that requirement.”27
After discussion, Liberty TripAdvisor management agreed to continue to pursue the proposed reincorporation and to follow up with the Board for formal approval at a later date. On April 5, 2023, the Liberty TripAdvisor Board approved the Conversion by unanimous written consent.
3. The Stockholder Votes on the Conversions
Both corporations distributed proxy statements in advance of the stockholdеr
- “[T]he Redomestication will provide potentially greater protection from unmeritorious litigation for directors and officers of the Company.”28
- “The Redomestication will result in the elimination of any liability of an officer or director for a breach of the duty of loyalty unless arising from intentional misconduct, fraud or a knowing violation of law.”29
- “[W]e believe that, in general, Nevada law provides greater protection to our directors, officers, and the Company than Delaware law.”30
Liberty TripAdvisor identified similar rationales and disclosed, among other reasons, the following under its “Reasons for the Conversion“:
- “We believe that . . . Nevada law generally provides greater protection against liability for our directors, officers and the company than Delaware law.”31
- “The conversion will therefore result in the elimination of liability of an officer or director for breaches of fiduciary duties to the company, including its stockholders unless, [sic] involving intentional misconduct, fraud or knowing violation of law.”32
Assuming Maffei and Liberty TripAdvisor voted all their shares in favor, only 5.4 percent of minority Tripadvisor and 30.4 percent of Liberty TripAdvisor‘s minority stockholders voted for the Conversions.33 Therefore, the Conversions would not have been approved without the votes of Maffei and Liberty TripAdvisor. However, with Maffei and Liberty TripAdvisor‘s votes included, the Conversions were approved by a majority of each corporation‘s voting power at their respective annual meetings in June 2023.34
C. Proceedings in the Court of Chancery
1. Events Preceding the Court of Chancery‘s Decision
On April 21, 2023, Plaintiffs filed a Verified Complaint, Motion for Expedition, and a Motion for a Preliminary Injunction seeking to enjoin the redomestication of Tripadvisor and Liberty TripAdvisor into Nevada entities (the “Conversions“).35 On May 1, the Court of Chancery issued a Stipulation and [Proposed] Status Quo Order noting that, among other things, “the parties have stipulated and agreed as follows:
- [Tripadvisor] and Liberty TripAdvisor are entitled to hold stockholder votes on the Conversions.
-
[Tripadvisor] and Liberty TripAdvisor will not effectuate the Conversions until the Court enters an order dismissing the action that is final and non-appealable or by agreement of the parties, subject to the Court approving the termination of this Order. Plaintiffs agree that they will seek to expedite any appeal to the Delaware Supreme Court from an order dismissing the action. - Plaintiffs withdraw their Motion for Expedition and Motion for a Preliminary Injunction as moot.”36
In June 2023, Plaintiffs filed a Verified Amended Complaint (the “Complaint“), contending that the Conversions were self-interested transactions and that Defendants breached their fiduciary duties by entering into them.37 They sought to enjoin the closing of the Conversions.38
In February 2024, Tripadvisor announced that it had entered into discussions with Liberty TripAdvisor regarding a potential going-private transaction. Tripadvisor also announced that it had formed a special committee and that any transaction would be subject to the twin MFW protections. No assurances were provided that an agreement would be reached or when a going-private transaction might happen. The court asked the parties whether the announcement had implications for the motion to dismiss. The parties agreed that the potential for a transaction at some point in the future did not have any effect on the pending motion. Both sides asked the court to render a decision.39
In their Complaint, Plaintiffs argued that “the Conversions will insulate [the Defendants] from almost any stockholder litigation, including claims that would be highly meritorious under Delaware law.”40 In support of this argument, Plaintiffs claimed that Nevada has been engaged in a project to craft a no-liability corporate safe haven and has become a “hotbed for corporate wrongdoers.”41 Plaintiffs then argued that “[t]he Conversions essentially deprive Plaintiffs and other public stockholders of [the right to sue] without any fair process and without any consideration.”42 Further, Plaintiffs alleged that the market values Nevada firms less than it values Delaware firms.43 After citing Defendants’ proxy materials, Plaintiffs argued that “[a]t bottom, the Conversions are self-interested transactions aimed to benefit the Companies’ directоrs, officers, and conflicted controlling stockholder to the clear detriment of minority public stockholders.”44
Plaintiffs alleged that Maffei, as a controller, breached his fiduciary duties by entering into a transaction that is not entirely fair to Tripadvisor‘s and Liberty
TripAdvisor‘s public stockholders. They also alleged that the directors breached their fiduciary duties by approving the self-interested Conversions to insulate themselves and Maffei from future liability without providing any material consideration to the public stockholders.
Defendants filed a motion to dismiss under Rule 12(b)(6) arguing that the business judgment rule applies because Plaintiffs failed to plead a self-interested transaction.45 After disputing Plaintiffs’ characterization of Nevada law, Defendants argued that:
In any event, this motion does not ask this Court to evaluate Nevada‘s legislative choices: The question presented here is whether Nevada‘s allegedly greater protection from litigation for Maffei and the other Directors constitutes a unique benefit to them sufficient to render the Conversions self-interested transactions. It does not.46
Defendants then cited Delaware case law for the proposition that “Delaware courts have found directors to be interested only when approving a transaction that
speculation about a potential future transaction is insufficient to plead self-interest today by Maffei.”49
Plaintiffs opposed the Motion to Dismiss arguing that the Conversions are subject to entire fairness because they would provide a non-ratable benefit to Maffei and the other directors.50 Plaintiffs sharply disagreed with Defendants that “a controller obtains a non-ratable benefit only when ‘a transaction . . . extinguishes existing potential liability[.]‘”51 Plaintiffs argued further that the scale of the D&O insurance market, corporate lawyers rates, and the very reason Defendants are entering into the Conversions shows that “[i]t defies reality to suggest that Maffei - or any controller - wоuld be indifferent to the risk of future liability for disloyal self-dealing.”52
3. The Court of Chancery‘s Analysis
Applying the familiar Rule 12(b)(6) standard, the Court of Chancery observed that “[d]ismissal is inappropriate ‘unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances.‘”53
The court‘s analysis of the fiduciary duty claim proceeded in four parts.54 First, it held that entire fairness would apply if “the conversions conferred a non-ratable benefit on the fiduciary defendants.”55 Second, it held that it was “reasonable to infer from the complaint‘s allegations that Nevada law provides greater protection to fiduciaries and confers a material benefit on the defendants.”56 Third, it held that the court could conduct an entire fairness inquiry and consider “whether stockholders received the substantial equivalent of what
a. The Court of Chancery‘s Standard of Review
The court considered which of three standards of review would apply: business judgment, enhanced scrutiny, or entire fairness. Although Defendants contended that the Conversions were protected by the business judgment rule, the court noted that “Delaware
law has deemed the business judgment rule rebutted and applied the entire fairness test ab initio to any transaction between the corporation and a controlling stockholder in which the controller receives a non-ratable benefit.”59 The court noted that the parties agreed that Maffei controlled the corporations and that there were no cleansing actions. Accordingly, the court held that the standard of review “depends on whether the conversions conferred a non-ratable benefit on the fiduciary defendants.”60
b. The Court of Chancery Found That the Conversions May Convey a Non-Ratable Benefit to Defendants
The court 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.”61 Although the parties argued that no Delaware decision applied these principles to a reincorporation merger, the court determined that Harris v. Harris62 did just that.63 The court noted that the Harris defendant sought a reincorporation merger that would change the corporation‘s domicile from Delaware to New Jersey and, in the process, would extinguish minority stockholders’ standing to pursue derivative claims.64 Because those claims sought to recover compensation and benefits paid to the director defendant and the Advisors, the defendants were “interested in the litigation.”65
Accordingly, “[b]ecause the merger extinguished the plaintiffs’ standing to pursue those claims, the defendants received a non-ratable benefit from the reincorporation merger.”66
The court then rejected Defendants’ attempt to distinguish Harris by differentiating between existing potential liability and future potential liability.67 The court commented that such a distinction “would make Delaware law piteously naive.”68 It drew an analogy to the insurance industry and considered that “an insurer gets greater benefit from the same dollar value of premium if onerous conditions mean the insurer is less likely to pay.”69 The court
The court criticized Defendants’ temporal distinction by comparing it with alterations of future dividends and call options. In both cases, the court reasoned that applying the existing versus future distinction would produce results incompatible with market understandings of value.72
Next, the court rejected Defendants’ reliance on Bamford v. Penfold, L.P.,73 Orloff v. Shulman,74 Coates v. Netro Corp.,75 and Sylebra Capital Partners Master Fund, Ltd. v. Perelman,76 concluding that these cases support a materiality requirement, rather than a temporal distinction.77 The court noted that “[a] fiduciary is interested in a transaction when it confers a material benefit on the fiduciary.”78 The court, therefore, interpreted the cases as seeking to determine whether the fiduciary received something that was (i) a benefit; and (ii) was material. In the court‘s view, the cases treat litigation proteсtion as a benefit and ask whether the litigation protection is material.
The court reasoned that Bamford “did not distinguish between existing-potential and future-potential liability[]” and that the exculpatory provision in Bamford was material making Bamford about a materiality rule – not a temporal distinction.79 And the court stated that “[t]he same is true with Orloff.”80 The court read Orloff as turning on a lack of materiality because the
Finally, the court stated that Sylebra was inapplicable because that court “refused to address the merits of the plaintiffs’ claims and dismissed the case based on the forum-selection bylaw.”85 Thus, the court concluded that “[t]he Sylebra decision has nothing to do with the point the defendants are trying to make.”86
The court also rejected comparisons with Boilermakers Local 154 Retirement Fund v. Chevron Corp.87 and Underbrink v. Warrior Energy Services Corp.,88 which the court said Defendants cited “[i]n passing[.]”89 The court did not interpret Chevron as being about whether the future application of a forum-selection bylaw creates a disqualifying interest.90 Instead, the court read Chevron as a case where the court “declined to consider as-applied challenges based on whether the bylaw might operate unreasonably in future cases.”91 Nonetheless, the court reasoned that forum-selection bylaws do not confer a material benefit on fiduciaries because “[t]he bylaw only changes the forum, not the law or the fiduciaries’ litigation exposure.”92
Finally, the court addressed Underbrink. The court noted that Underbrink “interpreted Orloff as supporting a temporal distinctiоn and put heavy emphasis on that concept when assessing materiality.”93 Nonetheless, the court viewed Underbrink to ultimately be about “materiality, not temporal orientation.”94
c. The Court of Chancery Rejected Defendants’ Argument That Applying the Entire Fairness Standard Is Not Feasible
The court began by outlining how it viewed the entire fairness standard. The court criticized Defendants’ argument that it would not be feasible to apply entire
d. The Court of Chancery Held That Plaintiffs Pled Sufficient Facts to Question Whether Entire Fairness May Apply
The court held that Plaintiffs had pled sufficient facts to make it reasonably conceivable that the Conversions were not entirely fair and, thus, Defendants have the burden of demonstrating entire fairness. On the fair price prong, the court found that Plaintiffs had pled sufficient facts showing that stockholders will not “receive the substantial equivalent of what they had before.”99 As to the fair dealing prong,100 the court concluded that the allegations supported an inference that the Conversions were not procedurally fair. As alleged, the controller and the directors did not implement any procedural protections, and the controller delivered the vote as the unaffiliated stockholders resoundingly rejected the Conversions. Finally, the court rejected Defendants’ argument that other benefits of the Conversions made the transaction fair. The court considered the reduction in franchise taxes immaterial given the corporations’ sizes and improved management recruitment ability not to be a separate benefit because it is merely a function of reduced litigation exposure.101 Regardless, the court determined that the countervailing benefits could not be addressed at that stage.102
e. The Court of Chancery Focused on Stockholders’ “Litigation Rights”
The court described three types of stockholder‘s rights: economic rights, governance rights, and litigation rights. The court discussed how curtailing economic or governance rights would trigger entire fairness and reasoned that “[t]he same should be true for litigation rights.”103 It noted that access to courts is necessary to protect the other rights and that “[w]ithout legal protection, an investor‘s capital becomes a gift.”104 The court then held that
f. The Court of Chancery Denied Injunctive Relief
The court rejected Defendants’ argument that a Delaware court could never enjoin an entity from leaving the state since the court has the power to prevent persons and assets from leaving its jurisdiction when necessary to preserve its ability to award final relief.107 However, the court found that such circumstances were not present because money damages would be an adequate remedy and, therefore, Plaintiffs failed to make the showing necessary for injunctive relief.
4. The Court of Chancery Denied Certification of Interlocutory Appeal
Following the Court of Chancery‘s decision, Defendants asked the court to certify the order for interlocutory review. The court denied the application.108
The court rejected Defendants’ argument that the opinion decided a substantial issue. The court observed that it “addressed the likely standard of review for pleading-stage purposes[]”109 but “did not make a final determination regarding the standard of review.”110 And the court noted that if “the defendants could show that Nevada law did not differ materially from Delaware law[]“, entire fairness would not apply and the business judgment rule would control.111
The court then rejected Defendants’ argument that the opinion decided a substantial issue because the opinion “created the prospect of prolonged, expensive litigation and an uncertain damages award.”112 The court found this argument to be flawed because it would support excessive interlocutory review and because Defendants could take actions to reduce the length and expense of the litigation. The court also rejected Defendants’ arguments that the opinion would preclude alleged controlled companies from leaving.113
5. This Court Granted Interlocutory Appeal
In April 2024, this Court accepted an interlocutory appeal of the Court of Chancery‘s decision.117 We concluded that the application met the standards for review under
Certainty regarding the standard of review applicable to a decision to reincorporate in another jurisdiction would be beneficial, the Interlocutory Opinion involves a question of law regarding reincorporation in another jurisdiction that was decided for the first time in this state, interlocutory review may terminate the litigation, and the likely benefits of interlocutory review outweigh the probable costs.119
Oral argument was held before this Court on October 30, 2024.
D. Events Following Oral Argument Before This Court
Following oral argument, on December 19, 2024, Defendants issued a press release announcing a proposed transaction that would “result in the simplification of Tripadvisor‘s capital structure into a single class of shares with no сontrolling stockholder, thereby creating more strategic flexibility for Tripadvisor.”120 On December 20, 2024, Plaintiffs sent a letter to this Court “to update the Court regarding a development that has, in [Plaintiffs‘] view, mooted the appeal.”121 Plaintiffs followed their letter with a Motion to Dismiss Appeal as Moot on January 3, 2025 citing the proposed transaction referred to in the December 19 press release.122 Defendants filed an opposition to the motion on January 13, 2025.123
II. STANDARD OF REVIEW
The standard of review applicable to a decision to reincorporate in another jurisdiction involves a “question of
III. CONTENTIONS ON APPEAL
Defendants argue that the Court of Chancery erred in finding the Conversions to be subject to entire fairness. Instead, Defendants contend 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 argue for a materiality requirement contending that “[t]he speculative benefits afforded to fiduciaries from risk mitigation do not constitute material benefits requiring entire fairness review.”127 Additionally, Defendants argue that ”MFW does not afford a solution even if a fiduciary-favorable change to the liability framework on a litigation-clear day constitutes a material, non-ratable benefit to directors.”128
Finally, Defendants raise several policy arguments against subjecting the Conversions to entire fairness review. Defendants argue that “[t]he Court of Chancery‘s decision raises comity concerns because it calls for the court ‘to quantify the extent of the harm, if any, that moving from Delaware to Nevada imposes on the unaffiliated stockholders.‘”129 Nor do Defendants view entire fairness review as practical in these circumstances and they question “how . . a court [is] supposed to determine whether stockholders’ allegedly diminished litigation rights (that might not ever be implicated) are more or less valuable than the company‘s expectation that it will enjoy value-enhancing benefits over the medium and long term?”130 Defendants conclude by asking this Court to reversе the judgment below.131
The State of Nevada filed an amicus brief generally supporting Defendants’ position. Nevada argues that the Conversions do not confer a non-ratable benefit that would trigger entire fairness.132 Nevada argues that the Court of Chancery‘s opinion “violates principles of comity by calling for Delaware courts to quantify the supposed ‘harm’ that a move from Delaware might theoretically inflict.”133 Further, Nevada argues that “if Delaware courts engage in that analysis (and they should not), they should take judicial notice of Nevada law as it is (as permitted by
Plaintiffs contend that the Court of Chancery was correct to apply entire fairness because the Conversions convey a non-ratable benefit,136 the availability of MFW cleansing does not impact the standard of review, and policy reasons support applying entire fairness. Accordingly, Plaintiffs argue that this Court should affirm the opinion below.
Plaintiffs’ December 20, 2024 letter pointed to a December 19 press release from Tripadvisor that indicated a “‘transaction will result in the simplification of Tripadvisor‘s capital structure into a single class of shares with no controlling stockholder, thereby creating more strategic flexibility for Tripadvisor.‘”137 In their Motion to Dismiss Appeal as Moot,138 Plaintiffs argued that “[b]ecause Tripadvisor is acquiring Liberty TripAdvisor and will no longer be a controlled corporation, the benefit to Maffei of being able to extract greater private benefits of control after redomestication – and the concomitant harm to minority stockholders – no longer exists.”139 Plaintiffs noted that they “intend to voluntarily dismiss their Complaint as moot[]”140 and that “[i]t follows logically that this appeal should be dismissed as moot.”141 Plaintiffs added in a footnote that they “intend to request thаt the Court of Chancery maintain jurisdiction over any motion for a mootness fee.”142
Defendants filed an Opposition to Plaintiffs’ Motion to Dismiss Appeal as Moot on January 13, 2025 and presented three reasons as to why the appeal was not moot. First, they noted that the transaction “has not yet occurred and remains subject to stockholder approval and other closing conditions.”143 Second, they argued that Plaintiffs’ claims were not reliant on the existence of a controller since they also included claims against the directors.144 And third, they argued that “‘[m]ootness does not mandate dismissal’ of an appeal[]”145 because “mootness does not prevent the Court from deciding an appeal that presents ‘a principle of Delaware law that could have significant impact in future cases, and that, therefore, should be subject to appellate review before it becomes operational prospectively.‘”146 Finally, Defendants argued that “if Plaintiffs no longer wish to pursue their claims, the correct procedure would be for them to move for voluntary dismissal with prejudice” and
IV. ANALYSIS
We begin by holding that this appeal is not moot. The transaction that Plaintiffs allege would moot this appeal is merely proposed and remains subject to conditions, including a stockholder vote. Therefore, the controller that existed when the Complaint was filed still exists as a controller.
In addition, the trial court held that Plaintiffs had adequately pleaded that the director defendants were conflicted based upon their proxy statements and board materials.148 The court found a pleading-stage inference that the directors were interested in the Conversions.149 At oral argument before this Court, Plaintiffs adhered to the view that they had independently stated a claim against the directors.150 Thus, the issue also remains live as to the directors.
A. Standards of Review in Corporate Transactions
There are three standards of review for corporate transactions under Delaware law: business judgment, enhanced scrutiny, and entire fairness. Here, Plaintiffs contend that entire fairness applies while Defendants contend that the business judgment rule applies.
“The [business judgment] rule creates a presumption ‘that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation.‘”151 “Subject to certain well defined limitations, a board enjoys the protection of the business judgment rule in discharging its responsibilities.”152 The burden is on the party challenging the decision to establish facts rebutting the presumption. “The effect of this presumption when applied by a court is that the court will not substitute its judgment for that of the board, unless it is shown by a preponderance of the evidence that the directors’ decision involved a breach of fiduciary duty.”153 But, “[i]f the presumption of the business judgment rule is rebutted . . . the burden shifts to the director defendants to prove to the trier of fact that the challenged transaction was ‘entirely fair’ to the shareholder plaintiff.”154
We have explained how the presumption reflected in the business judgment rule operates in the context of a motion to dismiss as follows:
Procedurally, the plaintiffs have the burden to plead facts sufficient to rebut that presumption. On a motion to dismiss, the pled facts must support a reasonable inference that in making the challenged decision, the board of directors breached either its duty of loyalty or its duty of care. If the plaintiff fails to satisfy that burden, “a court will not substitute its judgment for that of the board if the . . . decision can be attributed to any rational business purpose.”155
In contrast to the presumption found in the business judgment rule, under entire fairness review, “‘the defendants bear the burden of proving that the transaction with the controlling stockholder was entirely fair to the minority stockholders.‘”156 In Weinberger v. UOP, Inc., we described the entire fairness standard as follows:
The concept of fairness has two basic aspects: fair dealing and fair price. The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company‘s stock. However, the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness.157
These requirements make “entire fairness [] the highest standard of review in corporate law.”158 Accordingly, “this Court has noted that ‘[b]ecause the effect of the proper invocation of the business judgment rule is so powerful and the standard of entire fairness so exacting, the determination of the appropriate standard of judicial review frequently is determinative of the outcome of [the] litigation.‘”159
B. Triggers for Entire Fairness Review
This Court has noted that “[t]he entire fairness standard applies only if the presumption of the business judgment rule is defeated.”160 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.”161
“Entire fairness is not triggered solely because a company has a controlling stockholder.”163 “[C]ases where the controller stands on both sides of the transaction present a particularly compelling reason to apply entire fairness: both corporate decision-making bodies to which Delaware courts ardently defer – the board of directors and disinterested voting stockholders – are considered compromised by the controller‘s influence.”164 Accordingly, although controlling stockholders are at times free to act in their own self-interest, “a controlling stockholder is a fiduciary and must be fair to the corporation and its minority stockholders when it stands on both sides of a transaction and receives a non-ratable benefit.”165 “Transactions where the controller is on only one side of the transaction also face entire fairness scrutiny to assuage the risk that a controller who stands to earn ‘different consideration or some unique benefit’ will flex his control to secure that self-interested deal to the detriment of minority stockholders.”166 As we noted in Match, “[e]ntire fairness is the standard of review in transactions between a controlled corporation and a controlling stockholder when the controlling stockholder receives a non-ratable benefit.”167 Accordingly, “where a controlling stockholder transacts with the controlled corporation and receives a non-ratable benefit, the presumptive standard of review is entire fairness.”168
Here, Defendants include both a controller – Maffei169 – and several directors. Therefore, we analyze whether entire fairness review applies to either or both sets of defendants. Entire fairness may apply if
C. Defining a Non-Ratable Benefit
We begin by defining what a non-ratable benefit is. In the director context, “a director is considered interested ‘when he or she will receive a personal financial benefit
from a transaction that is not equally shared by the stockholders.”170 ““The benefit received by the director and not shared with stockholders must be of a sufficiently material importance, in the context of the director‘s economic circumstances, as to have mаde it improbable that the director could perform her fiduciary duties ... without being influenced by her overriding personal interest.“”171
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 stockholders.‘”172 “A non-ratable benefit ‘exists when the controller receives a unique benefit by extracting something uniquely valuable to the controller, even if the controller nominally receives the same consideration as all other stockholders.‘”173
“Delaware decisions have applied the entire fairness framework to compensation arrangements, consulting agreements, services agreements, and similar transactionsbetween a controller or its affiliate and the controlled entity.”174 However,
had the effect of strengthening the [controlling stockholders‘] control.”179 In Match, we distinguished Williams observing that in Williams, “[e]ntire fairness review did not apply because the controlling stockholders received the same benefit as other stockholders.”180
1. A Non-Ratable Benefit Must Be Material to Trigger Entire Fairness In This Context
The concern over controller and director self-interest animates the entire fairness standard,181 and the cases suggest that a non-ratable benefit must be material to trigger entire fairness review. As the Court of Chancery noted, “[a] fiduciary is interested in a transaction when it confеrs a material benefit on the fiduciary.”182
We agree with the Vice Chancellor that a materiality requirement is appropriate in the context of this case where the principal focus has been on the alleged non-ratable benefits potentially flowing to the controller. Further, such a requirement achieves continuity with our law in the director context where we have more explicitly stated that non-ratable benefits and financial interests must be sufficiently material in order to taint director interest.183
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. The court read precedent as supporting a materiality requirement as opposed to a temporal distinction. We do not view these concepts as mutually exclusive. Rather, our reading of Delaware precedent persuades us that temporality is a key factor because it weighs heavily in determining materiality in this context.
We recognize that providing protection to directors against future liability exposure does not automatically convey a non-ratable benefit. Were this the case, no board could use company funds to procure a Side A policy or adopt a Section 102(b)(7) exculpation provision without triggering entire fairness review. Yet Delaware courts have declined to find that directors lack independence or disinterestedness because they adopted a Section 102(b)(7) provision, even though such provisions reduce a director‘s future liability exposure.184 Our courts have also held that the receipt of indemnification benefits does not necessarily taint a director‘s judgment with self-interest.185 Finally, boards almostuniversally procure D&O policies, which reduce the risk of director liability exposure in future litigation.186
Based upon our review of the precedent, as further explained below, we conclude that temporality weighs heavily in determining materiality here and, ultimately, whether a non-ratаble benefit exists that triggers entire fairness review. We hold that the absence of any allegations that any particular litigation claims will be impaired or that any particular transaction will be consummated post-conversion, weighs heavily against finding that the alleged reduction in liability exposure under Nevada‘s corporate law regime is material.187
In Orloff v. Shulman, the Court of Chancery rejected “the plaintiffs’ claim that the defendants violated their fiduciary duties by approving a bylaw amendment which provided for the advancement of legal fees during litigation.”188 The court observed that “[t]he law of Delaware is clear on the permissibility of advancing legal fees[]” and that is “especially true” when “the plaintiffs challenge the adoption of a bylaw that requires the corporation to advance litigation costs sometime in the future rather than challenging the directors’ decision to advance particular litigation expenses.”189
In Underbrink v. Warrior Energy Services Corp.,190 the board of the defendant corporation on which the plaintiffs were serving had adopted a mandatory advancement bylaw by unanimous written consent.191 After leaving the board, the plaintiffs sought advancement when they were subsequently named in a Texas action.192 The defendant corporation refused advancement, and the plaintiffs filed suit.193 Although the defendant corporation alleged that the plaintiffs “knew that they were being targeted as directors of[the defendant corporation,]” the court observed that none of the proposed factual findings showed that the plaintiffs faced anything more than “an ‘imminent threat of litigation’ for actions taken by them as [the defendant corporation‘s] directors (e.g., they were not named defendants in the Texas Proceeding) such that the Board, when it enacted the 2006 Bylaws, was in fact advancing litigation expenses for a particular proceeding.”194 In declining to apply entire fairness, the court drew an analogy to Orloff and found the defendant was ““challeng[ing] the adoption of a bylaw that requires the corporation to advance litigation costs sometime in the future rather than challenging the directors’ decision to advance particular litigation expenses.“”195
Case law also demonstrates that courts draw a distinction between limitations of directors’ liability exposure for past acts and future acts. This distinction can be seen by comparing cases where directors adopted provisions under
In Orloff, the director defendants approved an amendment to the corporation‘s certificate of incorporation, “which include[d] a
The Orloff court rejected the plaintiffs’ arguments considering them “but variations on the ‘directors suing themselves’ and ‘participating in the wrongs’ refrain.”201 The court noted that it had “at least twice before rejected claims of this kind,” and cited Decker v. Clausen202 and Caruana v. Saligman.203 In those cases, the court held that the allegations
Similarly, the Court of Chancery applied this settled precedent in Sutherland v. Sutherland205 where the defendants added a
The court rejected the plaintiffs’ claim holding that “[e]ven if the Defendants, however, recognized the potential personal benefit of adoрting these charter amendments, making the amendments was not wrongful.”207 To support its decision, the court cited Caruana v. Saligman, and Decker v. Clausen, noting that “[t]he [c]ourt, in each instance, concluded that such allegations failed to create a reasonable doubt that the directors were recommended and approved a charter amendment limiting their liability has been made before[,]” and the court cited Decker v. Clausen in rejecting the argument. Id. at *4.
disinterested or not independent.”208 The court also cited Orloff considering it to be a case addressing the precise issue raised in Sutherland.209 In discussing Orloff, the Sutherland court noted that it would adhere to Orloff‘s path of following the Caruana and Decker line of cases.210 Accordingly, the court dismissed the plaintiff‘s claims regarding the adoption of the
But Delaware courts have applied entire fairness review when directors or controllers have adopted exculpatory provisions to shield themselves from claims based on past conduct. The Court of Chancery refused to apply the business judgment rule in Bamford v. Penfold, L.P. where the controller adopted an exculpatory provision while “fac[ing] claims for breach of the duty of loyalty based on his past conduct[.]”211 The Bamford court noted that the controller “sought to cut off that threat [of litigation]”212 and that a provision eliminating liability “prospectively and retrospectively” gave the controller a material benefit.213 Accordingly, the decision to approve the exculpatory provision was subject to entire fairness review.214
The Bamford court noted that “[f]iduciaries who control an entity can adopt prospective protective provisions, including exculpatory provisions, particularly if theprovisions do not implicate the duty of loyalty.”215 The court distinguished Orloff, in part, by noting that a
Manheim faced claims for breach of the duty of loyalty based on his past conduct. Manheim sought to cut off that threat and benefit himself through the adoption of the Exculpatory Provision. Superficially, the Exculpatory Provision treated all Covered Persons equally. But because Manheim had engaged in misconduct and faced litigation risk, it was really Manheim who benefitted.218
Similarly, in Harris v. Harris,219 the Court of Chancery found a unique benefit when the defendants pursued a reincorporation designed to defeat stockholder standing to pursuea stockholder derivative action.220 The Harris court noted both the prospect of litigation, and that the defendant “[a]dvisors also thought that the Outbound Merger would cut off the [plaintiffs‘] standing to assert derivative claims regarding events predating the merger[.]”221 Further, the court observed that, in the context of the alleged past conduct, “the extinguishment of derivative standing can confer a unique benefit on the fiduciaries that approved the merger, thereby subjecting the merger to a direct challenge.”222
The cloud of litigation relating to past conduct also led the Court of Chancery to apply entire fairness in In re Riverstone National, Inc. Stockholder Litigation.223 There, defendants acted to extinguish their existing potential liability after the plaintiffs notified the defendants of claims that the defendants “breached their fiduciary duties by usurping the opportunity to invest in Invitation Homes[]”224 and plaintiffs filed a books and records suit. The court noted that “[s]hortly after the Merger Board was notified of the [p]laintiffs’ investigation, the Merger Board executed the Merger Agreement, dated May 30, 2014, that purportedly released all potential liability concerning the Usurpation Claims that may have followed from that investigation.”225 The court found that these facts, combined with the rest of the plaintiffs’ pleading, demonstrated “that the majority of the Merger Board wasinterested
For the reasons above, the Plaintiffs have pled with particularity that, at least, Pearson and the Goulds were aware that they faced a derivative claim at the time they were considering the Merger, that the claim was viable, and that potential liability was material to them. They approved a merger which precluded prosecution of those claims derivatively, as a matter of law, and precluded the acquirer‘s pursuit of the claims as a matter of contract. They thus secured a valuable benefit from the Merger not shared by the stockholders. In light of this self-interest, their duty of loyalty is implicated, and the presumption of the exercise of business judgment overcome.227
After this, the court concluded that the plaintiffs had “adequately pled facts indicating that entire fairness applies and that the transaction was not entirely fair, sufficient to withstand the Defendants’ Motions to Dismiss.”228
In the opinion below in this case, 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 riskof liability.”229 However, we
Taken together, these cases suggest that 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. Given that Plaintiffs have not alleged any past conduct that would lead to litigation, this case aligns with our case law that applies the business judgment rule. As noted below, thistemporality distinction aligns with other areas of our case law where our courts have limited plaintiffs’ abilities to pursue litigation based upon scenarios where liability is speculative or hypothetical. Given the absence of any allegations that the Conversion decisions were made to avoid any existing or threatened litigation or that they were made in contemplation of any particular transaction, we hold that Plaintiffs have failed to adequately allege facts showing Defendants’ receipt of a material, non-ratable benefit.
3. Courts Apply Temporal Distinctions Regarding Speculative Liаbility in Other Areas and Courts Can Do So When Reviewing Corporate Transactions
We respectfully disagree with the Court of Chancery that such a temporal distinction is “arbitrary”230 and “hard to follow.”231 Courts routinely apply temporal distinctions to require litigants to do more than speculate. Defendants correctly argue that courts readily draw these distinctions in other circumstances, and they cite requirements for standing under the United States and Delaware Constitutions, as well as the federal and Delaware Declaratory Judgment Acts as examples. We agree with Defendants’ position.
For example, our ripeness jurisprudence shows that Delaware courts regularly require more than speculation about future litigation for a party to litigate a claim. In Rollins International v. International Hydronics Corp., we addressed a case where the defendant asserted a counterclaim seeking “a declaratory judgment to declare that it ha[d] no present duty to [the plaintiff] under the non-disclosure paragraphs of the agreements, that the paragraphs are void and unenforceable, and that [the defendant] acquired nospecialized knowledge, technical know-how or trade secrets within the meaning of these paragraphs.”232 In addressing the plaintiff‘s contention that no actual controversy existed,
In allowing the case to proceed, we noted that “[t]he basic dispute clearly went and continues to go beyond the particular claim of breach . . . and included and appears to continue to include charges of breach by disclosure to others yet unknown to plaintiffs as to which an injunction was sought and as to which injunctions are very likely to be sought in the future.”234 At the same time, we noted “that the holding of this Court does not make declaratory relief instantly available to any party to a contract upоn a mere allegation that a term of the contract may be subject to some future significant difference of opinion.”235 Rather, our Court held that “a sufficient state of facts has been alleged in the presentinstance so as to prevent the questions raised by [the defendant‘s] counterclaim from being classified as hypothetical.”236
We applied our ripeness principle again in Stroud v. Milliken Enterprises, Inc. where we cautioned against deciding cases when the parties’ dispute is not close to a “‘concrete and final form.‘”237 In Stroud, the plaintiffs alleged that the defendants had provided an inadequate notice regarding the annual stockholders’ meeting and proxy materials.238 In response, the defendants presented a proposed revised notice to the trial court and “plaintiffs charged the defendant directors with failing to provide [the defendant]‘s stockholders with ‘all information material’ to the business of the meeting and with proposing to issue a notice that was false and misleading and in breach of the directors’ duty of complete candor.”239
The parties conceded the original action was moot “but rather than seeking a dismissal of the suit, both parties [sought] a final judicial determination of the legal sufficiency of management‘s statutory notice technique before putting such process into effect.”240 This Court concluded that the appeal must be dismissed noting that “[t]he parties have thereby inappropriately drawn the trial court into the granting of an advisory opinionupon a significant question of corporation law which, in our view, was clearly not ripe for judicial intervention.”241
We also observed that “before a court should declare the rights of parties in a dispute, it must not only ‘be convinced that
This Court‘s standing jurisprudence further shows our reluctаnce to decide cases involving speculative litigation. In Employers Insurance Co. of Wausau v. First State Orthopaedics, P.A., “[t]he appellee‘s complaint sought a declaration that a billing code utilized by the appellant to deny insurance coverage to the appellee‘s patients violated Delaware‘s workers’ compensation law. The appellant, however, implemented a new billing system six months before the appellee filed this action, and none of the codes that the appellant use[d] in its new system contains the challenged language in the old code.”244 In holding that standing did not exist, this Court noted that “[w]e generally follow
Here, 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.248 On this record, we cannot conclude that the Conversions would provide Defendants with a material, non-ratable benefit triggeringentire fairness review.249 Accordingly, we hold that
D. Comity Considerations Reinforce Our Conclusion
We note finally that, although comity concerns are not an independent ground for reversal in this case, our holding furthers the goals of comity by our declining to engage in a cost-benefit analysis of the Delaware and Nevada corporate governance regimes.250 ““The United States is a federal republic that depends on comity among the stаtes for the peaceful and efficient conduct ... of private commerce.“”251 States have taken different approaches on matters such as the scope of director and officer exculpation, standards of review, and the scope of stockholder inspection rights. And litigation rights, as the ViceChancellor recognized, are only one stick in the corporate governance bundle.252 Delaware courts are well-aware that “it is more than the statutory words on paper that give life to a system of entity law. Much often depends on the extent to which specific disputes are consistently handled by courts, thus giving business[persons] predictable guidance by which to order their relations.”253
The record shows that Defendants considered a number of factors in their weighing of the costs and benefits of the Conversions.254 These factors included the respective court systems,255 the predictability of the courts with respect to corporate matters,256 the judges‘expertise in handling such disputes,257 the development
If one were to determine “whether stockholders received the substantial equivalent of what they had before[]“,260 it would make sense that the companies would consider the value of what the stockholders had regarding the overall integrated corporate governance structure. In addition to the court system,261 the judges, the state of the development of the case law, and the familiarity of market participants with the regime, such an analysis could also include the process by which corporate statutory amendments are proposed and adopted by the state legislatures,262 the effectiveness of the state‘s Secretary of State officein facilitating corporate filings,263 and the existence of a corporate Bar available, willing, and able to handle such disputes.
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 cоrporate governance regime over another‘s. Under the facts presented here, we 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.264
as here, would be an unacceptably speculative cost-benefit exercise. Such an exercise, under these circumstances, also risks intruding on the value judgments of state legislators and directors of corporations.
E. Our Conclusion Aligns With Delaware Policy
Delaware policy has long recognized the values of flexibility and private ordering.266 Allowing directors flexibility in determining an entity‘s state of incorporation is consistent with this Delaware policy. Declining to second-guess directors’ decisions to redomesticate where there are no well-pled allegations of a material, non-ratable benefit flowing to the directors or controllers furthers this important policy.
V. CONCLUSION
For the foregoing reasons, we hold that the business judgment rule applies to the present case. Accordingly, we REVERSE the judgment below.
Notes
Id. See also id. at 261 (“The reduction in the unaffiliated stockholders’ litigation rights inures to the benefit of the stockholder controller and the directors. That means the conversion confers a non-ratable benefit on the stockholder controller and the directors, triggering entire fairness.“).The defendant directors focused on the ability of the conversions to reduce or eliminate litigation risk. The board materials discussed those issues and called out past cases. And the proxy statements told the stockholders that the directors were recommending the conversions to reduce or eliminate litigation risk.
. . .
The plaintiffs have alleged particularized facts demonstrating that the defendants were interested in the conversions. Entire fairness therefore applies.
Oral Argument 22:34–24:04.[The Court]: [Counsel], would you agree that if we weren‘t dealing with a controller here and we had a clear day, would a director‘s independence be subject to challenge simply because she voted to reincorporate in Nevada?
[Counsel]: I think that the director question is a closer call certainly, Your Honor, than the controller сall, I think it depends on the facts that are pled, I think the facts here...
[The Court]: Clear day, no controller.
[Counsel]: You could still have the situation like here where the Defendants admit that they are redomesticating for the purpose of receiving that benefit and that‘s what the Court of Chancery relied on here. I don‘t think my friend, respectf...
[The Court]: So, in your view that‘s enough to deem that director not independent and not disinterested?
[Counsel]: I think the question is whether the director is receiving a unique benefit through the transaction that could skew the director‘s ability to impartially consider whether the redomestication is in the best interest of the company and so I think you can get there in two ways. One, you could say the benefit to the director is sufficient that that satisfies the standard. I think that‘s a close call in this situation, a redomestication to Nevada. I think another way to get there, to say, okay, the complaint has adequately pled that these director defendants are self-interested in this transaction is that they have admitted that they are voting in favor of this business decision for the purpose of receiving that benefit. And I think that...
Id. at *8.Plaintiffs plead particularized facts with respect to individual directors showing the existence of a chose-in-action against the directors which, if brought as a claim would have survived a motion to dismiss; that the director at the time of negotiating and recommending the merger was aware of the potential action; that the potential for liability was material to the director; and that the directors obtained and recommended an agreement that extinguished the claim directly by contract. Where, as here, such a pleading is made with respect to a majority of the directors, the complaint is sufficient to rebut the business judgment rule.
First, the plaintiff must allege an injury in fact, which is both concrete and actual or imminent. An actual or imminent injury is one that is neither hypothetical nor conjectural. Second, the plaintiff must show that the injury is caused by the defendant‘s actions. A plaintiff can meet this prong by demonstrating that the injury is fairly traceable to the defendant‘s complained-of conduct. And third, the plaintiff must show that their requested relief is likely to redress the injury.Id. (internal citations and quotations omitted).
The floor for substantive fairness is whether stockholders receive at least the substantial equivalent in value of what they had before. Before the conversion, the stockholders held shares carrying the bundle of rights afforded by Delaware law, including a set of litigation rights. After the conversion, the stockholders owned shares carrying a different bundle of rights afforded by Nevada law, including a lesser set of litigation rights.Palkon, 311 A.3d at 262; id. at 265 (“The directors also considered other potential factors associated with the conversion.“).