Delaware Ruling Paves the Way for Companies to Reincorporate to Other States More Smoothly

An article from law firm Fried Frank provides analysis and implications of the Delaware Supreme Court’s recent decision in Maffei v. Palkon, which overturned a lower court’s ruling in a case involving Tripadvisor’s decision to reincorporate from Delaware to Nevada.

The Court clarified that such a reincorporation decision is generally subject to the business judgment rule rather than the stricter entire fairness standard. This ruling clarifies how courts will assess reincorporations and offers greater flexibility for corporations considering moving their legal domicile to another state.

In early 2023, Tripadvisor’s board of directors, under the control of Gregory Maffei, decided to reincorporate from Delaware to Nevada. The stated reasons included lower fiduciary standards for directors and controllers, as well as reduced franchise fees, and more favorable conditions for recruiting corporate managers.

Some minority shareholders sued, claiming breach of fiduciary duties by the directors and Maffei. The reincorporation was unfair because it gave Maffei and other directors a material, non-ratable benefit. 

The Court of Chancery agreed, applying the entire fairness standard, but the Delaware Supreme Court reversed, ruling that the business judgment rule should apply.

The decision underscores that reincorporations from Delaware to other states are typically evaluated under the business judgment rule unless a “clear day” exception is applicable. This implies that, provided no litigation or specific transaction could advantage directors or controllers, the court will defer to the board’s judgment. 

The Court also clarified that the mere prospect of reduced liability exposure under Nevada law is too speculative to justify a higher standard of review. 

The ruling may encourage more companies, particularly controlled ones, to consider reincorporating from Delaware, though the number of such moves is expected to remain small.

For law firms, this decision provides guidance when advising clients on potential reincorporations. Among other considerations, firms should be aware of the business judgment rule’s deference to boards’ decisions, ensure reincorporations occur on a “clear day,” and guarantee transparency with stockholders regarding potential impacts.