Delaware’s Chancery Court Applies Fairness Standard in Tripadvisor Nevada Conversion Case

The Jones Day firm has weighed in on the implications of a Delaware Court of Chancery decision involving Tripadvisor and its planned conversion to a Nevada corporation. 

Tripadvisor, Inc. and its controlling corporation are publicly traded Delaware companies. In 2022, TripAdvisor’s management asked its board to approve a conversion to a Nevada corporation. The geographic switch’s benefits included greater protection against litigation for directors and officers, as Jones Day wrote in its blog post.

Tripadvisor’s board approved the conversion, as did its controlling shareholder’s board. However, shareholders of both corporations filed suit in the Delaware Court of Chancery, alleging that both boards of directors had acted to reduce their potential liability in future transactions.

In February 2024, the Court of Chancery refused to enjoin the conversions, but also refused to dismiss the plaintiffs’ claims. It said plaintiffs had shown that the controlling shareholders of both corporations had obtained a non-ratable benefit, the reduced risk of litigation against the corporations and themselves. 

The court explained that the entire fairness test was applicable, although the shareholders were not receiving any “price” in the conversions, and were instead receiving Nevada shares to replace their Delaware shares. It then ruled that the plaintiffs had adequately alleged that the “price” and the process were unfair, because the Nevada shares had fewer litigation rights than the Delaware shares, and the companies didn’t adopt protections to safeguard the rights of the minority shareholders.

Nevertheless, the court declined to enjoin the conversions, reasoning that if the minority shareholders suffered harm, they could be compensated by money damages, measured by the change in the companies’ stock prices after conversion. 

Jones Day offers three key takeaways: 

1. The Delaware court will carefully scrutinize a conversion that appears intended to benefit defendant directors or a controlling shareholder.
2. The court is unlikely to enjoin the conversion of to a non-Delaware corporation, and if shareholders allege that the conversion is unfair money damages will be the remedy.
3. Even in the case of a company with a controlling shareholder, it is possible to ensure that the business judgment rule applies by conditioning it on a resolution of independent directors and a vote of unaffiliated shareholders.