Palkon v. Maffei: Addressing Whether Reincorporation in Another State Constitutes a Breach of Fiduciary Duty
On February 20, 2023, Vice Chancellor J. Travis Laster issued an opinion in Palkon v. Maffei, refusing to dismiss minority stockholder claims against the controlling stockholder and board of TripAdvisor, Inc. that challenged the reincorporation of the company as a Nevada corporation. The Court held that it was reasonably conceivable at the pleading stage that Nevada law affords stockholders comparatively fewer procedural protections, thus rendering TripAdvisor’s reincorporation a self-interested transaction conferring a non-ratable benefit on the controlling stockholder and directors that was subject to entire fairness review, rather than the deferential business judgment standard of review.
Lately, there has been much public discourse on Delaware’s status as the go-to state for incorporation—and whether some corporations might migrate to perceived greener pastures in other states. Palkon addresses whether controlled Delaware corporations may face legal liability for reincorporation in jurisdictions with comparatively weaker stockholder protections.
I. Background: The First State v. The Silver State
States compete for business incorporation. With its specialized business courts, experienced judges, and sophisticated corpus of business law, Delaware has historically been the favored destination of choice for many corporations. Increasingly, however, other states—such as Nevada—have positioned themselves to compete as the new destination of choice for controlled companies.
TripAdvisor is the latest example of that trend. In late 2022, TripAdvisor’s management proposed changing their place of incorporation to Nevada, explicitly relying on alleged differences in Nevada law that afforded more protection to directors and officers faced with claims for breaches of fiduciary duty as the justification for the move. In April 2023, the board unanimously approved the company’s reincorporation. In the proxy statement circulated to the company’s stockholders to elicit their approval, the company explicitly justified reincorporation by asserting it would better protect TripAdvisor’s officers and directors by eliminating liability for breaches of the duty of loyalty, absent intentional misconduct, fraud, or knowing violation of the law. While the company’s stockholders voted to approve the reincorporation, the company’s controlling stockholder Liberty TripAdvisor Holdings, Inc., cast the decisive votes. Assuming Liberty cast all of its votes in favor of reincorporation, only 5.4% of unaffiliated minority stockholders voted in favor of the change.
II. Vice Chancellor Laster Refuses to Dismiss, Applies the Entire Fairness Standard
In April 2023, a group of minority shareholders filed suit, seeking to enjoin the reincorporation or, in the alternative, damages. In rejecting the defendants’ ensuing motion to dismiss, the Court of Chancery held that it was reasonable to infer the controller and directors of the company obtained a non-ratable benefit from the reincorporation, based on the allegations regarding board materials and proxy statements referring to reduced litigation risk under Nevada law. Given the material benefit to controllers, the court applied the entire fairness standard, which requires establishing both substantive and procedural fairness of the reincorporation to avoid liability.
The Court held that plaintiffs had sufficiently alleged both substantive and procedural unfairness at the pleading stage. The Court found that the Complaint sufficiently alleged substantive unfairness based on its allegations that minority stockholders stood to lose litigation rights under Nevada law that they had before. The Court went on to hold that the plaintiffs had also sufficiently alleged procedural unfairness, given that the company failed to replicate arms’ length bargaining between an agent for the stockholders and the controlling shareholders. As the decision noted, the board failed to adopt MFW protections, namely a special committee to bargain on behalf of minority shareholders and a requirement that the transaction be approved by a “majority of the minority” stockholders. In so holding, the Court noted that not every reincorporation of a controlled company gives rise to claims, because “[i]f directors proposed a similar conversion for a corporation with a stockholder controller, and if they properly conditioned the transaction on the twin MFW protections, then the dual approvals would be dispositive, again triggering an irrebuttable version of the business judgment rule.”[1]
Finally, while acknowledging that the complaint set forth viable claims, the Court declined to enjoin the reincorporation, instead holding that monetary damages could be assessed based on post-announcement changes in the share prices.
III. Implications for Practitioners
Palkon and the precedents it relies upon raise important considerations for controlled corporations considering reincorporation outside of Delaware. If the reincorporation is mainly intended to reduce litigation risk, reincorporation may be subject to enhanced scrutiny. On the other hand, if the driving motivations behind reincorporation are ratable benefits that can be realized by all stockholders (e.g. greater ease of hiring executives, lower franchise taxes and fees), the company would be well advised to clearly identify those benefits as they consider the transaction. Meaningful justifications for reincorporation will have a substantial impact on the question of substantive fairness.
If a controlled corporation decides to reincorporate, properly adopting the MFW procedural protections will trigger the application of the business judgment rule. Doing so requires (i) creating an independent special committee to evaluate the transaction on behalf of minority stockholders and (ii) obtaining the consent of a “majority of the minority” of the stockholders. The adoption of these protections may have a substantial impact on the viability of claims against the company’s controlling stockholders and officers.
[1] Palkonv. Maffei, 2024 WL 678204, at *2 (Del. Ch. Feb. 20, 2024),
