In late February, the Chancery Court denied a motion to dismiss a stockholder lawsuit against the controlling stockholder and board of directors of TripAdvisor, Inc., seeking to enjoin a reincorporation of TripAdvisor into Nevada based on allegations that the reincorporation was an unfair self-interested transaction. [1] Gregory B. Maffei controlled TripAdvisor through a dual-class voting structure (Maffei exercised control through a holding company, the board members of which were also defendants in the litigation). Plaintiffs argued that Nevada law was less protective of stockholder litigation rights and more protective of corporate fiduciaries than Delaware law and that by pursuing the reincorporation, Maffei and the directors were obtaining benefits not shared by the minority stockholders in breach of their fiduciary duties.
The court’s ruling turned on the applicable standard of review. Rejecting the defendants’ argument for business judgment, the court held that entire fairness applies to transactions where a controlling stockholder receives a non-ratable benefit. The court held that “a controller or other fiduciary receives a non-ratable benefit when a transaction materially reduces or eliminates the fiduciary’s risk of liability.” The court held that at the pleading stage, it was reasonable to infer that Nevada law was more protective of fiduciaries than Delaware law, and thus, entire fairness applied. The entire fairness test involves both substantive and procedural fairness. Rejecting the defendant’s argument that entire fairness does not make sense outside of transactions where minority stockholders are receiving cash for their shares, the court held that substantive fairness involves an inquiry into whether minority stockholders receive at least “the substantial equivalent in value” of what they held prior to the transaction. The court held that this test was not satisfied at the pleadings stage because of plaintiffs’ allegations that minority stockholders would have inferior litigation rights under Nevada law. The court held that plaintiffs had also sufficiently alleged procedural unfairness, given the complete absence of any showing that defendants tried to replicate arms’ length bargaining. In denying the motion to dismiss, the court held that injunctive relief was not the appropriate remedy and that monetary damages could be determined at a later stage of the proceedings, even after the completion of the reincorporation.
The decision provides a warning to controlling stockholders seeking to have their controlled corporations reincorporate in order to shield the controllers from stockholder litigation or for other self-serving reasons that afford them non-ratable benefits. For controlled corporations that want to go down the reincorporation path, boards should consider the court’s invitation to implement the twin protections of Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) in order to obtain the benefit of the far more lenient business judgment standard of review: where the transaction is “conditioned ab initio upon both (1) the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and (2) the uncoerced, informed vote of a majority of minority stockholders.”
The court also made clear that in the absence of a controlling stockholder, stockholder approval could immunize the transaction under a business judgment standard of review (see Corwin v. KKR Fin. Hldgs, LLC, 125 A.3d 304 (Del. 2015)). Accordingly, the court’s warning appears directed to controlled corporations and not all corporations that seek to reincorporate outside Delaware.
[1] https://courts.delaware.gov/Opinions/Download.aspx?id=360330