Delaware TripAdvisor Ruling Puts Governance in Investors’ Hands

The Delaware Supreme Court issued a landmark ruling last week in a case involving TripAdvisor Inc.’s leadership’s decision to reincorporate the company from Delaware to Nevada’s more permissive legal system. TripAdvisor’s victory signals more leeway for controllers to game differences in state corporate laws, putting the onus on investors to reassess their appetite for risk related to different governance frameworks.

The opinion comes against a backdrop of several large public controlled companies—such as Tesla Inc., Trade Desk Inc., DropBox Inc., and Meta Platforms Inc.—considering or making moves from Delaware to other states, including Nevada. This threat to Delaware’s prominence has been dubbed “DExit.”

The Delaware Supreme Court took judges out of the DExit debate. The opinion in the TripAdvisor case, Maffei v. Palkon, sidestepped whether controllers and directors face a conflict of interest when choosing to move their companies to Nevada based on a hypothetical future transaction that would face judicial review in Delaware but not in Nevada.

The ruling leaves open a path for judicial review if reincorporation is approved while a conflicted deal is pending. It also said allowing controllers and boards of directors to more freely change the state of corporate domicile “furthers the goals of comity by our declining to engage in a cost-benefit analysis” of the Delaware and Nevada corporate governance frameworks. The court thus avoided having to say what many take as a given—that Delaware’s corporate law provides better protection for investors than Nevada’s.

Although the opinion is narrowly written, the upshot is that every corporate controller in Delaware can depart the state for the accommodating confines of Nevada’s corporate law. With the Delaware judiciary now generally unable to restrict such opportunism, investors will have to decide how much they value good corporate governance and a judicial system that deters fiduciaries from exercising corporate power self-servingly.

Delaware and Nevada deliberately pursue different corporate policy objectives. Delaware has long led in corporate governance, balancing between facilitating legitimate business and protecting investors from abuse by overreaching fiduciaries.

The business judgment rule, a ubiquitous feature of virtually all corporate law systems, insulates well-intentioned corporate managers from judicial scrutiny. Delaware, like many jurisdictions (but not Nevada), balances deference to managers with protection for investors by permitting enhanced judicial scrutiny when fiduciaries act under an actual or situational conflict.

In the controller context, Delaware has achieved that balance by permitting judicial review of conflicted decisions for fairness. Despite the prospect of a judicially sponsored “kicking of the tires” in conflict situations, Delaware historically imposed personal liability only when the judicial review process uncovered egregious, immoral, and disloyal behavior.

To compete with Delaware, Nevada made a much different policy choice. Because the decision to select a place of incorporation requires director approval, Nevada adopted a universal business judgment rule, effectively prohibiting judicial review of business decisions based solely on the existence of a conflict and potential fiduciary misconduct.

Nevada’s corporate law prevents a stockholder from getting discovery and a chance to prove their claims unless they can credibly plead “intentional misconduct, fraud or knowing violation of law.” Investors filing suit in Nevada must overcome this hurdle without the benefit of prior access to internal corporate documents—a right that Section 220 of Delaware’s corporate law statute provides.

While investors in controlled companies have an established path in Delaware to protect themselves against egregious abuse by conflicted controllers, Nevada provides narrow, if any, prospect of holding misbehaving controllers accountable.

The business judgment rule is grounded in the realities of how the business world operates. Most, if not all, corporate fiduciaries exercise their power properly and for their stockholders’ benefit. But there are some who wield power over investor capital improperly. Such individuals surely would prefer to sidestep a judicial system willing to ferret out sophisticated corporate wrongdoing.

Investors must decide how much to risk relying on Nevada’s corporate laws. The Delaware Supreme Court’s decision to let controllers freely move their companies to Nevada tasks investors with deciding whether and how much they are willing to entrust their money without the robust fiduciary enforcement mechanisms they take for granted in Delaware.

If investors believe judicial oversight helps achieve better governance, which in turn leads to better financial results, they will be more cautious when investing in Nevada companies and more willing to rely on Delaware’s judicial system to continue balancing investor protection with deference to good-faith business activities.

Academic research is mixed on whether investors differentiate based on competing corporate law systems. Between the race-to-the-bottom versus race-to-the-top theories of how corporate law regimes develop and evolve, it has long seemed that Delaware prevailed by achieving the optimal balance between the interests of directors and those of investors.

Studies of market valuations in the 1980s and 1990s showed that investors assigned a premium to Delaware companies over those incorporated in Nevada. This premium was often attributed to the perception that Delaware provided meaningful governance protections while reducing legal uncertainty for business planners.

But more recent academic studies suggest that investors either no longer place a premium on good governance or don’t see a meaningful difference between Delaware and Nevada law. This shift may be driven by the increasing nationalization of corporate governance standards, federal interventions such as the Sarbanes-Oxley Act and Dodd-Frank Act, and the growing influence of institutional investors who demand governance reforms regardless of incorporation jurisdiction.

Because few major public corporations incorporated in Nevada until recently, it is possible that the largest, most diversified, and sophisticated institutional investors didn’t have strong enough reasons to parse the legal differences among competing corporate jurisdictions when making investment decisions. With larger controlled companies now making the move to Nevada, that rational indifference may have to change.

The Delaware Supreme Court’s TripAdvisor ruling may keep judges out of the reincorporation race. But it should motivate market-leading institutional investors to assess how much they value judicial protection of fiduciary duties and enmesh those judgments into their investment policies and decisions.

The market’s reaction to the growing DExit trend, and the prospect of holding minority investments subject to the whim of controllers enjoying the permissiveness of Nevada’s corporate law, may determine whether Delaware maintains its prominence—or whether Nevada enjoys an influx of controlled companies whose leadership prefers to avoid judicial oversight.

The case is Maffei v. Palkon, Del., No. 125, 2024, decided 2/4/25.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Mark Lebovitch is lecturer in law at Columbia Law School.

Anat Alon-Beck is associate professor of law at Case Western Reserve University School of Law.

Write for Us: Author Guidelines