TripAdvisor Relocation Appeal Tests Delaware’s Dominant Status

Amid heated debate in the corporate law community over whether Delaware is still the best home for much of the Fortune 500, no one seems to want the state’s highest court to rewrite the rules dictating how and when a company can relocate.

The state’s high court will hear an appeal challenging a Chancery Court opinion allowing TripAdvisor Inc. shareholders to pursue damages over the travel and booking website operator’s planned reincorporation in Nevada, the latest in a series of rulings and statutory changes scrutinizing corporate control.

Incorporation is a “garden variety issue” for companies, and predictability in Delaware law is paramount even when they don’t move there, said Jonathan Lazarow, a partner at corporate and IP boutique Ambrose Mills & Lazarow.

A physical headquarters, a principal shareholder’s location, or the executives’ preferred workplace is starting to matter more to some companies than a Delaware incorporation—so long as the state’s corporate landscape follows Delaware laws, he said.

There have been a few notable “DExits,” as one corporate law professor calls them, including Elon Musk’s moving Tesla Inc. to Texas after the Chancery Court’s chief judge invalidated his $56 billion CEO pay package. Advertising tech firm Trade Desk Inc.’s plan to relocate to Nevada now faces shareholder litigation.

“It’s less about what Colorado does—it’s about, do the justices and judges in Colorado look to what Delaware does so we get some predictability on shareholder rights and governance rights,” Lazarow said.

Why Nevada?

TripAdvisor and its controlling shareholder, Greg Maffei, say moving under Nevada’s stronger litigation protections for fiduciaries doesn’t constitute a material benefit requiring stricter judicial review, as the Chancery Court decided Feb. 20.

If the high court determines reincorporation in a jurisdiction less protective of shareholders doesn’t count as a conflicted transaction, that might allow controllers to undermine Delaware’s minority shareholder safeguards, said Ann Lipton, a Tulane Law professor. Her proclamation last year that “Nevada is where you incorporate if you want to do frauds” is cited by both sides in this week’s arguments.

The Delaware Supreme Court “doesn’t want to get into a fight with Nevada by saying merely leaving the state of Delaware is a conflicted transaction that requires close judicial review,” Lipton said. “But it also doesn’t want to make its own law toothless” if controllers can easily leave to avoid requirements they don’t like.

Affirming the lower court’s ruling would likely escalate the debate, she said. “If it says, ‘You’re right, this is a conflicted transaction,’ how do you determine if it’s entirely fair? Now you really do have to get into a question of which jurisdiction is better.”

University of Virginia law professor Michal Barzuza, whose research on Nevada corporate laws is extensively cited in the appeal briefs, said it would be helpful if the court clarifies the distinction between reincorporation to Nevada and reincorporation to other states. “Even Texas law is pretty similar to Delaware law,” she said. “Nevada is really an outlier.”

Guidelines Needed

The Delaware justices accepted a mid-case appeal in the lawsuit challenging TripAdvisor’s moving plans because it would be “beneficial” to have some guidelines as to the standard of review for such cases, per an April 16 order.

TripAdvisor argues the Chancery Court ruling applied the wrong standard and sets unrealistic expectations for board committees that evaluate reincorporation plans. The company had told shareholders that the reduced litigation risks in Nevada drove the relocation plan. Though Maffei has repeatedly faced claims in Delaware over allegedly conflicted transactions, there was no pending litigation when the board made the decision to move.

“If you were really smart, you might have said, ‘We’re going to Nevada because they have much lower franchise taxes,’” because that would benefit all shareholders and the company overall, said Robert Miller, a University of Iowa law professor.

“Elon and a few other controlling shareholders will see a benefit to them in being elsewhere and move out, but are you going to see any public companies without a controller moving over to Nevada or Texas?” he said. “I think that’s inconceivable.”

Nevada argues in a brief supporting TripAdvisor that its critics exaggerate the differences in policy decisions that “reflect each states’ view of the benefits, costs, and burdens of litigation on its corporations.” That’s a fair argument, as there’s not much data available supporting the idea that reincorporation seriously affects shareholder economic value, said Jill Fisch, a University of Pennsylvania business law professor.

“Even if Nevada law reduces shareholder litigation rights, that’s not necessarily bad for the shareholders or for the corporation,” she said. “Given the general debate about whether it’s problematic for corporations to try to leave Delaware, I think that it’s valuable for the Supreme Court to provide some guidance.”

The case is Maffei v. Palkon, Del., No. 125,2024, oral argument scheduled 10/30/24.