Delaware’s Chancery Court is in the awkward position of deciding whether TripAdvisor can move its incorporation to Nevada, another state vying to be a business-friendly destination.
Investors sued in late April to stop the anticipated move. The suit argues Greg Maffei is using his voting power and position as chairman of TripAdvisor’s parent Liberty TripAdvisor Holdings to relocate to a state whose “race to the bottom” laws will better protect company directors from investor suits.
The Chancery Court will want to protect investors from corporate actions that appear rife with directors’ self-interest—as TripAdvisor and Liberty TripAdvisor shareholders allege. But the court also will have to balance that against perceptions Delaware is a “Hotel California,” where companies can never leave.
“The delicacy of it is in the possible perception that Delaware is just engaging in a power grab,” said Lawrence Hamermesh, professor emeritus at Widener University Delaware Law School.
Barring a settlement, the case could set guidelines for companies when a shareholder who controls the voting power wants to leave Delaware, which touts itself as home to over 60% of Fortune 500 companies.
The two sides agreed last week to let a vote on the proposed move take place, as planned, in early June. Barring a settlement, any reincorporation wouldn’t occur until the court has a chance to rule.
TripAdvisor said it doesn’t comment on pending litigation.
Nevada has tried to position itself as a competitor to Delaware for companies’ incorporation, in part by providing more protections to officers and directors.
Nevada offers “a different package that is intentionally and consciously more relaxed than Delaware corporate law,” University of Virginia law professor Michal Barzuza said.
Delaware companies can exculpate directors for breaching their duty of care, allowing them to evade personal liability for money damages, attorneys noted. Exculpation in Nevada is automatic and broader. In Nevada, shareholders also may find suing directors and inspecting corporate records more difficult.
Still, it “would be quite extraordinary if Delaware were to say it’s a breach of fiduciary duty to incorporate in another state because that state’s laws are different than our state’s laws,” said Allen Matkins Leck Gamble Mallory & Natsis LLP attorney Keith Bishop.
The shareholders are inviting Delaware to become the “Hotel California,” he wrote in a blog post last week.
“Having attracted all of these publicly traded corporations, it would be somewhat ironic if it were to decide, you can check in but you can’t check out of Delaware and go to another state,” said Bishop, a former California commissioner of corporations who wrote a treatise about Nevada corporate law.
TripAdvisor and Liberty TripAdvisor investors argue Maffei is seeking a corporate home where he and other directors would be better insulated from shareholder lawsuits.
A longtime media executive, Maffei has been involved in large settlements of cases alleging breaches of fiduciary duties, the complaint said.
A shareholder lawsuit over Lions Gate Entertainment Corp.’s acquisition of Starz Inc. settled for $92.5 million in 2018. Maffei was chairman of Starz’s board of directors. He was also a defendant in a shareholder suit over a tie-up between GCI Liberty Inc. and a unit of Liberty Broadband Corp., which settled for $110 million.
TripAdvisor said in public filings a reason for moving would be to provide “potentially greater protection for unmeritorious litigation.” It also said the move could save $250,000 per year on franchise taxes. Maffei controls the voting power of Liberty TripAdvisor, which in turn controls TripAdvisor, according to the complaint.
The complaint paints a picture that starts to look like a self-interested move by a controlling shareholder, legal scholars said. Shareholders said TripAdvisor has hinted it’s considering a future transaction and that “Maffei would prefer to be governed by Nevada law when that happens.”
“Even though it involves exiting Delaware at the end, it’s a conflict-of-interest transaction like any other,” said University of Connecticut law professor Minor Myers.
But the case arises in unusual circumstances, scholars said. Conflict-of-interest cases normally involve a decision where the controlling shareholder receives a benefit that other shareholders don’t.
“Here the controlling shareholder obtains a benefit the others do not only to the extent that the controlling shareholder anticipates or hopes to make a self-interested decision in the future,” New York University law professor Jennifer Arlen said.
A recent ruling by Delaware’s Chancery Court in another case could offer a clue how it might approach TripAdvisor’s proposal.
Harris FRC Corp., which was incorporated in Delaware, was alleged in that case to have merged with a New Jersey shell company to fend off anticipated litigation. Harris FRC, which owns technology underpinning the epilepsy drug Vimpat, also has a controlling shareholder, according to the complaint.
Vice Chancellor J. Travis Laster, the same judge overseeing the TripAdvisor case, suggested in a January decision it may be a breach of the duty of fair dealing if the merger was “effectuated with the primary purpose of extinguishing” other shareholders’ ability to bring certain claims.
There are other recent examples of companies leaving Delaware and moving west. Twitter Inc. is no longer incorporated in Delaware after it merged in March with X Corp., a Nevada entity. Elon Musk is president of X Corp. and its parent, Bloomberg News reported.
Meanwhile, recent Delaware court decisions, including one explicitly holding that corporate officers can be held accountable by shareholders, have stoked concerns among some corporate leaders that the state’s law may be on a trajectory too friendly to shareholders.
There’s no sign, however, that Delaware is in danger of losing its status as the mecca for incorporation.
“I’m not aware of a tidal wave, or even a gentle wave lapping at the shore, of movement to Nevada in public companies,” Hamermesh said.
The case is Palkon v. Maffei, Del. Ch., No. 2023-0449.
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