Delaware Court Reverses Chancery Court and Provides the Standard of Review for the Redomestication of Corporations

Background

Delaware corporations seeking to redomesticate to another state should be advised that on February 4, 2025, the Delaware Supreme Court issued its highly anticipated decision in Palkon v. Maffei, C.A. No. 2023-0449-JTL, addressing a challenge to TripAdvisor's redomestication from a Delaware corporation to a Nevada corporation. The case raised important questions regarding the standard of review applicable to such reincorporations, particularly when fiduciaries may derive a benefit from shifting to a legal regime perceived as more friendly.

The case followed a long-standing debate over Delaware’s stringent corporate governance laws versus Nevada’s more flexible, director-friendly legal framework. Delaware has historically been the jurisdiction of choice for corporations due to its well-developed corporate law and judiciary, while Nevada has marketed itself as offering greater liability protections for corporate directors and officers.

The Present Case

In April 2023, TripAdvisor’s board of directors decided to redomesticate to Nevada. The board's materials and proxy statements cited several justifications, including the belief that Nevada law provided “greater protection” against “unmeritorious litigation.” In June 2023, stockholders voted to approve the move, but the approval relied on the vote of TripAdvisor’s controlling stockholder.

Stockholder plaintiffs sought to enjoin the redomestication, arguing that the move provided a non-ratable benefit to fiduciaries by limiting potential liability at the expense of minority shareholders. The Delaware Court of Chancery declined to block the redomestication but allowed stockholders to seek damages based on potential trading price fluctuations resulting from the conversion. It further determined that because Nevada law offered greater protection to fiduciaries, the redomestication conferred a material, non-ratable benefit to TripAdvisor’s controlling stockholder, triggering an entire fairness review instead of the more deferential business judgment rule.

The Delaware Supreme Court’s Decision

The Delaware Supreme Court unanimously reversed the Chancery Court’s decision, holding that the business judgment rule, rather than the entire fairness standard, applies to corporate reincorporation decisions. The Court emphasized that Delaware law has historically permitted boards to take steps to mitigate future liability exposure, such as obtaining D&O insurance or adopting indemnification provisions, without triggering an entire fairness review.

The Supreme Court clarified that a reincorporation decision will be protected under the business judgment rule if it occurs on a “clear day,” meaning there is no existing liability the move seeks to extinguish or pending litigation it aims to avoid. Here, the plaintiffs failed to allege any past misconduct or ongoing claims that would have made the redomestication improper. The Court also stated that comparing Delaware and Nevada corporate laws is not the judiciary’s role, as such policy decisions are the responsibility of state legislators and corporate boards.

Future Outlook

The Palkon decision, holding that courts will apply the business judgment rule to a board’s redomestication decisions if they were made on a clear day, significantly limits stockholder challenges to them. In making that “clear day” distinction, the Court differentiates “existing potential liability” for the fiduciaries from their “future potential liability.” If, for example, there was another pending or contemplated lawsuit (i.e., existing potential liability), then that would weigh “heavily in determining materiality” of a non-ratable benefit to a controller that would trigger an entire fairness review. As the Palkon Court stated, “…the hypothetical and contingent impact of Nevada law on unspecified corporate actions that may or may not occur in the future is too speculative to constitute a material, non-ratable benefit triggering entire fairness review.” Here, plaintiffs did not allege any past conduct that would lead to litigation, so there was no existing potential liability. In Delaware then, the temporal nature of the potential liability matters in determining whether there is a material non-ratable benefit to a controller and thus which standard of review to apply to redomestication decisions.

Moving forward, boards of directors of Delaware corporations contemplating redomestication should carefully document their decision-making process to demonstrate that the move occurs on a “clear day” and is not designed to evade existing potential liability. Legal counsel should be engaged early in the process to ensure compliance with corporate governance best practices and to mitigate potential stockholder disputes.

For further inquiries or questions, please contact Steve Migala at smigala@lavellelaw.com or 847-705-7555.