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Delaware’s top court has ruled that a 2023 decision by internet company Tripadvisor to switch its incorporation to Nevada from Delaware should not face a strict judicial review demanded by some aggrieved ordinary shareholders.
The Delaware Supreme Court’s decision on Tuesday comes against a backdrop of large, high-profile companies shifting their legal residence from the small, mid-Atlantic state that has traditionally dominated corporate law.
Tripadvisor shareholders had convinced the lower Delaware Court of Chancery in 2024 that the move to Nevada would credibly generate disproportionate benefits for company directors due to Nevada’s less onerous corporate law governing managers and directors. That was a difference from Delaware that even Tripadvisor acknowledged in board presentations and proxy materials sent to company shareholders in advance of a vote.
The Tripadvisor shareholders, claiming future harm, had sought damages from the company, which is controlled by Greg Maffei, a longtime executive at John Malone’s Liberty Media.
However, the Delaware Supreme Court said on Tuesday that the future benefits to the board were merely hypothetical and not related to any specific corporate transaction, and therefore the company did not need to now rigorously demonstrate that the move was “entirely fair” to current minority shareholders. The current shareholder lawsuit is now expected to be dismissed.
“This Court’s standing jurisprudence further shows our reluctance to decide cases involving speculative litigation,” according to the opinion.
Only 5 per cent of unaffiliated Tripadvisor shareholders voted to allow the Nevada move, which was only pushed through when Maffei and Liberty exercised their supervoting shares.
Last week, the Silicon Valley company Dropbox announced it was moving its domicile from Delaware to Nevada. Meta, the Financial Times has reported, is also weighing moving its legal residence to Nevada, Texas or some other state. Tesla chief Elon Musk has been a harsh critic of Delaware law following two decisions to rescind his $56bn pay package over corporate governance failures at the electric-car maker, where a majority of unaffiliated shareholders last year supported the company’s move to Texas.
Delaware corporate law has strict rules for companies with a dominant shareholder. Increasingly, companies led by a founder, or backed by private equity or venture capital, have complained that dissident minority shareholders have too much power in Delaware.
The state’s judges, legislators and lawyers have been debating, bitterly at times, the right balance between corporate and shareholder rights. Incorporation fees account for a substantial chunk of state revenues and an exodus of corporations could imperil Delaware’s finances.
Against that backdrop, Nevada and Texas, the latter which just opened a new business court, sense an opportunity to attract frustrated Delaware companies. The shareholder plaintiffs described Nevada as a “hotbed for corporate wrongdoers”.
The Delaware Supreme Court refused to compare the quality of the differing regimes. “It becomes even more apparent that courts are ill-equipped to quantify the costs and benefits of one state’s corporate governance regime over another’s,” it wrote.
Ann Lipton, a law professor at Tulane University, said: “I think the recent pressures on Delaware made this outcome somewhat inevitable, but the writing was on the wall simply from the nature of the dispute.
“The Delaware Supreme Court did not want to put Delaware in the impossible position of explicitly holding that other states’ corporate law offers less value to shareholders.”
