Reincorporations from Delaware to Nevada and elsewhere remain in the news with the Delaware Supreme Court awaiting oral argument in the TripAdvisor case.  I’ve covered the issue here before and written about Nevada with our Secretary of State for the Wall Street Journal.  Nevada offers an alternative to Delaware and a different litigation environment.  In that op-ed, we framed the issue this way:

The likelihood of expensive, meritless or value-destroying litigation leads public companies in Delaware to avoid deals they would otherwise make. Another of the three public companies that recently decided to exit, Fidelity National Financialexplained in a shareholder letter that the state’s approach “may discourage pursuit of transactions the Board might otherwise believe to be in the best interests of the Company and its stockholders” because of litigation costs.

This issue looms particularly large for corporations with significant shareholders. Although Delaware law offers a process for companies to manage transactions with conflicts outside court, Delaware jurists themselves don’t always agree about how much information corporate boards must push out to shareholders to avoid litigation. When the process becomes too costly and cumbersome, deals don’t get done.

This brings me to the most recent reincorporation proxy filed this week–Trade Desk, Inc.–a company with a market capitalization of over $50 billion.  The preliminary proxy contends that Delaware has grown uncertain and overly litigious for their tastes and that Trade Desk has been left burned by litigation distractions in Delaware.  The preliminary proxy explains:

The Trade Desk has felt the weight of this trend in Delaware courts. Our litigation wins in Delaware have not been without cost.. . . .

. . .  Even after following the time-consuming and costly process set out in MFW, we were still sued in Delaware based on allegations that we did not follow the requisite process, that our independent committee members were conflicted and that we provided supposedly deficient disclosures. This resulted in the Company expending significant time and resources to defend the case. Two years [later] . . . the case was dismissed after the judge determined the plaintiffs failed to state a claim against the Company and its then-directors. Although we were successful on the merits and the plaintiffs’ case was dismissed in full, it was not without significant diversion of time and resources from our business.

We and certain of our directors again face time-consuming and costly litigation in Delaware in connection with the market-based performance award granted to Mr. Green in 2021 (the “CEO Performance Option”), for which the proceeding was initiated in May 2022. We continue to view the CEO Performance Option as an appropriate tool for incentivizing Mr. Green and creating a long-term incentive to further align his interests with stockholder interests. As of September 23, 2024, litigation over the CEO Performance Option remains pending, and we are awaiting the court’s decision on the defendants’ motions to dismiss. 

Controlled corporations may conclude that the game of going through a conflict cleansing procedure under MFW may not be worth the candle because they get sued anyway and spend years litigating it even if they win.  The board concluded that they believed “flexibility and certainty in corporate decision-making can offer the Company competitive advantages needed to stay nimble and compete effectively in the years to come” and “determined it was in the best interests of the Company and our stockholders to evaluate reincorporating to a jurisdiction that we believe could provide this flexibility.”

As part of that exploration, the board ultimately settled on Nevada and obtained advice from Latham & Watkins LLP and Wilson Sonsini Goodrich & Rosati PC.  They even hired Steven Davidoff Solomon to evaluate differences in the jurisdictions.  He provided an “academic review of incorporation and reincorporation, including principles of corporate governance, the value attributable to a company’s situs of incorporation and legal and policy distinctions between Delaware and Nevada.”  Some of his findings and observations include:

  • Academic studies do not support the conclusion that there is additional value in incorporating in Delaware.
  • My own empirical analysis supports the view that reincorporation from Delaware to another state does not incur a negative premium.
  • Nevada and Delaware corporate law is largely similar with respect to many governance rights, including economic rights associated with holding common stock.
  • The differences between Nevada and Delaware law, often cited in the literature, stem from each state’s policy choices.
  • In assessing the differences between Delaware and Nevada law, the Board, under its duty of care, should determine which laws and internal governance structures best serve the interests of the Company and its shareholders.

Trade Desk appears likely to win its vote.  Jeff Green, the CEO, has 48.6% of the voting power.

It’s still early to see how many corporations might migrate away from Delaware.  As Vice Chancellor Laster memorably put it, the noise around Nevada as an alternative domicile to Delaware might just be a “practitioner-driven stormlet.”  To run with this theme, it could also turn into a controller cloudburst or some other weather pattern.  For now, it appears that corporations with controllers or other large shareholders may be closely considering this question.  It will be interesting to watch this continue to play out.

And here, I want to pause and plug my co-blogger’s excellent podcast on the TripAdvisor case that came out a few days ago.  If you want another way to get up to speed on this issue, it’s worth a listen.

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Photo of Benjamin P. Edwards Benjamin P. Edwards

Benjamin Edwards joined the faculty of the William S. Boyd School of Law in 2017. He researches and writes about business and securities law, corporate governance, arbitration, and consumer protection.

Prior to teaching, Professor Edwards practiced as a securities litigator in the New…

Benjamin Edwards joined the faculty of the William S. Boyd School of Law in 2017. He researches and writes about business and securities law, corporate governance, arbitration, and consumer protection.

Prior to teaching, Professor Edwards practiced as a securities litigator in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP. At Skadden, he represented clients in complex civil litigation, including securities class actions arising out of the Madoff Ponzi scheme and litigation arising out of the 2008 financial crisis. Read More