The Delaware Supreme Court has just released its decision in the TripAdvisor case. It’s available here.
Although I’m going to need more time to sit with and read the opinion carefully, it’s definitely a significant win for corporations considering exiting Delaware in favor of some other jurisdiction. The decision reverses the Chancery court and finds that redomesticating to operate under different state’s law with different standards for liability does not confer a material, non-ratable benefit on defendants. In essence, the mere possibility that the defendants might get away with something in the future that they could not get away with under Delaware law is too remote and speculative a reason to award damages for leaving Delaware or to apply anything other than business judgment rule deference. The Delaware Supreme Court found:
Taken together, these cases suggest that 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. Given that Plaintiffs have not alleged any past conduct that would lead to litigation, this case aligns with our case law that applies the business judgment rule.
. . .
Here, Plaintiffs’ allegations have not satisfied the requirement of pleading a material benefit because they have not alleged anything more than speculation about what potential liabilities Defendants may face in the future. On this record, we cannot conclude that the Conversions would provide Defendants with a material, non-ratable benefit triggering entire fairness review. Accordingly, we hold that the business judgment rule is the applicable standard of review in this case.
Delaware’s Supreme Court also weighted in on the basis of comity, finding that it provided another reason to stay out of trying to value differences between the two states. The decision finds:
We note finally that, although comity concerns are not an independent ground for reversal in this case, our holding furthers the goals of comity by our declining to engage in a cost-benefit analysis of the Delaware and Nevada corporate governance regimes. . . . States have taken different approaches on matters such as the scope of director and officer exculpation, standards of review, and the scope of stockholder inspection rights. And litigation rights, as the Vice Chancellor recognized, are only one stick in the corporate governance bundle. Delaware courts are well-aware that “it is more than the statutory words on paper that give life to a system of entity law. Much often depends on the extent to which specific disputes are consistently handled by courts, thus giving business[persons] predictable guidance by which to order their relations.”
I wrote about the case shortly after the oral argument and noted that it would be very difficult to figure out damages for moving between states because states offer such different overall packages. Then, I wrote:
Either for the loss of the constituency statutes or for other changes in rights between states, figuring out damages appears to be a really nasty thicket. I don’t know any great way to do it. I don’t think anyone does. How do you value a different set of statutes, different cases, and a different court system? I don’t know. I don’t think the Delaware Supreme Court has a great answer either. It might be better to just treat damages here as too speculative.
The Delaware Supreme Court concluded with a similar view, stating:
We submit that attempting to value competing corporate governance structures, particularly in the absence of any concrete allegations of Defendants receiving a material, non-ratable benefit, and based upon hypothetical future transactions, as here, would be an unacceptably speculative cost-benefit exercise. Such an exercise, under these circumstances, also risk intruding on the value judgments of state legislators and directors of corporations.
Although this decision closes the chapter on how Delaware will treat redomesticating firms, it does also highlight key factors for boards and other states to consider in evaluating jurisdictions and possible reforms. It sets out a broad range of factors that weigh on a decision including: (1) “the court system;” (2) “the predictability of the courts with respect to business matters;” (3) “the judges’ expertise in handling such disputes;” (4) “the development and body of judicial decisions;” (4) “the familiarity of market participants with the corporate governance regime; (5) the process by which corporate statutory amendments are proposed and adopted; (6) “the effectiveness of the Secretary of State office in facilitating corporate filings; and (7) “the existence of a Corporate Bar available, willing, and able to handle such disputes.”
When many firms look at these factors, they may continue to decide that Delaware offers them the best overall package. For states like Nevada, the list highlights areas the state should evaluate and devote additional resources to if it wants to more meaningfully compete.