Delaware Chancery Court Applies Entire Fairness To State Of Incorporation Conversions
M&A and Corporate Governance Litigation
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  • Delaware Chancery Court Applies Entire Fairness To State Of Incorporation Conversions


    On February 20, 2024, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied in part and granted in part a motion to dismiss a stockholder action against TripAdvisor, Inc. and its parent (together, the “Company”), controlling stockholder and certain directors and officers challenging the conversion of the Company from a Delaware to a Nevada corporation. Palkon v. Maffei, No. 2023-0449-JTL (Del. Ch. Feb. 20, 2024). The Court held that the conversion was subject to entire fairness review because it conferred benefits to the controller—in the form of more limited fiduciary obligations—that minority stockholders did not receive and found the complaint adequately stated a claim for breach of fiduciary duty but stopped short of enjoining the conversion.

    After the Company’s management presented the possibility of the conversion to the Board, citing greater protections from litigation under Nevada law for directors and officers, as well as lower franchise taxes and fees, the Board unanimously approved the conversion. Although the Company sought stockholder approval for the conversion, there was no requirement that a majority-of-the-minority vote in favor of the conversion. The majority of unaffiliated Company stockholders voted against the conversion, but it passed because the CEO, who held 43% of the voting stock, voted in favor of the conversion.

    Plaintiffs alleged that the controller sought the conversion to benefit from Nevada’s purportedly more fiduciary-friendly laws and argued that, accordingly, the entire fairness standard should apply. The Court agreed, holding that the principles of entire fairness—fair price and fair process—apply to conversions where the controller stands to receive a unique benefit in the form of “materially reduce[d] or eliminate[d] [] fiduciary [] … liability.” This was so notwithstanding defendants’ insistence that a conversion had no “price” component because, according to the Court, the element of “fair price” examines whether a minority stockholder received “the substantial equivalent in value of what he had before,” regardless of whether monetary value was paid. The Court emphasized that litigation rights are “first-class rights,” and under Nevada law, those rights are “inferably less” than under Delaware law. The Court also rejected defendants’ assertion that liability is only relevant if the fiduciary faces “existing potential liability,” pointing out that both the proxy and board materials emphasized that the conversion would reduce litigation risk.

    The Court further found that plaintiffs adequately alleged that the process to obtain the conversion was unfair, noting that the conversions were proposed by management and approved by the controlling stockholders while “the unaffiliated stockholders resoundingly rejected the conversions.” The Court declined, however, to enjoin the conversion, holding that “the circumstances in which the equities might warrant” such an extreme restraint was “limited” and in all events not present because money damages, calculated by the difference in the stock price before and after the conversion, would be an adequate remedy.

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