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Delaware Supreme Court Holds Business Judgment Rule Applies To Controlled Corporation’s Change Of Corporate Domicile From Delaware To Nevada
02/11/2025On February 4, 2025, the Delaware Supreme Court, on interlocutory appeal, reversed the decision of the Delaware Court of Chancery to deny defendants’ motion to dismiss breach of fiduciary duty claims against directors and a controller related to a decision to convert the state of incorporation of a travel guidance corporation and its parent (collectively, the “Corporation”) from Delaware to Nevada. Maffei v. Palkon, No. 125, 2024 (Del. Feb. 4, 2025). As discussed in our prior post, the Court of Chancery had held that the entire fairness standard of review applied because plaintiffs—stockholders of the Corporation—sufficiently alleged that the conversion would provide non-ratable benefits to defendants “in the form of reduced liability exposure” under Nevada law. In a decision authored by Justice Karen L. Valihura, the Delaware Supreme Court held that the reincorporation decision was subject instead to the business judgment rule because “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.”
After the Corporation’s management presented the possibility of the conversion to the board, citing, among other purported benefits, greater protections from litigation and liability under Nevada law for directors and officers, as well as lower franchise taxes and fees, the board approved the conversion. The decision was submitted to a stockholder vote with disclosures highlighting the greater protection for directors and the elimination under Nevada law of liability for breaches of the duty of loyalty (in the absence of intentional misconduct, fraud, or a knowing violation of law). The decision was approved by a majority vote, but only received a minority of votes from the Corporation’s minority stockholders and would not have been approved without the controller’s votes.
Plaintiffs asserted breach of fiduciary duty claims, alleging that the reincorporation would limit plaintiffs’ ability to bring “highly meritorious” claims under Delaware law and that, in exchange for losing this right, they did not receive fair process or any material consideration. The Court of Chancery agreed, finding it reasonably conceivable that the transaction provided a benefit to defendants by curtailing the litigation rights of minority stockholders and ruled that the transaction triggered entire fairness review. The Court of Chancery further held that plaintiffs had sufficiently alleged that the conversion was not entirely fair because plaintiffs had pled sufficiently that defendants had not implemented any procedural protections and minority stockholders would not receive “the substantial equivalent” in value of their lost litigation rights.
On appeal, the Delaware Supreme Court concluded that “a non-ratable benefit must be material to trigger entire fairness review” and that “temporality” is a “key factor” in that determination. Analogizing to prior decisions holding that boards may implement exculpatory provisions in their bylaws or procure director and officer liability insurance without triggering entire fairness review, the Court explained that “providing protection to directors against future liability exposure does not automatically convey a non-ratable benefit.” Accordingly, the Court held, “the absence of any allegations that any particular litigation claims will be impaired or that any particular transaction will be consummated post-conversion, weighs heavily against finding that the alleged reduction in liability exposure under Nevada’s corporate law regime is material.” The Court thus concluded that the business judgment rule is the applicable standard of review and reversed the decision to deny the motion to dismiss.
