DealLawyers.com Blog

Last month, Vice Chancellor Laster refused to dismiss claims challenging a controlled corporation’s decision to move its jurisdiction of incorporation from Delaware to Nevada. In reaching that decision, the Vice Chancellor concluded that because the reincorporation would reduce the litigation rights of stockholders, it involved a non-ratable benefit to the controller & the decision should be evaluated under the entire fairness standard.

On Thursday of last week, Vice Chancellor issued a subsequent decision in the case denying the defendants’ application for an interlocutory appeal of the decision.  In doing so, he clarified that a controlled corporation’s decision to move from Delaware won’t invariably be subject to entire fairness review:

The defendants also seek to bolster their argument for interlocutory appeal by asserting that the Opinion “precludes any allegedly controlled company from leaving the State without satisfying entire fairness review . . . .” The defendants reach that conclusion by observing that to satisfy the MFW standard, a controlled company must form a special committee of disinterested directors. The defendants argue that “under the Court’s reasoning, it is unclear when, if ever, there would be directors who are disinterested in a decision to move to a jurisdiction that provides greater litigation protection to those directors.”

The taint of alleged self-interest that the Opinion credited resulted from the inferably material reduction in litigation exposure that a fiduciary who otherwise would continue to serve under a Delaware regime could achieve by moving to a Nevada regime. The equation has two variables: (i) serving as a corporate fiduciary under Nevada law in lieu of (ii) otherwise serving as a corporate fiduciary under Delaware law. To remove the taint, remove one variable.

Vice Chancellor Laster then went on to illustrate how the company could address either of these variables. First, the transaction could be approved by a committee of directors who had submitted resignations that would become effective upon reincorporation in Nevada. Since those directors would not benefit from the enhanced protection Nevada provided, they wouldn’t be interested in the transaction.

Alternatively, the Vice Chancellor the board could add new directors who would serve as a committee to consider the reincorporation proposal, and who would submit resignations that would become effective if the reincorporation was not approved. These directors would also recuse themselves from any other matters acted upon by the board, thus eliminating their exposure to liability for those decisions.

The Vice Chancellor concluded that the new directors wouldn’t have served meaningfully as fiduciaries of the Delaware entity (other than with respect to the reincorporation), and that “it would be hard for a plaintiff to argue that the new directors were gaining any relative benefit from moving to the new jurisdiction, because the new directors would never face the prospect of continuing to serve unless the corporation moved to the new jurisdiction.”

– John Jenkins