DealLawyers.com Blog

Almost a year ago, the Delaware Chancery Court issued its decision in Palkon v. Maffei (Del. Ch.; 2/24) — denying a motion to dismiss a lawsuit against TripAdvisor’s board and controlling stockholder. The lawsuit challenged the board’s decision to reincorporate from Delaware to Nevada. The Court applied the entire fairness standard since TripAdvisor was a controlled company — and, since the purpose of the reincorporation was to reduce litigation risk to the company’s fiduciaries (and consequently also the litigation rights of the minority stockholders), the incorporation provided a non-ratable benefit to the controller.

You may remember that the Delaware Supreme Court granted an interlocutory appeal of this decision in April, previewing a potential reversal. That decision came out yesterday. In Palkon v. Maffei (Del.; 2/25), the Delaware Supreme Court reversed the Chancery decision and applied the business judgment rule. The Court was persuaded by the defendants’ arguments differentiating “existing potential liability” for the fiduciaries and “future potential liability” for the fiduciaries. If there was another pending or contemplated lawsuit (i.e., existing potential liability), that would weigh “heavily in determining materiality” of a non-ratable benefit to the controller.

We recognize that providing protection to directors against future liability exposure does not automatically convey a non-ratable benefit. Were this the case, no board could use company funds to procure a Side A policy or adopt a Section 102(b)(7) exculpation provision without triggering entire fairness review. Yet Delaware courts have declined to find that directors lack independence or disinterestedness because they adopted a Section 102(b)(7) provision, even though such provisions reduce a director’s future liability exposure. Our courts have also held that the receipt of indemnification benefits does not necessarily taint a director’s judgment with self-interest. Finally, boards almost universally procure D&O policies, which reduce the risk of director liability exposure in future litigation.

After reviewing relevant Delaware case law, Justice Valihura, writing for the Court, states, “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.”

I’m sure much ink will be spilled over this decision in the coming days and weeks. We’ll post memos in our “Controlling Shareholders” Practice Area.

– Meredith Ervine