Column: In new TripAdvisor suit, Delaware lawyers deride Nevada’s ‘no-liability regime’

Liberty TripAdvisor Holdings

24/04/2023 21:54

By Alison Frankel
       April 24 (Reuters) - (The opinions expressed here are
those of the author, a columnist for Reuters.)
Shareholder lawyers are hoping that the Delaware Chancery Court
is so concerned about encroachment on its turf that it will
block TripAdvisor Inc  TRIP.O  and its parent corporation from
transferring their incorporation from Delaware to Nevada.
    In a lawsuit filed on Friday in – you guessed it – Delaware
Chancery Court, plaintiffs' firms Bernstein Litowitz Berger &
Grossmann; Block & Leviton; and Friedman Oster & Tejtel are
seeking to enjoin TripAdvisor and Liberty TripAdvisor Holdings
Inc  LTRPA.O  from proceeding with board-approved plans to ditch
Delaware in favor of incorporation in Nevada.
    Both companies disclosed the planned incorporation
conversions in proxy filings with the U.S. Securities and
Exchange Commission earlier this month.
    The new complaint argues that the move from Delaware to
Nevada is specifically intended to take advantage of Nevada’s
“no liability regime,” which will make it harder for
shareholders to hold TripAdvisor and Liberty TripAdvisor
directors responsible if they breach their duties.
    That’s not really even a matter of dispute, since the
companies said as much in their proxy filings: TripAdvisor said
in its April 10 proxy statement that re-incorporating in Nevada
will stave off “unmeritorious” shareholder litigation, allowing
the company to attract directors and officers who might have
been dissuaded by the time and expense of defending against
shareholder claims. The holding company’s amended April 21 proxy
filing similarly said that the move to Nevada will insulate
directors and officers from liability to shareholders except in
the case of intentional misconduct.
    The holding company, moreover, acknowledged that board
members and executives may be in conflict with shareholders over
the conversion to Nevada incorporation. Its proxy statement said
that the board had considered those potential conflicts and
nevertheless recommended that shareholders vote in favor of the
move, which, it said will also save about $250,000 a year in
Delaware fees.
    The new lawsuit argues that shareholders who are not allied
with Gregory Maffei, chairman of both TripAdvisor and its
parent, have essentially been frozen out of any say in the plan
to abandon Delaware. A scheduled June 6 shareholder vote, the
complaint said, is at best a formality because Maffei controls
both TripAdvisor and its parent. Maffei, according to the
complaint, owns more than 43% of the voting rights in the parent
company. That's enough for him to be deemed a controller in
light of his sway over the rest of the board, the complaint
said. The parent company, in turn, controls nearly all of the
voting rights at TripAdvisor.
    Unless the Chancery Court steps in, the complaint asserts,
the fait accompli move to Nevada will allow Maffei and his
allies to strip the other shareholders of their right to sue —
without offering the minority shareholders any consideration for
surrendering that power. 
    The power-grab is all the more egregious, the complaint
said, because Maffei has been a defendant in six recent or
pending shareholder breach-of-duty suits that have collectively
garnered more than $200 million in settlements.
    “The core question in this case is whether fiduciaries of a
Delaware corporation — still bound by Delaware law and the duty
of loyalty — can use their control over the corporation to force
the company and its minority investors to give up all of
Delaware law’s protections,” the complaint said. “The answer to
that question is no.”
    A TripAdvisor spokesperson declined to comment via email. I
tried to reach Maffei by phone but his executive assistant said
that he and the parent company have no comment.
    Shareholder lawyers from Bernstein Litowitz and Block &
Leviton did not respond to my email.
    The shareholder firms devote considerable space in their
complaint to their contention that Nevada specifically set out
to attract businesses that sought to evade Delaware’s years of
precedent allowing shareholders in some circumstances to pierce
directors’ business judgment defenses. The complaint is full of
references to academic studies examining Nevada’s purported
“race to the bottom.”
        The lawsuit twice quotes a trenchant April 10 tweet from
Tulane University law professor Ann Lipton, who was commenting
on Elon Musk’s recent conversion of Twitter Inc from a Delaware
corporation into a Nevada corporation called X Corp.
    “I tell my students, Nevada is where you incorporate if you
want to do frauds,” Lipton tweeted.
    In a more scholarly comment on the new TripAdvisor lawsuit,
Lipton told me by email that the unusual shareholder claim
presents a particular challenge for the Chancery Court. “It will
be interesting to see how Delaware handles it,” she said,
“especially given its own interests in protecting its domain but
also not being seen as directly challenging other states.”
    Lipton told me she’s aware of only two previous Delaware
cases involving corporate moves to Nevada — one against Highland
Capital Management LP and the other against Sylebra Capital
Partners Master Fund Ltd — but neither is directly analogous to
the new TripAdvisor case.
    For Nevada’s perspective, I reached out to Benjamin Edwards,
a corporate law professor at the University of Nevada, Las
Vegas. Edwards agreed that Nevada deliberately set a higher bar
for shareholder liability claims than Delaware by, among other
things, codifying the business judgment rule. But Edwards said
shareholders can still hold directors accountable for
intentionally breaching their duties.
    Nevada, he said, simply struck a different balance than
Delaware. “The folks here are people acting in good faith,
trying to do what’s right – not cynically racing to the bottom,”
he said.
    Edwards said he’s not aware of a systematic study of
corporations moving from Delaware to Nevada, although he said
anecdotal evidence suggests a “growing trend.”
    Among that anecdotal evidence, Edwards said, is Musk’s
Twitter relocation earlier this month and a 2018 move from
Delaware to Nevada by the translation services company
TransPerfect, after years of bruising litigation in Delaware
between its founders.
    Both Musk and TransPerfect’s CEO, Edwards said, “voted with
their feet” against Delaware’s Chancery Court.
    “Nevada,” he quipped, “has become a home for billionaires
leaving Delaware in a huff.”

 (Reporting By Alison Frankel; editing by Leigh Jones)