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

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 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 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)