TripAdvisor Ruling Eases ‘DExit’ Path for Corporate Departures

Delaware’s top court magnified the “DExit” debate last week with a decision that makes it easier for businesses led by powerful corporate insiders to leave the state, which has seen a wave of high-profile exits.

The ruling—rejecting damages for investors over TripAdvisor Inc.'s move to Nevada—came days after Delaware’s new governor floated legal reforms in response to revelations that Meta Platforms Inc., Dropbox Inc., and Bill Ackman’s Pershing Square are eyeing the off-ramps after a year of heated attacks on the state’s reach from Elon Musk.

Delaware remains home to nearly 70% of Fortune 500 companies, and at stake is whether the trickle of exits will become a torrent. Nevada is leveraging looser accountability rules to attract corporate bigwigs leery of Delaware’s stance toward insider deals, while Texas is trying to lure startups with a business-friendly reputation and a brand-new commercial court.

But corporate leaders eager to leave—whether for mundane reasons or to curry favor with the increasingly powerful Musk—now have a more straightforward path than before the Feb. 5 ruling by Delaware’s Supreme Court, according to University of Pennsylvania law professor Jill Fisch.

“My guess is that a lot of companies have been sitting on the sidelines watching how this case was going to be decided,” Fisch said.

Controlling Stockholders

Musk’s social media bullhorn has amped up the pressure on Delaware’s Chancery Court, exposing its judges to months of crude smears after his $56 billion court loss.

But most companies flirting with Nevada and Texas are thinking less about the world’s richest man and more about the substantive evolution of Delaware law in recent years, said Berkeley Law professor Steven Davidoff Solomon. They view recent changes as “constricting their ability to act efficiently in dynamic situations,” according to Solomon.

“Putting Elon Musk aside, the law has changed,” he said. “The judges will say they’re just applying old doctrine, but it has changed.”

Many companies with controlling stockholders—like Meta and Dropbox—have become uneasy in Delaware, particularly after a decision last year in a case involving Match Group Inc. The state supreme court ruling suggested elevated scrutiny covers virtually all transactions involving corporate controllers with even the most technical conflicts of interest, even ordinary decisions on matters like executive compensation.

“You’re forced to go into this arduous process where historically you didn’t need to have a shareholder vote,” and “it might be overturned anyway,” Solomon said. “That’s what’s driving this. It’s not that ‘Elon Musk hates Delaware, so we’re going to also hate Delaware.’”

TripAdvisor has a controlling stockholder, media executive Greg Maffei, although a proposed restructuring may soon change that.

In last week’s unanimous decision, Justice Karen L. Valihura avoided the higher standard of scrutiny by ruling that moving to a friendlier jurisdiction without a conflicted transaction already pending didn’t give Maffei a “material” benefit at the expense of shareholders. The standard requires judges to determine if a corporate action was “entirely fair” to minority investors, rather than deferring to a board’s “business judgment.”

Cutting Back on Conflicts

The focus on what it takes to make a significant conflict of interest meant the opinion was both narrower and broader than it could have been.

The court’s discussion of “temporality,” in particular—the idea that TripAdvisor opted to relocate on a clear day, without a deal on the horizon that could steer value to Maffei—underscored that judges shouldn’t necessarily be taking a hard look at every decision “giving benefits to a controller that don’t perfectly square up, percentage-by-percentage, to their holdings,” according to Columbia University law professor Eric Talley.

“The temporality component is just part of the mix,” Talley said. “The lower the magnitude of a potential benefit, the lower the probability it will occur, and now the further pushed out in time—that all cuts against materiality.”

Conflicts stemming from disproportionate or “non-ratable” benefits comprise an important doctrine throughout corporate law, including in circumstances involving neither a reincorporation nor a controlling stockholder. The decision to cut back on scrutiny of some conflicts—or to clarify the concept’s existing limits—likely reflects the fallout from the Match decision, according to Fisch.

“The court is trying to draw a workable line between things that are really conflicts and things that are not,” she said. “This opinion could have been written to focus on reincorporation. It wasn’t. My guess is the reason was because of concerns like: Is Match too broad? What exactly constitutes a non-ratable benefit? Are we going to see a flood of shareholder suits every time a company amends its charter?”

Corporate Federalism

It’s unlikely companies without controlling stockholders are going to rush Delaware’s exits, according to Joshua Newcomer, a Houston-based partner at McKool Smith, who called the broadsides against Delaware “overblown.” There’s no incentive for those types of businesses to seek friendlier pastures because public investors benefit from the crackdown on insiders, he said.

Still, the TripAdvisor decision creates opportunities. “It’s going to be a dynamic environment where Delaware, Texas, Nevada, and potentially other states could step in to provide alternatives that may be better or worse given the type of business and the corporate structure,” Newcomer said.

That tradition of corporate federalism explains the final part of the TripAdvisor opinion, stressing “comity” between different jurisdictions, according to Fisch. “We have a long history in this country of states taking different approaches to corporate law,” she said. “The system works because corporations can choose.”

Talley called the comity section “another stick in the bundle.”

“It suggests that when the conflict involves a reincorporation, there’s kind of an additional materiality hump you have to get over,” he said. “While I do think it’s secondary, it’s not a nothingburger either. If we’re about to enter this interesting period of reincorporations, defendants are going to be able to use that.”