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Editorial 7 MIN READ

Palkon v. Maffei: Delaware puts a price on the Nevada exit

VC Laster applies entire fairness to a TripAdvisor reincorporation, and founders reading the tea leaves in Texas and Austin should pay attention

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 6 sections
  1. What the opinion actually says
  2. Why this case, why now
  3. What changes in practice
  4. The second-order questions
  5. The practical bottom line
  6. Sources

n February 20, 2024, Vice Chancellor J. Travis Laster issued an opinion in Palkon v. Maffei that did something Delaware watchers had been waiting years to see: it treated a controlling stockholder's decision to move the company out of Delaware as a self-dealing transaction. The case is about TripAdvisor and Liberty TripAdvisor Holdings reincorporating from Delaware to Nevada by merger. The holding is that the move is subject to entire fairness review, because the controller captures benefits that the minority does not share.

This is the Delaware-to-Nevada reincorporation question with a price tag attached, and the price is not theoretical.

What the opinion actually says

The procedural posture matters. The plaintiffs sought a preliminary injunction against the conversion. Vice Chancellor Laster denied the injunction but kept the case alive, holding that the claims for damages against the controller and the directors survive the motion to dismiss and proceed under the entire fairness standard. The opinion is styled Palkon v. Maffei, C.A. No. 2023-0449-JTL (Del. Ch. Feb. 20, 2024), and a companion set of claims against IAC's Barry Diller, Fisk v. Diller, C.A. No. 2023-0533-JTL, travels in parallel.

The reasoning runs like this. Delaware law imposes fiduciary duties on controllers and directors. When a controller stands on both sides of a transaction and extracts a non-ratable benefit, entire fairness applies unless the transaction is cleansed under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014): a fully empowered, independent special committee and an uncoerced majority-of-the-minority vote, both in place from the start. The Liberty and TripAdvisor conversions had neither.

Vice Chancellor Laster then asked whether a jurisdictional move confers a non-ratable benefit. His answer is yes, and the reason is narrow and specific. Nevada law offers controllers and fiduciaries substantially broader liability protection than Delaware. NRS 78.138(7) caps officer and director liability in terms Delaware does not match, and Nevada's case law is less developed on duty-of-loyalty claims against controllers. Moving the company from Delaware to Nevada therefore strips the minority of litigation rights they would otherwise hold. The controller, who is the most likely defendant in such litigation, keeps the upside of the reduced exposure. That asymmetry is the non-ratable benefit. The move is self-dealing.

The court did not hold that reincorporating out of Delaware is per se impermissible. It held that when a controller is present and the destination state meaningfully reduces fiduciary exposure, the transaction is reviewed for entire fairness absent proper cleansing. Stockholders who vote for it do not by themselves bless it; the board process does.

Why this case, why now

The backdrop is a migration that has been building for two years. High- profile founders have been loud about Delaware's perceived hostility to controlled companies, and the loudest complaint is the January 2024 Tornetta v. Musk ruling rescinding Elon Musk's 2018 Tesla compensation package. Elon Musk himself posted on X that companies should incorporate in Nevada or Texas, and Tesla's board announced it would ask stockholders to ratify the compensation package and reincorporate Tesla from Delaware to Texas.

The Tesla vote is scheduled for June 13, 2024, two days from this article's dateline. Palkon dropped four months earlier and gave the plaintiffs' bar a framework to challenge exactly the kind of migration Tesla is proposing. The timing is not coincidence; it is how Delaware courts work. The Court of Chancery decides cases on the facts in front of it and the doctrine it has built, and when a fact pattern lands on the docket, the opinion goes where the reasoning takes it.

Texas is not Nevada. Texas enacted Senate Bill 1045 in 2023, creating a dedicated Texas Business Court that began hearing cases on September 1, 2024. The Texas Business Organizations Code adopts a more management-protective posture on some points than Delaware. The open question after Palkon is whether a Delaware court would treat a Delaware-to-Texas move as similarly self-dealing on the ground that Texas reduces controller exposure. The answer depends on the comparison the plaintiffs can make. If counsel can show that Texas materially narrows a claim the minority would have held in Chancery, the Palkon logic reaches Texas as readily as it reaches Nevada.

What changes in practice

For boards of controlled Delaware companies considering a move, the process is no longer a proxy exercise with a fairness-opinion bolt-on. It has to look like an arm's-length sale of a control asset, because that is how Chancery will review it.

That means, concretely, the following. Form a special committee of independent directors before any negotiation over the reincorporation structure begins, and make the committee's mandate include the power to say no. Give the committee its own counsel, not company counsel. Get a fairness opinion that addresses the reincorporation specifically, not a generic merger fairness opinion ported over. Condition the transaction on an uncoerced majority-of-the-minority vote, disclosed as such in the proxy. Time the committee's formation and the majority-of-the-minority condition from the outset; MFW requires both to be in place ab initio, not added after negotiations begin.

Even with all of that, the substantive question remains whether the move confers a non-ratable benefit. Boards that want to avoid the Palkon trap either (a) can make a record that the destination state does not meaningfully reduce controller or fiduciary liability, which is hard if the controller is publicly saying the reverse, or (b) must accept that entire fairness review is coming and build a record the court can sign off on. There is no third option involving a clever structure, because Vice Chancellor Laster addressed and rejected the structural argument that a merger is just a vote.

For counsel representing minority stockholders, Palkon is a playbook. Every announced Delaware exit by a controlled company is now a potential complaint. Expect filings shortly after any proxy that proposes a move out of Delaware where a controller is present, and expect discovery to focus on the committee's formation, its mandate, and whether the majority-of-the-minority condition was set from the first substantive negotiation.

For the rest of the market, the signal is worth naming. Delaware continues to distinguish itself by protecting the minority, and it is willing to treat a jurisdictional change as a transaction rather than a housekeeping move. If the appeal of Nevada or Texas is that controllers expect to pay less when they lose a fiduciary suit, Delaware has just told the bar how to price that expectation at the exit.

The second-order questions

A few lines remain genuinely unresolved, and they will resolve in the next twelve to eighteen months on other dockets.

The first is whether a non-controlled company faces any of this. The Palkon reasoning is anchored in the controller's non-ratable benefit. A widely-held Delaware corporation with an independent board moving to Texas or Nevada does not obviously trigger entire fairness, because there is no controller on both sides of the transaction. The business judgment rule should apply, and stockholder approval should cleanse most claims under Corwin v. KKR Financial Holdings, 125 A.3d 304 (Del. 2015). Expect clean-company moves to continue, and expect some of them to be challenged anyway, if only to test the Palkon boundary.

The second is whether the Delaware General Assembly weighs in. There has been active legislative conversation about Section 122 and the scope of stockholder agreements after West Palm Beach Firefighters v. Moelis, C.A. No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024). If the legislature amends the DGCL to make controller behavior more permissible, some of the migration pressure eases. If it does not, the migration pressure stays high, and Palkon does more work.

The third is Tesla itself. The June 13 vote will either produce a ratified package and a Texas domicile or it will not. If it does, the next litigation will test whether stockholder ratification of the compensation package cures the Tornetta problem, and whether the Texas reincorporation survives a Palkon-style challenge. The facts are different enough from TripAdvisor that nothing is predetermined, but the framework is the same.

The practical bottom line

Boards that were told in early 2024 that a Delaware-to-Nevada or Delaware-to-Texas reincorporation was a low-risk governance project should reread the memo. Boards of controlled companies in particular should treat any exit as a related-party transaction from the first meeting and build the MFW record in parallel with the substantive negotiation. Founders reading headlines about Nevada should remember that a reincorporation is a merger, and a merger with a controller on both sides is what Delaware courts have been reviewing for forty years. The destination may change; the scrutiny does not.

The Palkon opinion is forty-nine pages and worth reading in full before any board meeting where a jurisdictional move is on the agenda. The opinion settles less than the bar hoped and more than the migration evangelists wanted. That is what a careful Chancery opinion tends to do.

Sources

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