Tripadvisor lawsuit shines light on companies moving to Nevada to escape Delaware's more stringent incorporation laws

By Ciara Linnane

Elon Musk recently placed Twitter inside a shell called X, which he incorporated in Nevada

A lawsuit filed in Delaware in April against the travel site Tripadvisor and its majority shareholder is highlighting what may be a growing trend: companies seeking to shift their incorporations to Nevada to avoid Delaware's more stringent and entrenched legal standards.

The suit was filed on behalf of a group of Tripadvisor Inc. (TRIP) shareholders, who are hoping to persuade the Delaware Chancery Court to stop the company from pushing ahead with board-approved plans to reincorporate in Nevada, arguing their motive is to take advantage of the state's "no-liability regime."

The suit alleges that Tripadvisor's majority shareholder, Gregory Maffei, is planning to use his supervoting stock holdings at shareholder meetings planned for June 6 to push through the move.

Maffei, CFO at Oracle (ORCL) and then Microsoft (MSFT) in the 1990s and 2000s, is chairman and chief executive of Liberty Media, which is parent to SiriusXM (SIRI) and Live Nation Entertainment (LYV). He is also chairman and CEO of Liberty TripAdvisor Holdings Inc. (LTRPA), which owns a controlling stake in Tripadvisor Inc.

Tripadvisor, whose headquarters are in suburban Boston, declined to comment on the litigation. Liberty TripAdvisor Holdings, based in the Denver area, did not respond to a request for comment.

The incorporation move will make it harder for minority shareholders to hold Tripadvisor and its parent liable if they breach their fiduciary duties, the suit argues.

That's because Nevada has become a "no-liability corporate safe haven," following legislative actions that have eliminated protections for shareholders by freeing directors and officers from liability arising from the operation and supervision of their companies, the suit alleges.

"As prominent corporate-law professor Ann Lipton recently observed, 'I tell my students, Nevada is where you incorporate if you want to do frauds,' " the suit states.

Nevada's corporate code has always been somewhat loose but has gotten even more so in recent years, Lipton, who is associate dean for faculty research at Tulane University in New Orleans and a securities and corporate litigator, told MarketWatch.

A recent amendment to the law was interpreted by the Nevada's state supreme court as relieving officers and directors of even more potential liability, she said.

TripAdvisor and Liberty TripAdvisor's recently published proxy statements lay out the rationale for reincorporating in Nevada.

"The redomestication will provide potentially greater protection from unmeritorious litigation for directors and officers of the company," says Tripadvisor in its April 10 proxy statement.

The move would further "result in the elimination of any liability of an officer or director for a breach of the duty of loyalty unless arising from intentional misconduct, fraud or a knowing violation of law," it continues.

Liberty TripAdvisor used similar language in its April 21 proxy: "The conversion into a Nevada corporation may help us attract and retain qualified management by reducing the risk of lawsuits being filed against us and our directors and officers. We believe that, for the reasons described below, Nevada law generally provides greater protection against liability for our directors, officers and the company than Delaware law."

In both proxies, the boards recommend that shareholders vote in favor of the resolution and say it would also save them $250,000 a year in fees paid in Delaware. Nevada charges an annual business license fee of just $500 and a filing fee that is currently about $1,225, according to the Tripadvisor proxy.

The Delaware fees, too, are modest, as compared with Tripadvisor's fourth-quarter revenue of $354 million, which was up 47% from $241 million in the year-earlier period and ahead of the FactSet consensus of $344.2 million.

The shareholder suit argues that shareholders are effectively cut out of any say in the plan, which they say was created without the hiring of a special committee or any other evaluation process. The parent company's proxy acknowledges that its board and shareholders interests may not align.

"These interests may present such persons with actual or potential conflicts of interest. Our Board of Directors was aware of these interests and considered them, among other matters, in reaching the decision to approve the plan of conversion and the conversion and recommend that our stockholders vote in favor of the conversion proposal," it says.

Maffei owns more than 43% of voting rights in Liberty TripAdvisor, sufficient to exercise control over the vote. And the parent company controls nearly all voting rights at Tripadvisor, "so the stockholder votes are a fait accompli," according to the suit.

Maffei, meanwhile, has been a defendant in a series of actions cited in the suit in which he engaged in "conflicted transactions favoring his own interests at the expense of public stockholders."

Those actions have resulted in settlements that run to more than $200 million.

The Tripadvisor proxy also discloses that "the redomestication is expected to provide corporate flexibility in connection with certain corporate transactions," without offering further details.

"At bottom, the conversions are self-interested transactions aimed to benefit the companies' directors, officers, and controlling stockholder to the clear detriment of minority public stockholders," says the suit.

Benjamin Edwards, associate professor of law at the William S. Boyd School of Law the University of Nevada, Las Vegas, said Delaware is the clear leader in state incorporation law and has been for more than 100 years. "It has a very deep body of case law, a lot of precedent and in the business world, it's a common tongue that almost everybody understands."

Delaware rules are all imposed by the courts, while Nevada has a statutory business code put in place by the state legislature.

Both states prohibit rank misconduct, but the nuance lies in the balance sought between allowing what could be viewed as meddlesome, low-value suits to be filed that destroy value for all shareholders, and making it too hard for investors to sue, which would deter some from investing in a company in the first place.

Recent research conducted by law professor Ofer Eldar of Duke University found that relatively lax corporate law can benefit some shareholders. That's especially true of those who own stakes in smaller companies, UNLV's Edwards noted.

"A possible explanation is that Nevada's pro-managerial laws reduce the likelihood of takeovers and litigation, thereby benefiting a segment of small firms for which the costs of corporate governance may outweigh the benefits," Eldar wrote

A number of companies have recently made the move to Nevada from Delaware, where more than 60% of the Fortune 500 are incorporated, earning Wilmington, Del., the nickname Corporate Capital of the World. These include Elon Musk--era Twitter, which Musk recently placed in his shell company called X, which is domiciled in Nevada.

For more: 'X' marks the spot where Elon Musk has buried Twitter Inc

Other companies that have asked shareholders to approve a move to Nevada from Delaware in recent years include Recruiter.com (RCRT), FG Financial Group Inc. (FGF), Predictive Oncology Inc. (POAI), Chembio Diagnostics Inc. and Surge Components Inc. (SPRS), according to SEC filings.

So, how is the Delaware court likely to respond to the Tripadvisor suit?

"It certainly puts Delaware in an awkward position, and it's delicate politically," said Lipton of Tulane. "It's weird for one state to say, 'Your state is so bad, we should leave.' The legal principles are well-established, but it hasn't come up in this context."

UNLV's Edwards agreed. "It's entirely valid for Delaware to set its own rules for when companies can leave and what procedures and processes they have to use," he said. "However, I would not expect Delaware to turn into the Hotel California, where you can check in, but you can never leave."

The law firms bringing the suit sum it up as follows: "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, with the sole purpose being to insulate the conflicted controller and insiders from accountability.

"The answer to that question is no."

Tripadvisor's stock is up 1.5% to date in 2023, while the S&P 500 has gained 8.9%.

-Ciara Linnane

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05-02-23 0804ET

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