In a significant ruling, the Delaware Supreme Court addressed when a controlling shareholder's actions trigger heightened scrutiny under Delaware corporate law. Maffei v. Palkon, CA No. 2023-0449-JTL (Del. Feb. 4, 2025), available at: https://courts.delaware.gov/Opinions/Download.aspx?id=374990.
Facts
The case involved Gregory Maffei, who controlled both Tripadvisor, Inc. and Liberty TripAdvisor Holdings, Inc. through super-voting shares. Maffei and the boards of both companies sought to change their corporate domiciles from Delaware to Nevada, citing Nevada's more protective liability regime for directors and officers among other reasons.
Though the Conversions received majority approval, this was only achieved through Maffei's controlling votes. The minority shareholders largely opposed the change, with only 5.4% of Tripadvisor's minority shareholders and 30.4% of Liberty TripAdvisor's minority shareholders voting in favor. This stark divide prompted litigation over whether the Conversions should be subject to Delaware's most stringent standard of review - the entire fairness standard.
Ruling
The Delaware Supreme Court reversed the Court of Chancery's application of entire fairness review, holding instead that the more deferential business judgment rule applied. Central to the Court's reasoning was the absence of any concrete, material benefit flowing to Maffei as controller.
While the Court thus reverses the decision below, it does so without harsh criticism or strong language condemning the Vice Chancellor's analysis. The Court primarily disagrees with two aspects of the Vice Chancellor's reasoning. First, it respectfully disagrees with his rejection of a temporal distinction between existing and future potential liability as "arbitrary" and "hard to follow." The Court explains why such temporal distinctions are both workable and consistent with other areas of Delaware law, citing examples from ripeness and standing jurisprudence.
Second, the Court differs with the Vice Chancellor's view that comparing competing corporate governance regimes would be a workable approach to determining whether stockholders received the substantial equivalent of what they had before. The Court suggests that such an analysis would be "unacceptably speculative" and risks intruding on the value judgments of state legislators and corporate directors.
Analysis
According to the Court, the entire fairness standard applies to controller transactions when there is a concrete showing that the controller receives a material, non-ratable benefit from the transaction. Importantly, the Court clarifies that not every benefit that might advantage a controller qualifies as non-ratable.
The Court defines a non-ratable benefit primarily through examples and explanations of what does and does not qualify. The Court explains that classic examples include situations where a director appears on both sides of a transaction or receives a personal benefit not received by shareholders generally. In the controller context, a non-ratable benefit exists when the controller "receives a unique benefit by extracting something uniquely valuable to the controller, even if the controller nominally receives the same consideration as all other stockholders." At its core, a non-ratable benefit thus exists when a controller or fiduciary receives something of value that is not shared equally with other stockholders.
In applying that standard, the Court harmonized and clarified prior precedent by focusing on two key elements: materiality and temporality.
On materiality, the Court explained that a benefit must be sufficiently concrete and substantial. A merely theoretical or speculative advantage is not enough to trigger entire fairness review. The Court agreed with the basic principle that when a controlling stockholder stands on both sides of a transaction or receives something uniquely valuable to the controller, entire fairness applies. However, the benefit must be material enough to create a reasonable inference that it would affect the controller's judgment.
The Court placed particular emphasis on temporality as a key factor in determining materiality. The Court noted that the Conversions occurred on a "clear day"—there was no pending litigation or specific transaction that the change in domicile would affect. In doing so, the Court distinguished between two scenarios. In the first scenario, where controllers take action to extinguish or limit liability for past conduct or existing claims, entire fairness typically applies. The Court cited cases like Bamford v. Penfold and Harris v. Harris, where controllers attempted to eliminate existing potential liability or defeat standing for pending derivative claims. These concrete attempts to escape liability for past actions constituted material, non-ratable benefits triggering entire fairness.
In contrast, in the second scenario, where controllers take action that might affect hypothetical future claims or liability, without any specific threatened or pending litigation, entire fairness generally does not apply. The Court found the potential future benefits of Nevada's more protective liability regime too speculative to constitute a material benefit. This aligns with how Delaware Courts treat other prospective protections, like Section 102(b)(7) charter provisions or D&O insurance, which do not trigger entire fairness merely because they might reduce future liability exposure.
Importantly, the Court noted that if directors or controllers were to take concrete steps toward breaching their duties prior to redomiciliation, even if the breach would not be completed until after the change in domicile, the analysis could be different. But absent such specific conduct or existing claims, the mere possibility of future advantage under a different state's corporate law is insufficient to trigger entire fairness review.
The Court's framework thus requires examining both the nature of the alleged benefit (whether it is concrete and material) and its temporal relationship to the challenged transaction (whether it affects existing or purely prospective liabilities). This approach provides clearer guidance for practitioners while preserving entire fairness review for situations where controllers receive demonstrable, non-ratable benefits at the expense of minority shareholders.
This timing, combined with the speculative nature of any benefits to the controller, led the Court to conclude that the business judgment rule should apply. The ruling reflects Delaware's broader policy of allowing flexibility in corporate governance decisions when there is no concrete showing of self-dealing or receipt of non-ratable benefits by controlling shareholders.
This decision provides important guidance on when redomiciliation decisions will trigger heightened scrutiny, suggesting that theoretical future advantages under a different state's corporate law regime are insufficient without more concrete benefits to the controller.
Comparison to My Approach
In a forthcoming article, A Course Correction for Controlling Shareholder Transactions, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5022685, that Delaware Courts need a course correction. They have pushed the law governing controlling shareholders far beyond legitimate policing into unnecessary and unwise overregulation. This has prompted a backlash in which controllers threaten to reincorporate outside of Delaware, following Elon Musk’s example of moving Tesla to Texas.
Among the course corrections proposed by the article, I argue that the Delaware Courts should narrow the class of cases under which entire fairness is the standard of review by adopting a reinvigorated Sinclair Oil threshold test under which entire fairness is triggered only when the controller receives a benefit at the expense of and to the exclusion of the minority.
While the Court does cite Synthes (which in turn quoted Sinclair Oil) for the proposition that a conflicting interest exists when the controller "derived a personal financial benefit 'to the exclusion of, and detriment to, the minority stockholders,'" it does not establish this as a requirement. Rather, the Court's broader discussion suggests that the key inquiry is whether the controller receives a unique or differential benefit, regardless of whether that benefit actively harms or excludes the minority.
This interpretation is supported by the Court's discussion of cases involving compensation arrangements, consulting agreements, and services agreements between controllers and their controlled entities. In these situations, entire fairness can apply not because the minority is necessarily harmed or excluded from benefits, but because the controller receives something uniquely valuable.
My article and the Court's opinion thus reflect fundamentally different approaches to analyzing when controlling shareholder transactions should trigger entire fairness review, particularly in their treatment of non-ratable benefits.
The most significant divergence appears in how we define when a controller's receipt of non-ratable benefits should trigger heightened scrutiny. As noted, my article advocates for a return to Sinclair Oil's strict two-pronged test, under which entire fairness applies only when a controller receives a benefit that is both to the exclusion of the minority and comes at the minority's expense. In contrast, the Court's opinion focuses primarily on whether the benefit is "material" and "non-ratable," without requiring proof that it directly harms minority shareholders.
The Court and I also differ markedly in our treatment of temporality. While my article does not emphasize timing as a crucial factor in analyzing non-ratable benefits, the Court makes temporality central to its analysis by drawing a sharp distinction between existing or pending claims versus speculative future benefits.
These differences reflect contrasting theoretical frameworks. My article grounds its analysis in the controller's "rights of selfish ownership" and argues that controllers should have broad latitude to receive non-ratable benefits unless they directly harm minorities. The Court, however, focuses more on protecting minority shareholders through robust fiduciary duty analysis, viewing non-ratable benefits with greater inherent suspicion.
These theoretical differences manifest in their practical approaches. My article advocates for a clear threshold test based on Sinclair Oil that would apply business judgment review unless there is both exclusion and detriment. The Court adopts a more nuanced approach focusing on materiality and timing of benefits, allowing for greater judicial flexibility in reviewing controller conduct.
The approaches also diverge in our policy considerations. The article emphasizes market constraints, hypothetical bargains between controllers and minorities, and transaction costs as reasons to limit judicial intervention. The Court focuses more on traditional fiduciary principles and protecting minority shareholders from controller overreach.
In essence, these contrasting approaches reflect a fundamental disagreement about how to balance controller rights against minority protections in corporate law. The article favors clearer rules and greater controller autonomy, while the Court maintains uncertain and unpredictable standards that purport to provide stronger minority protections. This tension demonstrates the ongoing evolution of Delaware law away from the strict Sinclair Oil framework that my article seeks to revive.
