By: Sebastian Sauermann
INTRODUCTION
Delaware’s entire fairness test as applied to actions of corporation directors is often the kiss of death for director defendants.[1] That being the case, it is not surprising that companies such as Tripadvisor and Liberty Tripadvisor opted to pack their bags and head for Nevada where the level of scrutiny applied to director actions was substantially less taxing. However, before they left, the decision to seek protection from potential future liability was challenged by minority shareholders and, ultimately, brought before the Supreme Court of Delaware. The Court granted their exit, finding the entire fairness test did not apply.
MAFFEI v. PALKON
In Delaware, the default test to be applied to a director’s or officer’s action is the business judgment rule.[2] The business judgment rule creates the presumption that all directors and officers acted in good faith and in the belief that their actions furthered the best interests of the corporation.[3] Thus, directors and officers enjoy a certain freedom in carrying out their duties, though this freedom is not absolute. Plaintiffs can overcome the business judgment presumption rule upon a showing by a preponderance of the evidence that the directors breached their fiduciary duty or its unlikely officers and directors are able to comport with their duties given the nature of the transaction.[4] The entire fairness test will be triggered upon a showing that a director and officer is interested in a transaction such that they will receive a material, non-ratable benefit should the transaction be allowed to go forward. Whether such a non-ratable benefit was to be conferred on Mattei and others following the reincorporation of Tripadvisor and Liberty Tripadvisor was heavily debated by the parties in this litigation.
The crux of the litigation in Maffei was the board’s decision to reincorporate in Nevada with the express purpose of limiting the potential liability exposure of directors and officers for breach of fiduciary duties.[5] Not all stockholders supported the move, especially knowing their litigation rights may be affected.[6] In fact, without the controlling vote of Mattei, the proposed decision to relocate to Nevada would have failed.[7] On its face, the move seemingly only benefits those who would face liability for breach of their duties, namely officers and directors. Thus, why wouldn’t the move be subject to the entire fairness test?
The Plaintiffs argued that the directors and officers stood to gain a material benefit from the transaction – namely a liability shield upon its corporate relocation to Nevada. In Nevada, the directors and officers of Tripadvisor and Liberty Tripadvisor would enjoy greater protection from personal liability.[8] Nevada law eliminates personal liability for directors for breach of fiduciary duties, unless the transaction involves intentional misconduct, fraud or knowing illegal act.[9] In contrast to Delaware, Nevada does not apply the entire fairness standard to officer and director action. Plaintiffs took issue with the move because it was obvious the directors and officers wanted to escape to Nevada to limit their liability exposure. Plaintiff also point out that Mattei owns 43 percent of Liberty TripAdvisor’s voting power, and is the CEO, President and Chairman of Liberty TripAdvisor.[10] Moreover, Liberty TripAdvisor holds 56 voting interest in TripAdvisor.[11] Thus, the Plaintiffs argued, that the entire fairness test was the appropriate standard by which to analyze the board’s action. They asserted the transaction failed the two-prong test of entire fairness: fair dealing and fair price. The fair price prong was not met because the directors stood to gain a material, non-ratable benefit from the transaction.[12] Likewise, the transaction also failed the fair dealing prong because the controlling shareholder, Mattei, delivered the decisive vote.[13]
The Court of Chancery agreed with the arguments of the Plaintiff finding both that the entire fairness test was the applicable standard, and the director defendants were unable to show that the transaction was entirely fair. On appeal, the Supreme Court took pause and determined the director defendants did not stand to gain a material, non-ratable benefit by the proposed transaction. The Court noted that just because a director and officer stands to benefit from a transaction, that does not end the inquiry, much to the chagrin of the Plaintiffs. For a benefit to be considered material under Delaware law, the personal interest to be gained must be so significant such that the directors and officers are unlikely to be able to fulfill their fiduciary duty “without being influenced by [their] overriding personal interest.”[14]
The Court explained that the key factor in their analysis in Maffei was the lack of ongoing or anticipated litigation concerning the board and officer actions. In other words, the decision to relocate to Nevada was not done to shield the board from imminent or immediate liability, rather, it was done to protect against potential future liability of the board and officers.[15] Thus, the business judgment rule, rather than the entire fairness test was the appropriate analysis framework for this particular transaction. The Court also pointed out that the material benefit to be gained, if any, from relocation to Nevada is a hypothetical one, since the directors and officers did not face any imminent or immediate litigation at the time of the vote to relocate.[16] Accordingly, the Court leaned on Constitutional principles of standing to further explain the lack of material benefit to be gained should the transaction be upheld.[17]
CONCLUSION
The Mattei decision rendered by the Delaware Supreme Court is an important one in the world of the director and officer personal liability. Although Delaware courts are quick to protect against self-dealing transactions by directors and officers, the presumption that officers and directors act in good faith and in the best interests of the corporation must properly be rebutted before heightened scrutiny will apply.[18] This echoes the longstanding principle in Delaware that courts will not substitute their own decisions for that of the board absent a showing that director and officers gained a material, non-ratable benefit at the expense of the shareholders.[19]
[1] Maffei v. Palkon, 339 A.3d 705, 729 (Del. 2025).
[2] Id. at 728.
[3] Id.
[4] Id.
[5] Maffei, 339 A.3d at 711.
[6] Id.
[7] Id. at 710.
[8] Id. at 713.
[9] Maffei, 339 A.3d at 714.
[10] Id. at 711.
[11] Id.
[12] Id. at 722.
[13] Maffei, 339 A.3d at 722.
[14] Id. at 732.
[15] Id. at 733.
[16] Id. at 741.
[17] Maffei, 339 A.3d at 741.
[18] Id. at 723.
[19] Id. at 729.
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