Delaware has long been the default choice for countless companies, drawn by Delaware’s reputation for corporate-friendly laws and established legal precedents.

More than 2 million businesses incorporate there, 67% of Fortune 500s choose Delaware and approximately 80% of all U.S. initial public offerings in 2023 were registered in Delaware, according to Delaware.gov .

But some companies are asking: Is Delaware truly the best venue, or simply the most familiar one?

Anecdotally, we are seeing more companies consider incorporating in states like Nevada, which has branded itself as a liability-free jurisdiction .

As corporations weigh the benefits of reincorporation in states like Nevada, the 2024 TripAdvisor lawsuit showcases the risks and considerations at stake for companies contemplating this move.

Separately, potential changes in jurisdiction may also have implications for directors and officers (D&O) insurance, though the impact on coverage and costs remains uncertain.

TripAdvisor Case Highlights

In a February 2024 ruling, a Delaware judge allowed TripAdvisor to proceed with its plan to reincorporate in Nevada despite objections from minority shareholders.

According to the Delaware court , TripAdvisor was motivated to reincorporate at least partly due to the increasing frequency of shareholder litigation in Delaware.

Per the TripAdvisor Proxy and board materials, TripAdvisor’s board believed Nevada law would offer stronger protections against shareholder claims and greater protection to its directors and officers (the Delaware court opinion cited eight lawsuits against its affiliated companies since 2012.)

TripAdvisor has two classes of stock, with the CEO and chair Greg Maffei holding high-vote shares that grant him majority voting control.

This enabled him to unilaterally approve the board’s decision to convert the company from a Delaware corporation to a Nevada corporation, even though the majority of public stockholders did not vote in favor.

Shareholders sued TripAdvisor and its parent company, Liberty TripAdvisor Holdings, Inc., arguing the move deprived shareholders of their litigation rights and that Nevada’s more lenient laws makes it easier for management and the board to take advantage of shareholders.

Delaware Vice Chancellor Travis Laster declined to block the reincorporation, but noted that the shareholders could sue for damages as a result of their loss of protections and litigation rights.

The court noted that the board’s decision to reincorporate in Nevada provided a “nonratable benefit” to the board, that benefit being enhanced protection from shareholder litigation.

This triggered the entire fairness standard of review because, in addition to providing a disproportionate benefit, the transaction lacked procedural protections—such as an independent committee or minority shareholder approval—which could have cleansed the transaction of conflicts.

Unlike the deferential business judgement rule, the entire fairness standard of review is an especially tough one for boards since the court will examine both procedural and substantive fairness.

This case highlights a potential way for Delaware companies to reincorporate in other states, but the process carries litigation risks.

As this article by Cooley LLP points out, companies—particularly those controlled by a dominant stockholder—should adhere to the MFW process or use traditional cleansing mechanisms such as approval by independent directors, a special committee or disinterested stockholders.

How Might Reincorporation Further Benefit Directors And Officers?

Corporate boards considering reincorporation out of Delaware will undoubtedly select the jurisdiction that best aligns with their objectives—and there are 49 other states to choose from.

A desire to reincorporate may not be driven solely by a desire to minimize legal liabilities. For example, the franchise tax costs in some states can be lower than in Delaware.

There may be other key regulatory considerations as well. It could also be the case that a company may want to support the state where the company is headquartered by reincorporating there.

If the choice for reincorporation is Nevada, companies may also ask whether moving to Nevada, where it’s generally harder for plaintiffs to win suits compared to Delaware, will reduce directors and officers (D&O) insurance costs.

The answer is a tentative "maybe.” It's too early to say definitively whether reincorporation in states like Nevada will result in lower D&O insurance costs.

The insurance market has not yet adjusted its pricing to reflect this shift, as there's insufficient data to predict long-term trends.

However, strong companies willing to use their balance sheet to protect directors and officers might save money by purchasing less D&O insurance.

One key difference between Nevada and Delaware is that, in Nevada, the corporation can pay settlements for derivative suits. By contrast, Delaware corporations are typically not able to indemnify directors and officers for derivative suit settlements.

This means that such settlements must be paid personally or through a type of D&O insurance referred to as “Side A” D&O insurance. Side A insurance responds on behalf of individual directors and officers when something is insurable but not indemnifiable.

In the United States, that is typically corporate bankruptcy (where the company cannot indemnify due to insolvency) and the settlements of derivative suits where state corporate law does not permit indemnification.

This difference in how derivate suit settlements can be treated could reduce the need for Nevada corporations to purchase Side A D&O insurance compared to Delaware corporations. Delaware corporation typically buy material amounts of Side A insurance due to the risk of derivative suits.

Indeed, Delaware companies with substantial balance sheets that otherwise might choose to self-insure their D&O risks will still purchase Side A insurance because of the non-indemnifiable derivative suit settlement exposure.

So, while it is too soon to say if premium rates for Nevada versus Delaware corporations will be different, it seems intuitive that some large, well-funded Nevada corporations may save on the overall cost of insurance by just purchasing less of it.

We’re still waiting to see how this plays out in practice.

Balancing Opportunity And Risk

The TripAdvisor case underscores the complexities and risks associated with reincorporation.

Companies considering reincorporation that follow a strict process designed to protect minority shareholders will be going to a lot of trouble and expense.

However, that is probably less trouble and expense than having a Delaware court apply the entire fairness standard of review to the reincorporation process.