IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
DENNIS PALKON and HERBERT ) WILLIAMSON, ) ) Plaintiffs, ) ) v. ) C.A. No. 2023-0449-JTL ) GREGORY B. MAFFEI, ALBERT E. ) ROSENTHALER, MATT GOLDBERG, JAY ) C. HOAG, BETSY MORGAN, GREG ) O’HARA, JEREMY PHILIPS, TRYNKA ) SHINEMAN BLAKE, JANE JIE SUN, ) ROBERT S. WIESENTHAL, LARRY E. ) ROMRELL, J. DAVID WARGO, MICHAEL ) J. MALONE, CHRIS MUELLER, and ) CHRISTY HAUBEGGER, ) ) Defendants, ) ) and ) ) TRIPADVISOR, INC. and LIBERTY ) TRIPADVISOR HOLDINGS, INC., ) ) Nominal Defendants. )
MEMORANDUM OPINION DENYING APPLICATION FOR INTERLOCUTORY APPEAL
Date Submitted: March 11, 2024 Date Decided: March 21, 2024
Gregory V. Varallo, Andrew E. Blumberg, Mae Oberste, Daniel E. Meyer, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Kimberly A. Evans, Lindsay K. Faccenda, Irene R. Lax, Robert Erickson, BLOCK & LEVITON LLP, Wilmington, Delaware; Jeroen van Kwawegen, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Jeremy Friedman, David Tejtel, Christopher Windover, Lindsay La Marca, FRIEDMAN OSTER & TEJTEL PLLC, Bedford Hills, New York; Jason Leviton, BLOCK & LEVITON LLP, Boston, Massachusetts; D. Seamus Kaskela, Adrienne Bell, KASKELA LAW LLC, Newtown Square, Pennsylvania; Attorneys for Plaintiffs Dennis Palkon and Herbert Williamson.
Kevin R. Shannon, J. Matthew Belger, Jaclyn C. Levy, Christopher D. Renaud, Justin T. Hymes, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Matthew W. Close, Jonathan B. Waxman, O’MELVENY & MYERS LLP, Los Angeles, California; Abby F. Rudzin, Asher Rivner, O’MELVENY & MYERS LLP, New York, New York; Attorneys for Defendants Gregory B. Maffei, Albert E. Rosenthaler, Larry E. Romrell, J. David Wargo, Michael J. Malone, Chris Mueller, Christy Haubegger, and Nominal Defendant Liberty TripAdvisor Holdings, Inc.
Bradley R. Aronstam, S. Michael Sirkin, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; John A. Neuwirth, Evert J. Christensen, Jr., Stefania D. Venezia, WEIL, GOTSHAL & MANGES LLP, New York, New York; Attorneys for Defendants Matt Goldberg, Jay C. Hoag, Betsy Morgan, Greg O’Hara, Jeremy Philips, Trynka Shineman Blake, Jane Jie Sun, Robert S. Wiesenthal, and Nominal Defendant TripAdvisor, Inc.
LASTER, V.C. The court issued an opinion that largely denied the defendants’ motion to
dismiss (the “Opinion”).1 The defendants have asked the court to certify the order
implementing the Opinion for interlocutory review.
This decision denies the application. Supreme Court Rule 42 requires that an
interlocutory order meet strict criteria before being certified for interlocutory appeal.
The order does not meet those criteria.
Of course, that does not prevent the Delaware Supreme Court from accepting
the appeal. A trial court’s ruling on an application for interlocutory appeal is only a
recommendation. In particular, the justices will have their own sense of the public
importance of the case, which Supreme Court Rule 42 does not invite a trial court to
consider.
I. FACTUAL BACKGROUND
The factual background is drawn from the Opinion. The facts are
straightforward.
TripAdvisor, Inc. (the “Company”) and Liberty TripAdvisor Holdings, Inc.
(“Holdings”) are both Delaware corporations. Each has issued both high-vote and low-
vote shares. Gregory Maffei owns sufficient high-vote shares of Holdings to give him
control, and Holdings owns sufficient high-vote shares of the Company to give it
control. Maffei thus controls both entities.
1 Palkon v. Maffei, --- A.3d ---, 2024 WL 678204 (Del. Ch. Feb. 20, 2024). The boards of directors of both companies decided to convert them into Nevada
corporations. Maffei delivered the vote at the Holdings level and caused Holdings to
deliver the vote at the Company level. Neither board implemented any protections to
simulate arm’s length bargaining. Neither conversion was conditioned on either
special committee approval or an unaffiliated stockholder vote.
Stockholder plaintiffs challenged the conversions. The defendants moved to
dismiss the complaint, arguing that it failed to state a claim on which relief can be
granted. The court issued the Opinion, which largely denied the motion.
The plaintiffs argued that Nevada law offers fewer litigation rights to
stockholders and provides greater litigation protections to fiduciaries like directors
and stockholder controllers. The plaintiffs alleged that the defendants approved the
conversions to secure for themselves what they believed to be a materially reduced
risk of stockholder litigation. The plaintiffs assembled a combination of sources to
support their allegations, including the defendants’ own public statements.
Because the complaint’s allegations supported the inference that the
conversions were interested transactions, the court held that they were subject to
review for entire fairness.2 The court also held that the conversions were inferably
unfair.3 Along the substantive dimension of the unitary entire fairness inquiry, the
conversions inferably failed to provide stockholders with at least the substantial
2 Op. at *1, *14.
3 Id. at *17, *19.
2 equivalent of what they had before.4 Along the procedural dimension of the unitary
entire fairness inquiry, the conversions did not involve any efforts to replicate arm’s
length bargaining or otherwise protect minority stockholders.5
The court nevertheless dismissed the plaintiffs’ request for injunctive relief.6
The court held that it was not reasonably conceivable that an injunction would issue
to prevent the conversions from closing.7
After the court entered an implementing order, the defendants filed an
application asking the court to certify the implementing order for interlocutory
appeal (the “Application”). The plaintiffs oppose that relief.
II. LEGAL ANALYSIS
Supreme Court Rule 42 governs the certification of an interlocutory appeal.
“[T]he purpose of Rule 42 is to prevent wasteful piecemeal litigation from
overwhelming the docket of the Supreme Court.”8
Rule 42 cautions that “[i]nterlocutory appeals should be exceptional, not
routine, because they disrupt the normal procession of litigation, cause delay, and
4 Id. at *17.
5 Id.
6 Id. at *23.
7 Id. at *21–23.
8 Stein v. Blankfein, 2019 WL 3311227, at *1 (Del. Ch. July 23, 2019).
3 can threaten to exhaust scarce party and judicial resources.”9 Certification is
“generally not favored.”10 Thus, an application for interlocutory appeal “requires a
strict analysis by the trial court.”11
Rule 42 states that “[n]o interlocutory appeal will be certified by the trial court
or accepted by this Court unless the order of the trial court decides a substantial issue
of material importance that merits appellate review before a final judgment.”12 To
apply this test, the trial court first asks whether the interlocutory order decided a
substantial issue of material importance. If that requirement is met, then the trial
court must analyze whether “there are substantial benefits that will outweigh the
certain costs that accompany an interlocutory appeal.”13 The rule identifies eight
factors relevant to the assessment.14 Only if both criteria are met can the trial court
certify the interlocutory appeal.
A. Whether The Opinion Decided A Substantial Issue Of Material Importance
The first question a trial court must answer is whether the interlocutory order
decided a substantial issue of material importance. “The ‘substantial issue’
9 Supr. Ct. R. 42(b)(ii).
10 Supr. Ct. R. 42 cmt.
11 Chemours Co. v. DowDuPont Inc., 2019 WL 2404817, at *1 (Del. Ch. June 7, 2019).
12 Supr. Ct. R. 42(b)(i).
13 Supr. Ct. R. 42(b)(ii).
14 Supr. Ct. R. 42(b)(iii)(A)–(H).
4 requirement is met when an interlocutory order decides a main question of law which
relates to the merits of the case, and not to collateral matters.”15
The Delaware Supreme Court has held that “an order directed to the pleadings
falls within the class of interlocutory orders which are unappealable,” unless the
ruling “will . . . substantively affect the merits of a case or change the status of the
parties . . . .”16 Put differently, as a general matter, “[t]he substantial issue
requirement is not met where no final determination was made on the merits of
plaintiff’s claims, but only that plaintiff would be afforded the right to pursue
discovery related to the allegations of the complaint.”17 “Consistent with this
paradigm, this Court has reasoned that an order denying a motion to dismiss a
stockholder claim generally does not raise a substantial issue.”18
15 Sprint Nextel Corp. v. iPCS, Inc., 2008 WL 2861717, at *1 (Del. Ch. July 22, 2008);
accord Castaldo v. Pittsburgh–Des Moines Steel Co., 301 A.2d 87, 87 (Del. 1973).
16 Levinson v. Conlon, 385 A.2d 717, 720 (Del. 1978).
17 JB & Margaret Blaugrund Found. v. Guggenheim Funds Inv. Advisors, 2023 WL
2562933, at *3 (Del. Ch. Mar. 17, 2023) (ORDER) (cleaned up).
18 Id.; see, e.g., Fannin v. UMTH Land Dev., L.P., 2020 WL 5198356, at *2 (Del. Ch.
Aug. 28, 2020) (ORDER) (determining that the order did not decide a substantial issue of material importance because the order “merely decided, applying the liberal standard of [] Rule 12(b)(6), that the [c]omplaint stated a claim against the Appealing Defendants for breach of fiduciary duty.”), appeal refused sub nom. Etter v. Fannin, 238 A.3d 193 (Del. 2020) (TABLE); In re Tesla Motors, Inc. S’holder Litig., 2018 WL 2006678, at *3 (Del. Ch. Apr. 27, 2018) (ORDER) (determining that the order did not decide a substantial issue of material importance where plaintiff met its “minimal pleading-stage burden” to demonstrate controlling stockholder status and discovery could show otherwise), appeal refused sub nom. Musk v. Ark. Tchr. Ret. Sys., 184 A.3d 1292 (Del. 2018) (TABLE); 2 Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 18.04[b], at 18-12 (2d ed. & Sept. 2021 Supp.) (“[R]ulings found not to have determined a substantial issue include . . . the denial of a [] motion to dismiss a derivative suit in response to the recommendation of a special litigation committee . . . .” (citation omitted)); see also 5 The defendants assert that the Opinion decided a substantial issue because
the court “decided the legal question at the heart of this dispute: what standard of
review applies to a corporate move for potential enhanced litigation protection.”19
Both the Delaware Supreme Court and this court have rejected arguments that a
pleading-stage ruling on the likely standard of review decided a substantial issue.20
The Opinion addressed the likely standard of review for pleading-stage
purposes. The complaint adequately alleged that the benefit to the defendants was
material because (i) “the defendant directors focused on the ability of the conversions
to reduce or eliminate litigation risk,” (ii) “[t]he board materials discussed those
issues and called out past cases,” and (iii) “the proxy statements told the stockholders
that the directors were recommending the conversions to reduce or eliminate
litigation risk.”21
Levinson, 385 A.2d at 720 (“[T]he Court determined that an affirmative defense was not available, and the consequence of the decision was that the parties must proceed to trial, a ruling which our cases have held is not [a] basis for an interlocutory appeal.”).
19 App. ¶ 4.
20 See, e.g., MS Pawn Corp. v. Treppel, 133 A.3d 560, 2016 WL 921933, at *1 (Del.
2016) (TABLE) (refusing interlocutory review of decision which denied a motion to dismiss and held that entire fairness might govern challenged transaction); Reading Co. v. Trailer Train Co., 1984 WL 21202, at *1 (Del. Ch. June 7, 1984) (ORDER) (denying certification where order determined that business judgment rule applied at pleading stage, but had not “foreclosed” plaintiff from attempting to establish entire fairness “at a later stage in this lawsuit.”).
21 Op. at *14.
6 The Opinion did not make a final determination regarding the standard of
review. The court left open the possibility that the defendants could show that
Nevada law did not differ materially from Delaware law.22 If the defendants make
that showing, then entire fairness will not apply. The plaintiffs have not identified
any other reason for the standard of review to intensify, so the business judgment
rule would control, and the defendants would prevail.
The defendants seek to bolster their substantial-issue argument by asserting
that the Opinion “created the prospect of prolonged, expensive litigation and an
uncertain damages award.”23 That argument proves too much. Any denial of a motion
to dismiss means that the case will proceed to discovery and could reach trial. That
is particularly true for claims that inferably implicate the entire fairness standard.
Crediting that argument would support interlocutory review whenever a motion to
dismiss is denied, contrary to the final order doctrine and the regime that Supreme
Court Rule 42 establishes.
Regardless, the defendants’ assertion is not necessarily true. Whether the
litigation becomes prolonged and expensive is up to them. They could choose to
concede that they sought to take advantage of Nevada’s laws and viewed those laws
as conferring significant litigation protections, consistent with their
contemporaneous disclosures. If they do, then the need for fact discovery and the
22 Id.
23 App. ¶ 6.
7 presentation of evidence about what the defendants thought or believed will be
limited. The case will become more prolonged and expensive only if the defendants
seek to walk away from their contemporaneous disclosures. If they do, that is their
choice.
The case also need not become prolonged or expensive over of the comparison
between Delaware and Nevada law. During oral argument on their motion to dismiss,
the defendants suggested that they might seek to show that Nevada law and
Delaware law are functionally equivalent.24 The defendants need not hire experts to
make that showing, because under Delaware Rule of Evidence 202(a)(1), “[e]very
court in this State may take judicial notice of the common law, case law and statutes
of the United States and every state, territory and jurisdiction of the United States.”
Of course, the defendants might choose to proffer an expert on this topic, and under
Delaware Rule of Evidence 202(b), “[t]he court may inform itself of the laws identified
in paragraph (a) of this Rule in any manner that it deems proper.” The case will
become more prolonged and expensive only if the defendants choose to retain experts
on Nevada law. If they do, that is again their choice.
Admittedly, there is one area where expert testimony will be necessary. The
Opinion indicated that the court would likely look to the stock price reaction (if any)
to the conversion proposals as an indication of whether and to what extent the market
24 See Palkon v. Maffei (Oral Argument), C.A. No. 2023-0449-JTL, at 13–17, 56–58
(Del. Ch. Nov. 8, 2023).
8 reaction suggested harm.25 But even that analysis is not particularly challenging for
a qualified expert. Event studies are common. That aspect of the case need not make
this matter prolonged or expensive.
Consequently, as entire fairness cases go, this case is relatively unlikely to
involve prolonged, expensive litigation. And any potential damages award is also less
uncertain than in most entire fairness cases. By suggesting the market reaction
would provide a baseline, the court has given the defendants a sense of the potential
exposure.
The defendants’ assertions about “the prospect of prolonged, expensive
litigation and an uncertain damages award” thus not only fail to provide a basis for
interlocutory appeal generally, they are also relatively inaccurate characterizations
of this case.
The defendants also seek to bolster their argument for interlocutory appeal by
asserting that the Opinion “precludes any allegedly controlled company from leaving
the State without satisfying entire fairness review . . . .”26 The defendants reach that
conclusion by observing that to satisfy the MFW standard, a controlled company must
form a special committee of disinterested directors. The defendants argue that “under
the Court’s reasoning, it is unclear when, if ever, there would be directors who are
25 Op. at *22.
26 App. ¶ 7.
9 disinterested in a decision to move to a jurisdiction that provides greater litigation
protection to those directors.”27
The taint of alleged self-interest that the Opinion credited resulted from the
inferably material reduction in litigation exposure that a fiduciary who otherwise
would continue to serve under a Delaware regime could achieve by moving to a
Nevada regime. The equation has two variables: (i) serving as a corporate fiduciary
under Nevada law in lieu of (ii) otherwise serving as a corporate fiduciary under
Delaware law. To remove the taint, remove one variable.
One answer is to attack the problem from the post-conversion side. Directors
who do not continue with the corporation after the conversion will not benefit from
any greater litigation protection and would not be interested in the outcome. The
directors appointed to the special committee could submit resignations that would
become effective if the conversion were approved.28 Because they would not serve on
the board of the post-conversion entity, they would not benefit from the legal
protections offered by the post-conversion regime. The members of the special
committee would not be interested, at least as a result of the conversion.
Or attack the problem from the pre-conversion side. Just as boards often
appoint new directors when forming a special litigation committee, a board could add
27 Id.
28 See 8 Del. C. § 141(b) (“A resignation is effective when the resignation is delivered
unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events.”).
10 directors to consider the conversion. Those directors might (i) submit resignations
that would become effective if the conversion was not approved, eliminating any
prospect that they would continue as directors under the existing regime and (ii)
recuse themselves from any decisions other than considering the conversion,
eliminating any exposure for those decisions under the existing regime. With that
combination, it would be hard for a plaintiff to argue that the new directors were
gaining any relative benefit from moving to the new jurisdiction, because the new
directors would never face the prospect of continuing to serve unless the corporation
moved to the new jurisdiction. And the new directors would not have served
meaningfully as directors under the existing regime (other than to approve the
conversion itself).
Those are only two examples. Both would be obvious to the defendants’
sophisticated lawyers, which suggests that that their protestations of bewilderment
could be tactical. There may well be other ways to structure a committee so that its
members are not inferably interested in a jurisdictional move. The existence of at
least two ways negates the defendants’ contention that entire fairness necessarily
will apply whenever controlled corporations seek to leave Delaware.
Finally, the defendants assert that the Opinion decided a substantial issue
because “thousands of other Delaware corporations . . . need certainty as to the rules
that apply to a decision to reincorporate in another jurisdiction.”29 That statement
29 App. ¶ 22.
11 implies that thousands of Delaware corporations will be considering that issue,
thereby subtly alluding to the disproportionate media attention that the Opinion
received after Elon Musk’s high-profile comments about forsaking Delaware.
Rule 42 does not invite a trial court to consider the level of media attention
that a decision has received. That does not mean that the Delaware Supreme Court
could not consider it. The justices might conclude that given the media attention and
practitioner-driven stormlets over Delaware’s place in the corporate universe,
Delaware’s highest court should weigh in. But that is not a consideration that Rule
42 instructs a trial court to take into account.
The denial of a motion to dismiss claims challenging a self-interested
transaction does not constitute a substantial issue. The threshold requirement for
certification is not met.
B. Whether The Opinion Merits Appellate Review Before A Final Judgment
A ruling addressing a substantial issue is a necessary but not sufficient
condition for the certification of an interlocutory appeal. The trial court’s ruling also
must “merit[] appellate review before a final judgment.”30 When analyzing that issue,
Rule 42(b)(iii) instructs trial courts to consider eight factors. The defendants rely on
four, but they group two of the factors together, resulting in three distinct arguments.
30 Supr. Ct. R. 42(b)(i).
12 Because the Opinion did not decide a substantial issue, this decision could stop
there. But a trial court’s ruling under Section 42 merely offers a recommendation to
the Delaware Supreme Court, so the justices may want to have the benefit of the trial
court’s views on the other elements of the application. Out of an abundance of caution,
this decision therefore considers the defendants’ arguments under Rule 42(b)(iii).
1. Whether The Opinion Involves A Question Of First Impression
The defendants start with factor (A), which asks whether the “[i]interlocutory
order involves a question of law resolved for the first time in this State.”31 That factor
does not support interlocutory review.
To satisfy factor (A), the defendants assert that “no other Delaware court has
addressed whether and under what circumstances a company’s move to a state
affording some greater litigation protection for potential future cases based on
hypothetical future facts constitutes a non-ratable benefit material enough to trigger
entire fairness review.”32 The defendants then that in prior cases, “the fiduciaries
sought greater litigation protection for the specific purpose of defeating specific
claims.”33 They also contend that in prior cases, “the transaction at issue threatened
to extinguish, rather than just limit, stockholder claims.”34
31 Supr. Ct. R. 42(b)(iii)(A).
32 App. ¶ 9.
33 Id. ¶ 11.
34 Id. ¶ 12.
13 These assertions advance two ideas. One is that no Delaware court has
previously addressed the fiduciary standards that apply when a corporation moves to
another state that would provide fiduciaries with a more protective legal regime. The
other is that unlike prior decisions, the Opinion held that a fiduciary could receive “a
material non-ratable benefit from potentially greater litigation protection when (i)
there is no pending or threatened litigation and (ii) the greater protection would not
altogether extinguish the prospect of litigation.”35
The application of settled law to new facts does not mean that the court decided
a question of first impression.36 The Opinion did not apply new legal principles when
it issued a pleading-stage ruling on what standard of review would apply to the
conversions. Although the Company and Holdings seek to leave Delaware using
Section 266 of the Delaware General Corporation Law, that statute achieves the
functional equivalent of a direct, forward stock-for-stock merger between a Delaware
corporation and a Nevada corporation. The application of entire fairness to an
interested merger is not a novel issue. Nor is the application of entire fairness to a
35 Id. ¶ 10.
36 See Riker v. Teucrium Trading, LLC, 2023 WL 4411609, at *2 (Del. Ch. July 7, 2023)
(“[T]he Ruling did not present an issue of first impression; it considered a factual situation that has some differences from applicable precedent.”).
14 merger that confers litigation protections on the fiduciary defendants who approved
it.37 Nor is a challenge to an-outbound merger that confers litigation protections.38
The Opinion also did not address a new issue by focusing on the materiality of
a reduction in the litigation risk.39 Using a materiality standard to evaluate
interestedness is not novel.40
The defendants assert that applying a materiality standard to litigation risk
departed from how Delaware precedents had addressed the issue. That aspect of their
37 E.g., In re AmTrust Fin. Servs., Inc. S’holder Litig., 2020 WL 914563, at *11–12
(Del. Ch. Feb. 26, 2020) (holding that plaintiff pled that merger conferred a non-ratable benefit on defendants by extinguishing stockholder standing to bring a derivative claim that threatened defendants with damages that would be material to them personally); In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2018 WL 3120804, at *13 (Del. Ch. June 25, 2018) (crediting that stockholder plaintiffs had stated a direct claim against defendants who extracted non-ratable benefits through a settlement agreement); In re Riverstone Nat’l, Inc. S’holder Litig., 2016 WL 4045411, at *1 (Del. Ch. July 28, 2016) (finding that a complaint adequately alleged that by extinguishing stockholder standing to bring a threatened but not yet pending lawsuit, “a majority of the Defendant directors received a material benefit from the merger not shared by the common stockholders.”); In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 487 (Del. Ch. 2013) (same); see also Morris v. Spectra Energy P’rs (DE) GP, LP, 246 A.3d 121, 134–35 (Del. 2021) (adopting Primedia framework).
38 See Harris v. Harris, 2023 WL 115541, at *8–9 (Del. Ch. Jan. 6, 2023) (considering
allegations of interest arising from the alleged reduction in litigation exposure due to the loss of stockholder standing resulting from the merger of a Delaware corporation with a New Jersey corporation).
39 Compare App. ¶ 12–13.
40 E.g., United Food & Com. Workers Union & Participating Food Indus. Emps. Tri-
State Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021) (material personal benefit); Chester Cty. Empls.’ Ret. Fund v. New Residential Inv. Corp., 186 A.3d 798, 2018 WL 2146483, at *1 (Del. 2018) (TABLE) (same); Cede & Co. v. Technicolor, Inc. (Technicolor Appraisal II), 634 A.2d 345, 364 (Del. 1993) (same), decision modified in part on reargument, 636 A.2d 956, 957 (Del. 1994) (same).
15 novel-issue argument is really an argument that the Opinion conflicts with prior
rulings. This decision addresses it under that factor.
Factor (A) of Rule 42(b)(iii) therefore does not support certification. The
Opinion applied settled principles of law to hold that a transaction that confers
material benefits on corporate fiduciaries is subject to the entire fairness test. That
is not an issue of first impression.
2. Whether Decisions Of The Trial Courts Conflict
The defendants next rely on factor (B), which supports certification when “[t]he
decisions of the trial courts are conflicting upon the question of law.”41 Whether the
cases conflict depends how one interprets prior cases. On balance, this factor does not
support interlocutory review.
As discussed in the preceding section, the Opinion drew a pleading-stage
inference that the defendants sought to obtain a material reduction in litigation risk
from the conversions.42 The defendants insist that under prior cases, interestedness
from reduced litigation exposure can only result if both (i) the conduct giving rise to
the claim had already happened, and (ii) the transaction completely extinguished
(rather than just reduced) the scope of the litigation exposure.43
41 Supr. Ct. R. 42(b)(iii)(B).
42 Op. at *14.
43 App. ¶¶ 10–13.
16 Whether conduct has already happened and whether the claims were
extinguished are certainly two factors that could cause a reduction in litigation risk
to be material, but they are not the only ones. The defendants’ characterizations of
prior cases also dial up both factors to extremes.44 As the Opinion explained, the
defendants’ overly simplistic reading of precedent would render Delaware law
“piteously naive.”45
Imagine a graph with two axes. The vertical axis identifies the degree of
reduction in litigation exposure and ranges from 0% (no change) to 100% (total
extinguishment). The horizontal axis is a measure of how viable the case is, ranging
from 0% (not viable at all) to 100% (sure winner). There are an infinite number of
points where the combination can be material, and an infinite number of points where
it won’t be. For example, a 100% reduction in a 0% risk will be immaterial, because
there was never any risk to begin with. A 50% reduction in a 5% risk should not be
material, because the risk doesn’t change much. For the same reason, a 5% reduction
in a 50% risk should not be material. Other combinations will be material.
The defendants claim that under previous cases, only a 100% risk reduction
can ever be material.46 That unrealistically sets the bar at the highest possible level.
A reduction in litigation risk short of 100% can certainly be material.
44 App. ¶¶ 10–13, 15–17.
45 Op. at *9.
46 App. ¶ 17.
17 The defendants also assert that when evaluating how viable a claim is, the
cases only look to whether the events giving rise to a claim have happened or not. 47
But whether the events have happened already is not a reliable proxy for the strength
of a claim. Because of timeliness doctrines like laches and the statute of limitations,
events that have happened already may be unable to support a viable claim. By
contrast, if parties regularly engage in conduct that carries a significant risk of
litigation, or if they anticipate doing so, then the likelihood of meaningful litigation
over future conduct may be quite high, even though the events have not happened
yet. Here, for example, the plaintiffs argued that the defendants intended to take the
Company or Holdings private and wanted to move to Nevada before doing so. 48 The
defendants vehemently rejected that allegation as unduly speculative.49 Then one of
Maffei’s affiliates announced that he had approached the Company and Holdings
about a going-private transaction.50
And there are other factors that could influence the viability of a claim. One
obvious consideration is whether the claim implicates the duty of care or the duty of
loyalty. Section 102(b)(7) of the Delaware General Corporation Law authorizes
charter provisions that exculpate directors (and, to a lesser degree, officers) for the
47 Id. ¶¶ 15–17.
48 Oral Argument, 2023-0449-JTL, at 50–51.
49 Id. at 7–10.
50 Op. at *5.
18 former but not the latter.51 In the face of an exculpatory provision, a claim for breach
of the duty of care does not support a meaningful threat of liability.52 Even without
an exculpatory provision, a plaintiff must establish gross negligence, which in the
corporate context really means recklessness.53 Even if the events allegedly giving rise
51 See 8 Del. C. § 102(b)(7).
52 Zuckerberg, 262 A.3d at 1054..
53 In re McDonald's Corp. S’holder Derivative Litig., 291 A.3d 652, 689 (Del. Ch. 2023)
(“In the corporate context, gross negligence has its own special meaning that is akin to recklessness.”); In re Lear Corp. S’holder Litig., 967 A.2d 640, 652 n.45 (Del. Ch. 2008) (“[T]he definition [of gross negligence in corporate law] is so strict that it imports the concept of recklessness into the gross negligence standard ....”); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *4 (Del. Ch. Aug. 26, 2005) (“Gross negligence has a stringent meaning under Delaware corporate (and partnership) law, one which involves a devil-may-care attitude or indifference to duty amounting to recklessness.” (cleaned up)); Tomczak v. Morton Thiokol, Inc., 1990 WL 42607, at *12 (Del. Ch. Apr. 5, 1990) (“In the corporate context, gross negligence means reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason.” (cleaned up)).
In civil cases not involving business entities, the Delaware Supreme Court has defined gross negligence as “a higher level of negligence representing ‘an extreme departure from the ordinary standard of care.’” Browne v. Robb, 583 A.2d 949, 953 (Del. 1990) (quoting W. Prosser, Handbook of the Law of Torts 150 (2d ed. 1955)). This test “is the functional equivalent” of the test for “[c]riminal negligence.” Jardel Co., Inc. v. Hughes, 523 A.2d 518, 530 (Del. 1987). By statute, Delaware law defines “criminal negligence” as follows:
A person acts with criminal negligence with respect to an element of an offense when the person fails to perceive a risk that the element exists or will result from the conduct. The risk must be of such a nature and degree that failure to perceive it constitutes a gross deviation from the standard of conduct that a reasonable person would observe in the situation.
11 Del. C. § 231(a). The same statute provides that a person acts recklessly when “the person is aware of and consciously disregards a substantial and unjustifiable risk that the element exists or will result from the conduct.” Id. § 231(e). As with criminal negligence, the risk “must be of such a nature and degree that disregard thereof constitutes a gross deviation from the standard of conduct that a reasonable person would observe in the situation.” Id.; see id. § 231(a). Under this framework, gross negligence “signifies more than ordinary inadvertence or inattention,” but it is “nevertheless a degree of negligence, while recklessness connotes a different type of conduct akin to the intentional infliction of harm.” Jardel, 523 19 to a care claim have already occurred, the claim is unlikely to present a meaningful
risk of liability in the first place, so the implications of risk reduction will often be
immaterial.
Yet the defendants insist that under Delaware law, a reduction in litigation
risk can only give rise to interestedness if both (i) the risk is completely extinguished
and (ii) the conduct has already happened.54 For that proposition, the defendants rely
principally on Orloff v. Shulman,55 and Sutherland v. Sutherland.56 The Opinion
explained why that interpretation of Orloff and Sutherland is incorrect.57 Both cases
involved mid-stream adoptions of Section 102(b)(7) provisions that exculpated
directors for breaches of the duty of care.58 As discussed previously, care claims
generally do not present a meaningful risk of liability, even when the events have
already happened, so adopting an exculpatory provision does not change the status
quo by extinguishing what is likely an immaterial risk. Moreover, by authorizing
exculpatory provisions, the General Assembly made a determination that foreclosing
A.2d at 530. The comparison shows the protectiveness of Delaware’s corporate law standard: To hold a director liable for gross negligence requires conduct more serious than what is necessary to secure a conviction for criminal negligence.
54 Id. ¶¶ 10, 17.
55 2005 WL 3272355 (Del. Ch. Nov. 23, 2005).
56 2010 WL 1838968 (Del. Ch. May 3, 2010).
57 See Op. at *12.
58 Sutherland, 2010 WL 1838968, at *14–15; Orloff, 2005 WL 3272355, at *6, *14.
20 monetary liability for breaches of the duty of care confers net benefits on corporations
and their stockholders.59 It follows that adopting a Section 102(b)(7) provision is not
a presumptively self-interested act and does not inferably confer a material and non-
ratable benefit, because the directors’ interest in obtaining care-based exculpation
align with the stockholders’ interests in providing it.
Loyalty is different. Exculpation for duty of loyalty claims is “inconsistent with
the public policy of this State to hold fiduciaries accountable for breaches of the duty
of loyalty.”60 An inferably material reduction in potential liability for breaches of the
duty of loyalty confers a benefit on a director and renders that director interested.
The plaintiffs allege that the conversions materially reduce the defendants
accountability for breaches of the duty of loyalty. Orloff and Sunderland are therefore
distinguishable.
The defendants also imply that under the Opinion’s logic, a board’s decision to
use company funds to purchase D&O insurance would be subject to entire fairness
review.61 The Opinion did not say that. As with Section 102(b)(7), Delaware law
specifically authorizes insurance, reflecting a public policy determination that
59 See Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1052 (Del. Ch. 1996) (“[I]t is in
the shareholders’ economic interest to offer sufficient protection to directors from liability for negligence, etc., to allow directors to conclude that, as a practical matter, there is no risk that, if they act in good faith and meet minimal proceduralist standards of attention, they can face liability as a result of a business loss.”).
60 CCSB Fin. Corp. v. Totta, 302 A.3d 387, 401 (Del. 2023).
61 App. ¶ 13.
21 securing D&O insurance generally benefits corporations and their stockholders, both
by encouraging qualified directors to serve and by providing a source of funds for a
potential recovery.62
At bottom, the defendants want bright-line rules to dictate when equity will
provide a remedy. Making that demand express, they complain that “[t]he Court’s
decision thus leaves uncertain the question of what nature and degree of risk
reduction constitutes sufficient benefit to trigger entire fairness review.”63
Issues of materiality are often fact-intensive.64 The level of uncertainty created
by the Opinion is no different than in any case applying a materiality standard at the
pleading stage.
More broadly, claims for breach of fiduciary duty sound in equity.65 The
purpose of equity is to ameliorate “any harsh or otherwise undesirable effects
resulting from the strict application of any particular rule of law,”66 not to impose
62 See 8 Del. C. § 145(g).
63 App. ¶ 12.
64 See, e.g., Acela Invs. LLC v. DiFalco, 2019 WL 2158063, at *31 (Del. Ch. May 17,
2019) (“Relatedly, in the context of interested director transactions, only ‘sufficiently material’ interests can rebut the business judgment rule presumption, the determination of which is a ‘fact- dominated question.’” (quoting Technicolor Appraisal II, 634 A.2d at 364)).
65 Lebanon Cty. Empls.’ Ret. Fund v. Collis, 287 A.3d 1160, 1196 (Del. Ch. 2022) (“[A]
claim for a breach of fiduciary duty is an equitable tort.”).
66 Howard L. Oleck, Historical Nature of Equity Jurisprudence, 20 Fordham L. Rev.
23, 24 (1951); see Holland v. Florida, 560 U.S. 631, 650 (2010) (“We have said that courts of equity must be governed by rules and precedents no less than the courts of law. But we have also made clear that often the exercise of a court’s equity powers must be made on a case-by- case basis. In emphasizing the need for flexibility, for avoiding mechanical rules, we have 22 strict rules of law of its own. To the contrary, “a court of equity generally does not
favor bright-line rules, instead using its discretion to make decisions on a case-by-
case basis.”67 That necessarily results in some lack of clarity, but “[t]his unclarity,
one should be quick to note is to a large extent inherent in ex post fiduciary review
and there is good reason to suppose it can be efficient.”68
The defendants can only argue that the Opinion conflicts with other cases by
adopting an extreme reading of those precedents. There is no conflict, and this factor
followed a tradition in which courts of equity have sought to relieve hardships which, from time to time, arise from a hard and fast adherence to more absolute legal rules, which, if strictly applied, threaten the evils of archaic rigidity.” (cleaned up)).
67 Park Empls.’ & Ret. Bd. Empls.’ Annuity & Benefit Fund of Chi. v. Smith, 2016 WL
3223395, at *10 (Del. Ch. May 31, 2016), aff’d, 175 A.3d 621 (Del. 2017); see Am. Healthcare Admin. Servs., Inc. v. Aizen, 285 A.3d 461, 493 n.13 (Del. Ch. 2022) (“Equity has generally favored standards, and one of the traditional roles of equity has been to deploy fact-specific equitable doctrines to mitigate the sometimes harsh outcomes that a brightline rule of law can produce.”); Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 728 A.2d 25, 52 n.105 (Del. Ch. 1998) (“[E]quitable and fiduciary principles . . . by their nature are highly fact specific and particularized . . . .”), aff’d sub nom. Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998).
68 Equity-Linked Invs., L.P. v. Adams, 705 A.2d 1040, 1055 n.48 (Del. Ch. 1997) (Allen,
C.). And at the extreme, it can lead to Selden’s epigram about the length of the Chancellor’s foot. John Selden, “Equity,” Table Talk (1669). But as I have explained at length elsewhere, that seventeenth century sound bite does not describe modern equity. “[T]hat characterization of equity had lost its force by the beginning of the nineteenth century, if not before, and both Pomeroy and Story demolished it in their treatises. Today, consistent with the famous maxim, “[e]quity follows the law.” LG Elecs., Inc. v. InterDigital Commc’ns, Inc., 98 A.3d 135, 144 (Del. Ch. 2014) (citations omitted), aff’d, 114 A.3d 1246 (Del. 2015).
23 3. Whether Review Would Terminate The Litigation And Serve Considerations Of Justice
As their final basis for interlocutory appeal, the defendants invoke two factors
together: factor (G), which asks whether “[r]eview of the interlocutory order may
terminate the litigation,”69 and factor (H), which asks whether “[r]eview of the
interlocutory order may serve considerations of justice.”70 That combination does not
For purposes of factor (G), the defendants point out that if the Delaware
Supreme Court holds that the business judgment rule applies to the conversions, then
the case should be dismissed.71 That is likely true. Without the inference of self-
interest deriving from the inferably greater litigation protections that Nevada law
provides, the plaintiffs have not alleged any grounds to rebut the protections of the
business judgment rule. But this argument again proves too much. The prospect of a
dismissal grounded on the business judgment rule often will be available when a
court denies a motion to dismiss because it is reasonably conceivable that a higher
standard of review could apply. Relying regularly on that truism would result in
automatic interlocutory appeals from opinions that denied motions to dismiss where
the defendants argued that the business judgment rule applied. That is not what Rule
42 contemplates.
69 Supr. Ct. R. 42(b)(iii)(G).
70 Supr. Ct. R. 42(b)(iii)(H).
71 App. ¶ 19.
24 For purposes of factor (H), the defendants argue that an immediate appeal
would serve considerations of justice by allowing the Delaware Supreme Court to
address threshold issues of law now, before the parties undergo an extensive effort to
litigate this matter to conclusion.72 The possibility that a reversal could save
litigation costs “is not unique to [this] application and would otherwise warrant
certification after nearly every trial court decision even in cases lacking ‘exceptional’
circumstances.”73 Moreover, for reasons discussed previously, this matter is likely to
require relatively less extensive litigation efforts than other entire fairness cases.
Finally, the defendants contend that respect for “principles of comity” warrants
interlocutory appeal.74 The defendants say the Opinion disrespected principles of
comity because “[t]he Court found it ‘reasonably conceivable’ that a share in a Nevada
corporation is inherently less valuable than a share in a Delaware corporation simply
because Nevada law is different.”75 Not quite. As the Opinion explained, nothing
about the ruling turns on anything about Nevada as a state.76 If the Company and
Holdings were converting into Delaware LLCs whose internal governance regimes
72 Id. ¶ 20.
73 In re Carvana Co. S’holders Litig., 2022 WL 4661841, at *4 (Del. Ch. Oct. 3, 2022).
74 App. ¶ 21.
75 Id.
76 Op. at *2.
25 paralleled Nevada law, then the outcome would be the same.77 The allegations about
the substance of the post-conversion legal framework generate the result, not
whether it was created by Nevada legislators or Delaware lawyers.
Relatedly, the defendants contend that “[h]olding a trial to quantify the
purported ‘harm’ suffered by stockholders if they become owners of a corporation
governed by Nevada law rather than Delaware law would require passing judgment
on the different balance struck by the two States.”78 They imply that principles of
comity should foreclose any possibility of implicit interstate criticism.
Here again, the Opinion did not offer any criticisms of Nevada law.79 The
Opinion drew an inference based on the allegations of the complaint, which included
the defendants’ own statements. At oral argument, the defendants asserted that
Nevada and Delaware law are substantively identical,80 and they may attempt to
show that at a later stage of the case. If that is true, then they will win. Regardless,
as the Opinion also explained, the court does not intend to value the corporations as
Delaware entities and then value them again as Nevada entities.81 The court intends
to (i) determine if there are differences between Delaware and Nevada law, then (ii)
77 Id.
78 App. ¶ 21.
79 Op. at *2.
80 Oral Argument, 2023-0449-JTL, at 13–17, 56–58.
81 Id. at *22.
26 look to the market reaction, if any.82 If the defendants are correct that, on net, Nevada
law benefits stockholders, then the defendants will again prevail.
This is not a case where the interests of justice require early stage intervention
by the Delaware Supreme Court. It is a case where the Delaware Supreme Court
would benefit from considering these issues on a more developed record, after any
differences between Delaware law and Nevada law have been explored.
C. The Balancing
As a final step, Rule 42 directs the trial court to engage in balancing:
After considering [the eight] factors and its own assessment of the most efficient and just schedule to resolve the case, the trial court should identify whether and why the likely benefits of interlocutory review outweigh the probable costs, such that interlocutory review is in the interests of justice. If the balance is uncertain, the trial court should refuse to certify the interlocutory appeal.83
There must be “substantial benefits that will outweigh the certain costs that
accompany an interlocutory appeal.”84 Although the prior steps are again dispositive,
this decision considers the balancing in the interest of completeness.
Assuming for the sake of argument that grounds for interlocutory appeal
existed, then the balancing would be a close call. It is always helpful to have the
Delaware Supreme Court’s views on an issue. Plus, as the defendants point out, a
reversal could end up saving everyone the effort to litigate the case. But those benefits
82 Id.
83 Supr. Ct. R. 42(b)(iii).
84 Supr. Ct. R. 42(b)(ii).
27 are not unique to this case. What this case lacks is a particular reason why an appeal
should happen now that would distinguish it from other denials of motions to dismiss.
According to the plaintiffs, the Application should be denied for the additional
reason that it effectively seeks an advisory opinion from the Delaware Supreme Court
that will not confer substantial benefits on anyone.85 As the plaintiffs point out, the
Company and Holdings publicly disclosed that they are exploring a going-private
transaction with one of Maffei’s affiliates that would render the case moot.86 But the
court previously asked the parties how they wanted to proceed in light of the
defendants’ announcement, and both sides asked the court to render its decision.87
There is no difference between the Court of Chancery ruling in the shadow of a going-
private transaction and the Delaware Supreme Court doing so. The plaintiffs waived
any objection to the case proceeding while the going-private discussions take place.
On balance, there are not substantial benefits from an interlocutory appeal
that outweigh its costs. In that setting, Rule 42(b)(iii) instructs the trial court to deny
certification.
III. CONCLUSION
Ultimately, whether to permit an interlocutory appeal lies in the discretion of
the Delaware Supreme Court. The justices’ views, not the trial court’s, determine
85 Opp. ¶¶ 2, 5.
86 Id. ¶ 2.
Palkon v. Maffei, C.A. No. 2023-0449-JTL, at 6–10 (Del. Ch. Feb. 13, 2024) 87
(TRANSCRIPT); Op. at *5–6.
28 whether the defendants’ request will be granted. This court’s role under Rule 42 is to
make a recommendation. In this case, that recommendation is for the Delaware
Supreme Court to refuse the interlocutory appeal.