Dive Brief:

• In one of the latest examples of a company moving to a more business-friendly state, shareholders of The Trade Desk, an ad-buying software company, voted to leave Delaware and reincorporate in Nevada. But in this case, the move was made easier by a business-friendly decision by Delaware’s Chancery Court.
• In a win for the company, the Chancery Court on November 6 ruled that The Trade Desk needed only a majority vote to approve the move, not a two-thirds supermajority that one of the company’s shareholders argued was necessary. Since the company’s co-founder and CEO owned almost half the stock, it was virtually a foregone conclusion the company would win approval to move under the lower standard.
• “The corporation’s chief executive officer controls approximately 49% of the outstanding voting power,” Vice Chancellor Paul Fioravanti said in the closely watched ruling. “Thus, the conversion is almost certain to receive the requisite majority vote under the statute.” And that’s what happened. The Trade Desk “announced that its stockholders approved the reincorporation of the Company from the State of Delaware to the State of Nevada,” the company said Nov. 14.

Dive Insight:

Celebrity CEO Elon Musk is the poster child of company leaders wanting to leave Delaware for a more business friendly state, typically Nevada or Texas. He made headlines earlier this year after threatening, and then making good on his threat, to move Tesla out of Delaware after the state’s Chancery Court shot down what would have been his record pay package of tens of billions of dollars on the grounds that it was unfair to the company’s shareholders and improperly put forward. 

In the decision, which Musk is asking the court to revisit, Chancellor Kathaleen McCormick, applying the court’s strict entire fairness doctrine, said the board breached its fiduciary duty by approving the pay package because it was effectively devised by Musk who, although he didn’t own a majority of Tesla shares, was a controller of the company. 

Critics of the decision said it was one of the latest in which the Chancery Court was seen as micromanaging company governance matters at the expense of management. 

Soon after that adverse ruling, Musk said on his X platform, “Never incorporate your company in the state of Delaware.” He followed up with another post, “I recommend incorporating in Nevada or Texas if you prefer shareholders to decide matters.” In June, Tesla took that step when its shareholders approved a move to Texas. 

Other decisions reinforced the view that Delaware was getting too involved in the internal operations of business, and some business interests even went so far as to push for the state’s lawmakers to get involved. 

In June, state lawmakers passed, and Delaware Gov. John Carney signed, a law allowing a controlling shareholder to enter into a private agreement with the company to exercise authority over key management decisions. The bill effectively codified into law what critics say is an increasingly common use of private agreements to shift authority from boards to powerful shareholders over critical matters like mergers and recapitalization. 

In short, it was seen as an effort to override Chancery Court decisions that were driving companies to leave the state.

Krista Griffith, the bill’s sponsor in the state’s lower chamber, said the law was needed to protect Delaware’s franchise as the go-to incorporation state. That franchise, she said, “represents the largest combined source of state revenue, $2 billion in corporate franchise taxes and fees.”  

Move to Nevada

In wanting to move to Nevada, The Trade Desk in preliminary proxy materials said it was becoming too hard to operate in Delaware.  

“The increasingly litigious environment facing corporations with controlling stockholders has created unpredictability in decision-making and has started to impede our ability to act quickly,” the company said. 

It cited a recent Delaware decision, in In re Match Group, Inc. Derivative Litigation, that all transactions involving a controlling stockholder receiving a non-ratable benefit are presumptively subject to entire fairness review — Delaware's most stringent standard — unless the transaction adheres to strictures in another Delaware case, Kahn v. M&F Worldwide, cited as MFW in shorthand. 

The Match Group decision, the company said, “confirmed what corporate and legal communities had viewed in recent years as an expansion in Delaware” of standards that are leading to more legal fights.

It went on to mention Musk’s loss in Delaware court over his pay package.

“That court rescinded [Musk’s pay] award, determining that the co-founder and CEO was a ‘controller’ even though he only held 21.9% of the company's stock because he ‘wielded the maximum influence that a manager can wield over a company,’” The Trade Desk said

Lower standard

Notwithstanding its frustration with Delaware courts, The Trade Desk won a business-friendly decision when Vice Chancellor Fioravanti said the company needed only a bare majority shareholder vote to get the go-ahead to move to Nevada.

In the case, one of its shareholders argued the company’s certificate of incorporation required a supermajority vote to change or repeal any provision in the certificate, which, if the company were to move to Nevada, would in fact happen since it would be reincorporating under a new certificate.  

But there’s a provision in Delaware corporate law that allows a company to reincorporate with just a majority vote, and it was this provision Fioravanti said applied. For the provision in the certificate to apply, it would have had to specify that the reincorporation requires a supermajority vote, but it didn’t include that language. 

Citing the doctrine of independent legal significance and extensive case law in its application, the vice chancellor said that each provision — the majority requirement in Delaware corporate law and the supermajority requirement in the company’s certificate — can apply even though each one would lead to a result that would not be achievable if pursued through another provision of corporate law.   

“The doctrine of independent legal significance is a bedrock of Delaware corporate law and should not easily be displaced,” the Fioravanti said. 

In short, The Trade Desk won its move to business-friendly Nevada after winning a business-friendly decision in what critics say is increasingly less business-friendly Delaware.