Reincorporation Decision Protected by Business Judgment Rule
By Lisa Stark, Delaware Corporate Counsel
In a recent decision, Maffei v. Palkon, C.A. No. 125, 2024 (Del. Feb. 4, 2025), the Delaware Supreme Court reversed a decision of the Delaware Court of Chancery, in which the Court of Chancery held that plaintiffs had stated a claim that the directors and controller of two entities affiliated with TripAdvisor Inc. breached their fiduciary duties in choosing to redomicile TripAdvisor, from Delaware to Nevada, for the alleged benefit of reducing personal liability in future stockholder litigation.
TripAdvisor disclosed to its stockholders in connection with soliciting a stockholder vote on a reincorporation that the change in the state of incorporation would “provide potentially greater protection from unmeritorious litigation for directors and officers of the Company.” The Court of Chancery held that the exacting entire fairness standard of review would apply to its review of plaintiffs’ claim that TripAdvisor’s directors and controller were receiving a non-ratable benefit from the proposed change in domicile. The Delaware Supreme Court disagreed with the Court of Chancery, noting that there was no existing or threatened litigation against the TripAdvisor directors, and that the alleged benefit was too speculative. With respect to the controller, the Delaware Supreme Court stated, “[T]he mere fact that a controller may be better positioned after a transaction does not necessarily mean that the controller received a non-ratable benefit.”
Instead, the Delaware Supreme Court determined that the business judgment rule was the appropriate standard of review. The Delaware Supreme Court reaffirmed that for entire fairness to apply, the non-ratable benefit must be significant enough to compromise the directors’ ability to fulfill their fiduciary duties. The Delaware Supreme Court rejected the notion that merely improving a controller’s position or providing general protection against future liability automatically qualifies as a material benefit.
Delaware Superior Court Rules on Stock Issuance Settlement and Coverage Under D&O Insurance Policy
AMC Entertainment Holdings, Inc. v. XL Specialty Insurance Company, C.A. No. N23C-05-045 MAA CCLD (Feb. 28, 2025)
By Yu-Tyan Lin, Tsar & Tsai Law Firm
In AMC Entertainment Holdings, Inc. v. XL Specialty Insurance Company, C.A. No. N23C-05-045 MAA CCLD (Feb. 28, 2025), the Delaware Superior Court addressed a significant insurance dispute regarding whether AMC’s settlement of a shareholder lawsuit, which included issuing stock to resolve the claims, constituted a covered “loss” under its D&O insurance policies. The court ruled in favor of AMC, holding that the stock issuance qualified as a covered loss under the policy. However, it left unresolved issues, particularly regarding the consent-to-settle provision, to be determined by a jury.
In 2021, AMC experienced a surge in its stock price as it became a “meme” stock. After reaching its authorized limit for issuing Class A common stock, AMC attempted to obtain shareholder approval to increase the issuance limit but was unsuccessful. To circumvent this restriction, AMC issued AMC Preferred Equity Units (“APEs”), which carried equivalent voting rights and were convertible into Common Stock once shareholders did approve an increase in the issuance limit. As the court described it, “After selling the APEs, AMC submitted a new shareholder proposal, seeking to both increase the authorized number of Common Stock and effect a 1-for-10 reverse stock split of AMC’s Common Stock” (the “Proposal”).
Opposing the Proposal, AMC’s shareholders (the “Underlying Plaintiffs”) initiated multiple lawsuits in the Delaware Court of Chancery, which were consolidated into the “Underlying Action.” The Court of Chancery issued an order enjoining any amendment to AMC’s Certificate of Incorporation pending a final ruling by the Court (the “Chancery Order”). While the Proposal received shareholder approval, the Chancery Order temporarily barred its implementation. AMC later settled the Underlying Action with the Underlying Plaintiffs by issuing 6,897,018 shares of Common Stock and covering their attorney’s fees, thereby enabling the Proposal to proceed. This settlement led to a dispute over whether the stock issuance constituted a covered “Loss” under AMC’s directors’ and officers’ (“D&O”) insurance policies. XL Specialty Insurance Company (“XL”), AMC’s primary D&O insurer, covered defense expenses but reserved the right to deny coverage for the stock settlement. Midvale Indemnity Company (“Midvale”), an excess insurer, contested coverage, leading to cross-motions for summary judgment.
One key issue was whether the stock settlement constituted a covered “Loss” under AMC’s D&O insurance policies. XL’s primary policy defined “Loss” as “damages, judgments, settlements, pre-judgment and post-judgment interest or other amounts (including punitive, exemplary or multiplied damages, where insurable by law) that any Insured is legally obligated to pay and Defense Expenses, including that portion of any settlement which represents the claimant’s attorneys’ fees.” Midvale’s excess policy (the “Midvale Policy”) followed the terms of XL’s primary policy and contained an “Exhaustion and Legal Tender Clause,” which stipulated that coverage would attach only after the primary insurer had made payments in legal tender. Under Delaware law, insurance contract interpretation is a question of law, and unambiguous policy terms must be given their plain meaning. Midvale argued that the issuance of AMC stock as part of the settlement did not qualify as a covered “Loss” because shares of stock are not “money” and therefore cannot be “paid” in the ordinary sense of the word. AMC, in contrast, contended that the Midvale Policy’s definition of “Loss” imposed no limitation restricting coverage solely to cash payments. AMC also argued that Delaware caselaw recognizes stock as a form of currency.
The court ruled in AMC’s favor, holding that the Midvale Policy’s definition of “Loss” did not limit coverage to monetary payments. The court noted that the term “pay” was not defined in the policies, and Delaware caselaw does not preclude stock from being considered a form of consideration. The court highlighted that the “Bump-Up” Exclusion in the policies, which excludes amounts related to an increase in consideration for securities or assets, uses the term “paid.” While not directly applicable, this supports the view that stock issuance can be considered an amount AMC “pays,” qualifying as a covered “Loss” under the Midvale Policy, as terms in an agreement are presumed to have consistent meanings. The court also found that the policies’ provision for converting foreign currency for valuation of “Loss” indicated awareness that settlements might take noncash forms requiring valuation for indemnity purposes. Midvale further argued that because only AMC had the authority to issue new stock, the insurers could not be obligated to indemnify a liability that only AMC itself could satisfy. The court rejected this argument, emphasizing that the policies provided indemnification for covered losses rather than a direct payment obligation on behalf of AMC.
Despite the ruling on stock coverage, the court found unresolved factual questions regarding AMC’s compliance with the Midvale Policy’s consent-to-settle provisions. Midvale argued that AMC had failed to notify the insurers in a timely manner before settlement discussions, but AMC contested this claim. The court determined that the factual disputes regarding AMC’s compliance with the consent-to-settle provision could not be resolved at the summary judgment, as there were genuine issues of material fact. Therefore, it found these issues should be presented to a jury for resolution.
