Delaware Court of Chancery Rules No Supermajority for Nevada Reincorporation

On November 6, 2024, in Gunderson v. The Trade Desk, Inc.¹, Vice Chancellor Fioravanti denied a request for a permanent injunction seeking to require a supermajority vote in connection with the proposed conversion of The Trade Desk Inc. from a Delaware corporation to a Nevada corporation.  The Vice Chancellor applied the doctrine of independent legal significance to reject a claim that Trade Desk’s certificate of incorporation required 66 2/3% of the voting power of the outstanding stock of Trade Desk to approve the conversion.  The Court’s decision, if it survives appeal, removes a significant hurdle that could have limited the ability of corporations with similar certificate provisions to reincorporate from Delaware to another jurisdiction.

Background

Trade Desk, a Delaware corporation, was formed in 2009 and went public in 2016.²  Trade Desk has two classes of stock, a Class A common stock entitling the holders to one vote per share, and Class B common stock entitling the holder to ten votes per share. ³  Trade Desk’s co-founder, current director, Chief Executive Officer and acknowledged controlling stockholder, Jeff Green, holds 49% of Trade Desk’s voting power through his Class A and B common stock ownership.⁴

Trade Desk’s Restated Certificate of Incorporation includes an Article X requiring “the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of the outstanding shares of the Corporation entitled to vote thereon, voting together as a single class,” “to amend or repeal, or adopt any provision of this Restated Certificate inconsistent with, Article VI, Article VII, Article VIII, Article IX or this Article X of this Restated Certificate” (the “Protected Provisions”).⁵

On September 20, 2024, Trade Desk’s Board of Directors approved the reincorporation of the corporation to Nevada through use of the conversion mechanism of Section 266 of the Delaware General Corporation Law (the “DGCL”).⁶  Section 266 requires a majority of the voting power of outstanding stock entitled to approve a conversion.⁷  Trade Desk called a special meeting for November 14, 2024, to vote on the conversion.⁸  The proxy statement for the special meeting states that only a majority of the outstanding voting power needs to approve the conversion.⁹

Plaintiff filed suit, claiming that the conversion required supermajority stockholder approval pursuant to Article X because the certificate of incorporation of the new Nevada corporation would amend the current Restated Certificate in a manner that would be inconsistent with certain of the Protected Provisions.¹⁰ Plaintiff sought an injunction to block the November 14 vote on the grounds the vote violated the Restated Certificate and that the proxy inaccurately described the required vote.¹¹  Plaintiff also added claims challenging the fairness of the proposed conversion.¹²  The Court rejected Plaintiff’s claims seeking an injunction, while reserving on Plaintiff’s fairness claims for a later date.

The Court’s Analysis

Reflecting the expedited treatment of Plaintiff’s claims in advance of the November 14 stockholder vote, the Court’s decision is succinct while providing a helpful summary of the core Delaware doctrine of independent legal significance.

Specifically, the Court noted the plain meaning of Article X, which governs the amendment, repeal or adoption of provisions in the Restated Certificate.¹³  Further, the Court held that the certificate of incorporation for what would be the Nevada corporation would not be a continuation of the Restated Certificate.¹⁴  The question thus became whether a conversion pursuant to Section 266 fell within the types of formal acts governed by Article X.

To this, the Court looked to the doctrine of independent legal significance, which holds that “legal action authorized under one section of the corporation law is not invalid because it causes a result that would not be achievable if pursued through other action under other provisions of the statute.”¹⁵ The doctrine itself extends back almost a century, and “remains a cornerstone principle of interpretation that governs the application of Delaware’s business entity statutes” and which “should not easily be displaced.”¹⁶

Pursuant to the doctrine, Delaware courts have rejected past challenges to merger transactions that arguably altered stockholder rights in violation of protection provisions in organizational documents and specific stockholder approvals to “amend, alter or repeal” those provisions.¹⁷  Because a merger would not fall within an act to “amend, alter or repeal” such provisions, and would instead be an independent, legally significant act, a merger would not require the specific stockholder approval to amend such provisions.¹⁸ An exception has been when such protection provisions also provided “stockholders with a vote on any ‘amendment, alteration or repeal, whether by merger, consolidation or otherwise.’”¹⁹  Absent such “clear language” indicating the expansion of “chartered-based voting rights” to a merger or consolidation, the Court noted the history of Delaware courts rejecting legal challenges to mergers or consolidations that would still impact a protection provision.²⁰

Applying this caselaw, the Court held that the “plain language of Article X” governs only amendments and therefore does not extend to a conversion, which is a different, formal corporate act.²¹  The Court further noted that this reading of Article X was bolstered by other provisions in the Restated Certificate that made express reference to the voting rights of the Class A and Class B common stock in a merger or consolidation.²²

The Court thus entered judgment against Plaintiff on his claims seeking an injunction barring the November 14 vote, while also permitting Plaintiff to take an immediate appeal.²³  As of the date of this OnPoint, no appeal has been filed.  The stockholder vote remains scheduled for November 14.

Takeaways

The Court’s decision assures that a stockholder vote on a reincorporation—whether effected through a conversion, merger or otherwise—would be subject to majority stockholder approval unless the organizational documents include explicit language extending a supermajority vote requirement to such corporate actions.

Further, the Court’s decision, even if not appealed, does not mean this litigation ends due to Plaintiff’s remaining challenges to the fairness of the proposed conversion.  But as we previously wrote, in Maffei v. Palkon, No. 125024, the Delaware Supreme Court is currently reviewing the application of equitable standards to a stockholder challenge of a decision to reincorporate out of Delaware.  The Supreme Court heard oral argument in Maffei on October 30, 2024, with the Court particularly focused on two issues:  (1) the right framework for  reviewing such decision, where entire fairness and enhanced scrutiny review appear “ill-fitting”; and (2) how a court could conduct a fairness and damages analysis of a reincorporation decision when any benefit from that reincorporation due to reduced potential, future legal liability appears speculative.  The Supreme Court’s decision, which is expected before the end of January 2025, will prove significant both for this action and for other Delaware corporations contemplating a reincorporation to another domicile.