Delaware is, and has been for quite some time, the preeminent jurisdiction for incorporation and corporate law in the United States. Notwithstanding Delaware’s longtime leadership in these arenas, other states, such as Nevada and Texas, are attempting to grow their corporate franchise, a byproduct of which has led to several disputes in Delaware applying Delaware corporate law to corporate conversions in jurisdictions other than Delaware (e.g., a Delaware corporation converting to a Nevada corporation). The Delaware Court of Chancery’s decision in Gunderson v. The Trade Desk is an example a conversion dispute.
The Trade Desk, Inc. (the company) was a Delaware corporation. In September 2024, the company’s board recommended reincorporating in Nevada through a conversion under 8 Del. C. Section 266. Conversions under 8 Del. C. Section 266 require approval by a majority of a company’s shares. Given the 49% ownership stake of the company’s controlling stockholder, approval by a majority was likely to occur.
The company noticed a special meeting in October 2024 for stockholders to vote on the conversion in November 2024. The proxy statement which accompanied the meeting notice stated that the conversion required the approval of a majority of Trade Desk’s shares outstanding and entitled to vote. Upon receiving this notice, the plaintiff believed that the voting requirement was inaccurate and that a supermajority vote was required to effectuate the conversion. The plaintiff based his belief on Article X of the company’s charter which requires approval of 66 2/3% (a supermajority) of the company’s stock, voting as a single class, “to amend or repeal, or adopt any provision” of Articles VI-X of the charter.
On Oct. 4, 2024, the plaintiff filed suit in the Court of Chancery alleging that the proposed conversion of the company is subject to the supermajority voting requirement included in Article X of the company’s certificate because it would effectively repeal the company’s Delaware charter by adopting a Nevada charter with provisions inconsistent with Articles VI-X of the Delaware charter. The plaintiff asserted a breach of contract claim based on the Company’s purported failure to require a supermajority stockholder vote to effectuate the proposed conversion, as well as a breach of fiduciary duty claim based on purported false and misleading disclosures concerning the voting requirement necessary to effectuate the conversion.
The court determined on a summary judgment record that the defendants did not breach Article X of the company’s charter or violate their duty of disclosure. Relying on the doctrine of independent legal significance—which holds that legal action authorized under one section of Delaware’s General Corporate Law statute is not invalid because it creates a result that would be unachievable if pursued through other action under other provisions of the statute—the court held that Article X of the company’s charter did not apply to the proposed conversion of the company from a Delaware corporation to a Nevada corporation and therefore only a majority approval under 8 Del C. Section 266 was required. Article X of the company’s certificate plainly referenced 8 Del. C. Section 242 by solely addressing certificate amendments and required a supermajority vote to “amend or repeal, or adopt any provision” inconsistent with certain of its enumerated provisions. Article X did not address conversions, mergers, consolidations or anything else. Based on the language included, and not included, in Article X of the company’s charter, the court determined that its supermajority voting requirement only applies to certificate amendments under Section 242 of the DGCL and not conversions under Section 266 of the DGCL. Moreover, the court explained that a conversion of the company from a Delaware corporation to a Nevada corporation did not amount to an amendment or repeal of the charter, notwithstanding that the conversion would result in a Nevada corporate charter. The court further concluded that if corporate drafters seek to displace the doctrine of legal significance and broaden the language of its certificate to span various sections of Delaware’s General Corporate Law, they must do so with “clear, express language.”
The court’s decision in Gunderson v. Trade Desk was premised on the plain language of a charter provision and the DGCL to determine the stockholder voting requirements to approve a conversion. The court did not address issues or claims related to the purported reasons why a board or a controlling stockholder would propose a conversion away from a Delaware corporation. But not all conversion disputes are created equal. For instance, in TripAdvisor. See Palkon v. Maffei and TripAdvisor, C.A. No. 2023-0449-JTL, opinion (Del. Ch. Feb. 20, 2024), the Court of Chancery applied the entire fairness doctrine to a company’s conversion from a Delaware corporation to a Nevada corporation. Both the TripAdvisor and Trade Desk case have been appealed to the Delaware Supreme Court and are set to be on the forefront of addressing Delaware corporate law issues in the context of corporate conversions.
“Reprinted with permission from the January 29, 2025 issue of the Delaware Business Court Insider © 2025 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.”