Does A Board Have a Fiduciary Duty to Eliminate Delaware Franchise Taxes by Reincorporating in Nevada?
Tuesday, May 23, 2023

I have recently written about TripAdvisor's proposal to re-domesticate, by conversion, from Delaware to  Nevada.   The first reason given for the move in TripAdvisor's proxy statement is saving money:

The Redomestication will eliminate our obligation to pay the annual Delaware franchise tax, which we expect will result in substantial savings to us over the long term.  For Fiscal 2022, we paid approximately $250,725 in Delaware franchise taxes. We anticipate that, if we remain a Delaware Corporation, for Fiscal 2023, our Delaware franchise taxes will be approximately the same as 2022 (based on our current capital structure and assets).  If we redomesticate in Nevada, our current annual fees will consist of an annual business license fee of $500.00 and the fee for filing the Company's annual list of directors and officers based on the number of authorized shares and their par value, currently equal to $1,225.

If TripAdvisor succeeds in its re-domestication and these numbers are unchanged, it will save nearly $2.5 million in taxes over the next 10 years.  Thus, one might question whether a board has a fiduciary obligation to minimize the taxes that the corporation pays.  The answer to that question, at least according to former Vice Chancellor John W. Noble, is that there is no generalized fiduciary duty to minimize taxes.  Freedman v. Adams, Civ. No. 4199, 2012 WL 1345638, at *12 (Del. Ch. Mar. 30, 2012)  aff'd Freedman v. Adams, 58 A.3d 414 (Del. 2013).   Current Vice Chancellor Sam Glasscock III agrees.  Seinfeld v. Slager, No. CIV.A. 6462-VCG, 2012 WL 2501105, at *1 (Del. Ch. June 29, 2012) (quoting Freedman).

The reluctance of the Court of Chancery to second-guess a board's tax planning decisions can be understood as a specific application of the broader business judgment rule.  This deference should cut both ways so that a board's decision to re-domesticate to minimize Delaware franchise taxes should be accorded the same deference as any other business decision.


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