The End of an Empire? Companies Are Getting More (Dela)Wary

In the brilliant long-form podcast Fall of Civilizations, author Paul Cooper gives listeners a sense of how average citizens living in Tenochtitlan, Angkor Wat, Rome, and Constantinople may have felt as once-mighty empires crumbled around them.

The TLDR of these stories? Over a long enough time horizon, every empire eventually decays. Sometimes this is a slow decline; sometimes it happens suddenly. Often, usurpers use innovative new tactics to undermine the dominance of the incumbent power. The empire may try to strike back by copying the same tactics, but this is usually too little, too late. For stakeholders with vested interests in the predictable rhythms of empire—scribes, priests, courtiers—the experience of watching once-settled things become totally unsettled is, well, unsettling.

Last year, we wrote about the barbarians at the gates of Delaware, which has been the dominant empire of state corporate law for about 50 years. Since that writing, the attack on Delaware has intensified. Both in our practice and in the broader public sphere, we see more and more companies seriously considering incorporating or reincorporating in a non-Delaware jurisdiction. In recent weeks, Texas and Nevada have been pouring hot pitch on the siege flames by loudly taking new steps to show just how friendly they will be to newcomers. 

Clearly shaken, Delaware has responded by proposing its own new legislation. 

Meanwhile, setting aside Texas and Nevada specialists, big law firms have mostly circled the wagons to defend Delaware. Corporate lawyers like Delaware because they have been doing Delaware-focused work for decades and are comfortable with the rules and forms. Securities litigators like Delaware because it has clearly defined legal rules and sophisticated, fair judges for high-stakes corporate disputes—and because it is almost always quite business-friendly. 

This battle is just getting started, and it’s not at all clear that Delaware’s status as the premier state of incorporation is really in material decline. But the threat is definitely growing. In this article, I’ll take a look at recent developments in Texas and Nevada and discuss potential D&O insurance implications. 

Nevada Proposes New Business Courts 

For many years, Nevada has had perhaps the most director- and officer-friendly statute in the country when it comes to shareholder derivative litigation. However, unlike in Delaware and Texas, Nevada derivative cases are handled by generalist judges who may not have a deep background in handling high-stakes corporate disputes. 

This may not seem like a big deal to non-litigators, but I think it is a pretty big deal. When a judge has rarely handled complex securities litigation, it’s harder to predict how they will rule in a given case. This uncertainty is compounded by the fact that Nevada doesn’t publish its trial court decisions. This means that almost every dispute under the Nevada business code is an unpredictable voyage into the deep dark waters of de novo statutory interpretation. 

As several corporate heavyweights (for example, Tripadvisor and Pershing Square) have reincorporated or have announced plans to reincorporate, the high rollers of the Nevada legal community have started to see a potential jackpot. Touting “billions in new annual revenue, a greater appetite for investment in Nevada companies and what could turn out to be thousands of new jobs,” in February, state lawmakers proposed a constitutional amendment to create new dedicated business courts. 

If approved, the amendment to Nevada corporate law would: 

• Empower the state legislature to draft legislation to establish a new business court.
• Instruct the governor to appoint a minimum of three business court judges to six-year terms (with a maximum of two consecutive terms).
• Invest the business court with “exclusive original jurisdiction to hear disputes involving shareholder rights, mergers and acquisitions, fiduciary duties, receiverships involving business entities and other commercial or business disputes in which equitable or declaratory relief is sought.”

This looks a lot like the structure that already exists in Delaware and Texas—which is the point. Nevada is saying: Look at us! We can have shiny new sophisticated business courts, too! We can play in the big leagues! 

Two important notes: 

1. Nevada doesn’t currently have business courts—and, according to smart Nevada law people, the earliest they could be implemented via constitutional amendment is sometime after 2027. To the extent business courts are an important factor for companies considering potential reincorporation (it should be), Texas and Delaware will have Nevada beat on this part of the scorecard for some time. On the other hand, Nevada can still point to its existing law as the most D&O-friendly in the nation (at least for now).
2. If the amendment ultimately passes, judges will be appointed to six-year terms. This basically splits the difference between Delaware (12-year terms) and Texas (two-year terms). In Texas, the enticement to companies is that if any business court judges pull a John Paul Stevens, the governor will make quick work of them. Nevada is offering a home for those who don’t want to mess with Texas. I’m not sure how much weight companies will give to this factor. The specific identities and chops of the judges themselves are really what matters. 

Texas Proposes New D&O-Friendly Laws 

Not to be outdone, the Texas state legislature recently proposed a new bill designed to say to Texas-curious companies, “Come on in! Water’s nice and warm, y’all.” 

The bill includes a grab bag of provisions that would make it more difficult for shareholders to sue directors and officers, including: 

• Companies would be allowed to establish a minimum ownership requirement in governing documents, below which shareholders would be unable to initiate shareholder derivative litigation. By statute, the highest minimum threshold would be 3%. For a big company, that’s a lot of shares, and this restriction could eliminate a lot of shareholder derivative litigation right out of the gate.
• Plaintiffs’ lawyers would be prohibited from recovering attorneys’ fees in disclosure-only settlements. I like this one.
• A provision basically saying that Texas courts are not allowed to follow Delaware court decisions.
• A codification of the business judgment rule, which is currently a creature of case law.

Taken together, these provisions are significant. Even more significant, I think, is the signal they send. As the second biggest state economy in the country, Texas is dead serious about attracting more sophisticated business activity (see also plans for the new Texas Stock Exchange.) In the climate of 2025 America, I imagine it will have considerable success. Just how much is anyone’s guess. 

D&O Implications and Predictions

Assuming that a material number of new or incumbent companies choose to make their nests in Texas, Nevada, or another non-Delaware jurisdiction, how should we be thinking about the implications for D&O insurance? 

As we explained in our article last year, a company’s state of incorporation has not historically been a material factor in D&O insurance rates or coverage terms. The wildcard here is the extent to which companies, lawyers, and insurers talk in out-loud voices about the framework for indemnification of derivative settlements and judgments. This is, of course, prohibited in Delaware, making Side A D&O insurance particularly important for directors and officers. 

By contrast, indemnification of derivative suit settlements and judgments appears to be permitted in some forms in Nevada and Texas. Where companies are permitted/have an indemnification obligation for derivative settlements, and if directors are also subject to significantly more generous standards of liability, such as in Nevada, Side A D&O insurance really should be easier for insurers to write. It should also cost less than it does for a Delaware corporation. We’ll be watching this space closely.