The Beginning of the End of an Era? Competition to Delaware’s Supremacy as Corporate Domicile and Implications for D&O Insurance

Delaware has long been the leading jurisdiction in which companies incorporate. According to Delaware’s published statistics from 2023 :

• Delaware surpassed two million total business entities domiciled in the state,
• 6% of all Fortune 500 companies were incorporated in Delaware, and
• 80% of IPOs in the U.S. were in Delaware

Because of Delaware’s long-held title as the premiere state of incorporation, it has developed an advanced mosaic of corporate statutes and precedential law consisting of protections for both corporate officers and directors as well as shareholders. Some of the most well-known features of Delaware corporate law are:

• Scrutinizing directors’ conduct using the “Business Judgment Rule,” a deferential standard that will not second-guess actions of the directors as long as the actions were taken in good faith with due care and loyalty to the company, even if the decisions result in losses or mistakes. Only when a board action is approved by a majority of board members who have a conflict of interest in the transaction will Delaware courts apply a heightened “Entire Fairness” standard, shifting the burden to the directors to show the decision-making process and outcome were fair to the company as a whole and did not disproportionately advantage interested members of the board.
• A broad ability to offer exculpation to officers and directors, which means state law allows a company to absolve directors of any liability for a breach of the duty of care in running the business. This ability to exculpate directors does not extend to breaches of the duty of loyalty and good faith, to intentional misconduct, or to knowing violations of law.
• A “Demand Futility” standard for derivative suits against directors. When shareholders want to bring an action against directors and officers on behalf of, and in the interest of, the company, they must first issue a demand to the board that the company bring the suit. If the shareholders can demonstrate that such a demand would be futile, because a majority of the board would be exposed to liability in the suit and therefore would never vote to bring the action, the suit may proceed without first making the demand. The bar to prove demand futility is a high one, particularly because claims subject to exculpation do not pose a risk of liability, so a plaintiff cannot show that directors would not be impartial in evaluating the demand because of their exposure to liability.

Winds of Change?
Over the past year, there has been much commentary on whether Delaware is losing its primacy in the incorporation market to other states. The term “DExit” has even been coined to describe the decision by several large companies to re-domesticate to other states. In some cases, this was motivated by Delaware court rulings adverse to corporate decision making. A look at statistics, though, suggests that a large-scale DExit is not actually happening.

In response to the high-profile moves, the Delaware legislature enacted Senate Bill 21 in March 2025, which made changes to the Delaware General Corporation Law to try and keep pace with those states and stem any potential exodus of companies from the state. Critics have stated it was passed without sufficient legislative scrutiny, provides too much protection to controlling shareholders. Plaintiffs in a recent shareholder class action even challenged SB 21’s constitutionality, saying that it reduces the Court of Chancery’s equitable jurisdiction below the minimum established by the state constitution. And the Court of Chancery, recognizing where things are moving, dismissed a suit seeking to overturn a $250 million investment by a company in a controlled subsidiary, ruling that related-party transactions are not inherently wrongful. The court noted that the transaction would fit within the safe harbor protections of the SB 21.

Key changes made by the law are:

• Creating safe harbor protections for transactions involving interested directors, officers and controlling shareholders if approved by a majority of shareholders
• Defining who qualifies as a “disinterested director” or “disinterested stockholder, or a “controlling stockholder.”
• Restricting the types of documents that may be sought in a Books and Records Demand and requiring more specificity in stating the proper purpose for making a demand.

Two other jurisdictions have emerged as new contenders for incorporation and re-domestication: Nevada and Texas. Nevada has been vying to attract corporations for over 20 years, touting a low, flat franchise tax, no corporate income taxes, and lax corporate regulation and disclosure laws. For example, Nevada has codified the business judgment rule, and the Nevada Supreme Court has has ruled that it applies even in the case of alleged breaches of the duty of loyalty, ruling that it only allows for director liability when a plaintiff has demonstrated intentional misconduct, fraud or a knowing violation of law. Nevada’s exculpation statute is broader than Delaware’s, allowing for exculpation for breaches of duty and good faith. Recently, the Nevada legislature passed more changes in its laws  to make it a more attractive corporate domicile, and in February approved a joint resolution to amend the state constitution to allow the legislature to create a business court to direct securities litigation to judges with corporate law expertise. This would go some way toward overcoming one shortcoming Nevada as compared to Delaware by introducing a more efficient and predictable arena for litigation.

Texas has also entered the competition for company incorporation. In May 2025, Texas enacted laws favorable to companies and directors, which:

• Create a business court system dedicated to securities litigation;
• Introduce minimum ownership requirements to be able to bring derivative litigation;
• Prohibit fee recoveries for plaintiff counsel when bringing suits seeking only corporate disclosures; and
• Codify the business judgment rule, which has been applied by judicial precedent, already more broadly than in Delaware. The Texas Supreme Court has ruled that the rule’s presumption may be rebutted only by “ultra vires, fraudulent, and injurious practices, abuse of power, and oppression … subversive of the rights of the minority, or a shareholder, and which … would leave the latter remediless.”

Another very significant difference between the laws of Nevada and Texas versus Delaware is whether judgments and settlements in derivative actions are indemnifiable by a company. A derivative action is one purportedly brought on behalf of the company against its officers and directors for alleged breaches of duty and misconduct. Any damages sought in the suits are supposed to be paid to the company for its benefit. In Delaware, a company may not indemnify the liability of its directors and officers for judgments and settlements in derivative actions. Indemnifying that liability is essentially the company paying itself for the alleged wrongdoing of its directors and officers. But Texas and Nevada law do allow a company to indemnify derivative judgments and settlements, which serves as a very attractive and protective feature for corporate management.

Practical D&O Insurance Implications
Whether a widespread migration of companies outside of Delaware, or an arms race (to the bottom) of corporate laws, will have a significant impact on D&O insurance remains to be seen. Insurers in the D&O market do not tailor policies based on where each insured is incorporated. They rely on standardized forms they can sell in any jurisdiction. To the extent that more companies are incorporated in jurisdictions with laws that meaningfully reduce the frequency or severity of securities litigation (because of broad exculpation and barriers to suits by shareholders), then a company’s domicile might make it easier to place coverage and result in premium discounts. The logic is the same as carrying a higher retention for a reduction in premium: If the insurer faces less risk, then the cost of the insurance goes down. But there are some specific features of the new laws that could have an impact on the market and coverage:

• Indemnification of derivative judgments and settlements. Delaware’s prohibition on indemnification of derivative judgments and settlements has made Side A-only insurance policies a necessity for companies to carry to protect the personal assets of individual directors and officers. The availability of these policies up to high dollar limits is considered a factor in driving derivative settlements higher because there is less incentive to negotiate down if the insurance policies are there to fund the settlement. But if there is a significant increase in incorporations and re-domestications to states that allow companies to indemnify those settlements or judgments, then the demand for Side A policies could decline appreciably (and, perhaps, have a corresponding effect on the cost of Side ABC policies that end up paying those settlements).
• Books and Records Demand Coverage. Many D&O policies now include sublimited coverage for the cost of complying with a books and records demand, even extending such coverage up into higher excess policies. The recent changes to the Delaware law restricting the scope of these demands, or more and more companies incorporating in jurisdictions that also restrict or prohibit such demands, could reduce the need for such coverage and affect policy pricing.
• Choice of Law in Coverage Disputes. Just as Delaware corporate law is seen as protective of companies, case law in coverage disputes is generally viewed as favorable to policyholders over insurers. On issues like the insurability of allegations of fraud, subpoena response costs, disgorgement, and the bump-up exclusion, Delaware courts have interpreted policies broadly in favor of coverage for policyholders. The Delaware Supreme Court even decided that Delaware law should control in D&O coverage disputes regardless of the physical location of a Delaware corporation’s headquarters because the state of incorporation has the most significant interest in the risks covered by D&O insurance: the honesty and fidelity of officers and directors. The court also cited Delaware’s interest in having its corporate citizens benefit from Delaware’s law, which is the reason the companies chose to incorporate in Delaware. But companies that flee to the greener pastures of states like Nevada or Texas could lose both the benefits of Delaware’s choice of law rules and access to Delaware’s policyholder-favorable substantive coverage jurisprudence. What those companies might gain in a reduced need for insurance could be counteracted by adverse case law on coverage issues when a claim does arise.

It would take a very drastic mass-exodus from Delaware for some of the above impacts to really take hold, and for now the data do not suggest such a flight out of the state is in the offing. Nevertheless, the emerging choice of law question could have immediate importance. Companies moving to or incorporating in another less-regulated state should do their due diligence on the long-term insurance implications balanced against the short-term benefits of lower taxes and a more permissive legal regime. Qualified coverage counsel can provide invaluable assistance in that analysis.