It is an idea that suddenly is all the rage – that companies should shake the Delaware dust off their feet and reincorporate elsewhere. Elon Musk has famously said, in the wake of the Delaware Chancery Court’s decision voiding his $55.8 billion pay package, that he will seek to reincorporate Tesla in Texas. (SpaceX, also a Musk company, has in fact already reincorporated in Texas.) The former Attorney General William Barr and another GOP official published a Wall Street Journal column arguing that Delaware’s courts are driving corporations away (as discussed here), and suggesting that companies increasingly will find it more attractive to be incorporated in Nevada or another state. Some companies have indeed left Delaware and reincorporated elsewhere – including not just SpaceX, but also TripAdvisor, for example. Why would a company change its state of incorporation from Delaware to another state? And with reference to the focus of  this blog, does a company’s redomestication from Delaware to another state have implications for the potential liability exposures of the company’s directors and officers?

Let’s start with the most important question. What are the reasons why a company might want to incorporate in another state rather than Delaware? In an interesting March 11, 2024, post on the California Corporate & Securities Law blog entitled “Reason to Quit Delaware Are Getting’ Bigger Each Day”, (here) Keith Paul Bishop of the Allen Matkins law firm examines this question. Specifically, Bishop summarizes the specific reasons in the proxy statement given by the consumer products company Laird Superfood, in connection with its move its state of incorporation from Delaware to Nevada.

For starters, as the company explains in its proxy statement, in 2023, the company paid about $200,000 in Delaware Franchise Taxes; it expects to pay only $700 in annual fees to Nevada.

Second, the company specifically identified “potentially greater protection from unmeritorious litigation for directors and officers of the Company” as one of the important reasons for its redomestication. As Bishop notes in his blog post, “Nevada does not set the liability bar high.”

This is what the company said in its proxy statement, in reference to  Nevada Revised Statute 78.138(3), with respect to Nevada law concerning the liabilities of directors and officers:

Nevada law permits a broader exclusion of individual liability of both officers and directors to a company and its stockholders, providing for an exclusion of any damages as a result of any act or failure to act in his or her capacity as a director or officer unless the presumption that the director or officer acted in good faith, on an informed basis and with a view to the interests of the company, has been rebutted, and it is proven that the director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer, and such breach involved intentional misconduct, fraud or a knowing violation of law.

Nevada law, the company said in it proxy statement, “provides greater protection to our directors, officers, and the Company than Delaware law.” The company goes on to say, with respect to the risk of litigation in Delaware that “The increasing frequency of claims and litigation directed towards directors and officers has greatly expanded the risks facing directors and officers of public companies in exercising their duties. The amount of time and money required to respond to these claims and to defend these types of litigation matters can be substantia.”

Nevada law, as the proxy statement notes and as Bishop emphasizes in his blog post, “takes a statute-focused approach that does not depend upon judicial interpretation, supplementation and revision.” Bishop gripes that “you can read Delaware General Corporation Law cover to cover and still know very little about Delaware corporate law.” Most of the important Delaware corporate doctrines are the by-product of case law. While Delaware’s judge made law does “evidence a high degree of legal sophistication,” Bishop notes, it also “imposes significant costs on corporations due to the inherent uncertainty,” and “encourages litigants to test new theories of liability.”

Nevada statutorily rejects Delaware and other state precedent; its statutes provide: “The plain meaning of the laws enacted in the Legislature in this title, including without limitation, the fiduciary duties and liability of the directors and officers of a domestic corporation … must not be supplanted or modified by laws or judicial decisions from any other jurisdiction” and adds further that “judicial decisions or practices of another jurisdiction does not constitute or indicate a breach of fiduciary duty.”

I don’t know for sure that the liability exposures of corporate directors and officers under Nevada law are categorically lower than in Delaware; as far as I know, there is not enough of a track record of D&O liability actions in Nevada courts, by contrast to the many decades of experience under Delaware law.

However, the idea that under the laws of Nevada, the directors and officers face a reduced liability risk exposure than they would under the laws of Delaware was one of the important reasons for Laird Superfood in its decision to redomesticate in Nevada. The company’s move to change its state of incorporation show that this company at least believes the liability exposure is less in Nevada.

Over the last several weeks, I have received several inquiries asking whether D&O insurers price differently for Delaware corporations rather than they do for companies incorporated in other states. Although I have not been asked this question, it might also be asked whether Nevada companies should be priced at a discount relative to Delaware companies.

It is my perception that D&O insurers are not making price adjustments based on a company’s state of incorporation. Moreover, in a competitive marketplace, characterized by ample insurance capacity and falling prices, insurers have little power to make subtle pricing adjustment on bases other than the broadest risk selection factors – e.g., industry, company size, and financial condition. So – when asked, I have told inquirers that I don’t think insurers are adding a Delaware pricing load, or for that matter, applying a Nevada discount.

But just because insurers may not now be adjusting pricing based on a company’s state of incorporation, that does not mean that it isn’t something they should be doing. If you review the logic Laird Superfood followed to warrant the company’s redomestication in Nevada, you certainly do have to ask yourself whether D&O insurers maybe should be offering Nevada companies a discount.

Of course, it would be hard to know how much of a discount to apply, especially in light of the relatively light track record around issues of liability for directors and officers of Nevada companies. And, as I noted, in a marketplace already characterized by falling prices, insurers may feel they don’t have room for even further discounts. That said, it is at least something worth thinking about.

There is one other reason why D&O insurers might want to weight their company portfolio away from Delaware companies and in favor of companies incorporated in other states, and that is that the insurers with a portfolio weighted toward companies from other states would be less likely to have to litigate coverage issues in Delaware’s courts. Delaware’s courts, and its Superior Court in particular, have a well-earned reputation of a bias in favor of policyholders and against insurers. To be sure, the insurers could avoid Delaware’s courts by adding a forum selection clause (and, belt and suspenders, a choice of law clause), but for whatever reason, the marketplace seems resistant to making these kinds of policy changes. Just avoiding Delaware corporations altogether could accomplish the same thing without having to modify the policy form.

So – here’s my question for the audience: Should D&O insurers be taking state of incorporation into account as part of the risk selection and pricing process? A great topic for further discussion. Maybe a topic for a panel at the next PLUS D&O Symposium.