On Tuesday, March 25, 2025, the Delaware House of Representatives passed S.B. 21, the legislation designed to try to fight back against the move by some Delaware companies to reincorporate elsewhere, particularly in Texas or Nevada. The Delaware Senate previously passed the bill, which has been called the “most significant single-year revision of Delaware’s corporate code since at least 1967. Delaware Governor Matt quickly signed the legislation the same day as the House passed the bill. While the legislation is primarily intended to try to stem the departures of Delaware companies to other states, it could also have a significant impact on future litigation in the state, as discussed below.
S.B. 21 does introduces a number of changes to Title 8 of the Delaware Code. It does basically four things:
- Safe Harbor Procedures: The bill provides safe harbor procedures for acts or transactions involving directors, officers, controlling stockholders, or control groups with potential conflicts of interest. These acts or transactions will be protected if approved by a majority of disinterested directors or stockholders.
- Controlling Stockholder Transactions: It defines what constitutes a controlling stockholder or control group and outlines safe harbor procedures for transactions that benefit these parties. Different procedures apply depending on whether the transaction is a “going private transaction”.
- Independence and Disinterestedness: The bill sets criteria for determining the independence and disinterestedness of directors and stockholders. It also provides that controlling stockholders and control groups cannot be liable for monetary damages for breaches of the duty of care.
- Stockholder Inspection Rights: Amendments to § 220 define the materials a stockholder may demand to inspect and set conditions for making such inspections. The materials subject to inspection are significantly restricted compared to pre-amendment inspection rights.
Readers interested in the reasons why Delaware’s legislators felt compelled to act, the Delaware case law that could be affected by the legislation, concerns about the bill and its possible impact, will want to refer to the Powerpoint presentation prepared by Columbia Law School Professor Eric Talley, which is attached to his recent LinkedIn post, here. I highly recommend Professor Talley’s slides to anyone wanting to get the key background on this legislation.
While S.B. 21 basically sailed through the Delaware General Assembly, the legislation was not without its critics, some of them quite vociferous. Among other things, some critics worried that the bill will undermine the authority of Delaware’s courts; provides too much protection for corporate controllers; was introduced (and ultimately passed) in haste and without the usual scrutiny and multi-stakeholder participation that usually attends Delaware corporate law legislation; and could undermine corporate governance and accountability. These and other concerns got plenty of airtime on social media – but they did not slow down the Delaware legislature, which is obviously keenly interested in protecting Delaware’s turf as the favored jurisdiction for company incorporations. There were in fact a number of amendments to the legislation proposed for the House’s consideration, but all of the proposed amendments ultimately were shot down.
Readers may recall that the so-called DExit phenomenon picked up significant momentum following the decisions of the Delaware courts to block Elon Musk’s ginormous Tesla pay package. Musk publicly called for Delaware companies to flee the state, and he put his money where is his mouth is by orchestrating Tesla’s move to Texas. The court’s decision in the Musk executive pay lawsuit is one of several decisions involving so-called “controllers” – that is, individuals whose share ownership gives them control of companies.
Given that background, much of the legislation has to do with corporate transactions involving controllers, or conflicted directors and officers. The legislation lays out safe harbor procedures for these kinds of transactions, giving corporate boards and advisors a roadmap to follow, which, if they follow, should reduce potential liabilities, and, as a practical matter make litigation less likely. This aspect of the bill will have less impact on the majority of companies that do not have a controller – though, to be sure, in recent years, there has been a ton of Delaware litigation involving controller transactions, and less of this type of litigation undoubtedly will be a good thing overall for many Delaware corporations. There also likely will be fewer lawsuits based on or alleging conflicts of interest given the new standards on director independence and safe harbor procedures.
The books and records amendments could have a much greater impact. As UCLA Law Professor Stephen Bainbridge pointed out on his ProfessorBainbridge.com blog, the legislation adopts a much narrower definition of the corporate books and records that are subject to inspection. The bill’s revised definition of books and records largely limits the materials a shareholder may inspect to board-level materials. Emails and other correspondence between managers, contracts, and similar materials seemingly are not subject to inspection under the new provisions.
The greatly reduced scope of the books and records inspection rights potentially could have a significant impact on Delaware shareholder litigation. In recent years, prospective claimants (acting on directions that the Delaware courts had advised litigants to follow) have been using the inspection rights to in effect conduct pre-litigation discovery that substantially filled out the claims that the litigants hoped to assert.
The ability to inspect books and records has been an important factor for many high-profile Delaware cases in recent years. For example, many of the recent duty of oversight cases were built on information derived from books and records inspections. The Boeing Duty of Oversight case, which ultimately settled for $235 million, was built on details gleaned from a books and records inspection.
In light of the narrower range of materials subject to inspection, there are not only likelier to be fewer books and records requests, but there likely will be fewer merits cases filed as well – or more cases dismissed because they are built on less substantial factual allegations.
In other words, the hastily enacted Delaware legislation may or may not stop companies from fleeing Delaware, but it seems likely to have an impact on Delaware corporate litigation.
While Delaware has now taken active steps to try to preserve its preferred position for company incorporations, the competition is not simply standing pat. The same week as Delaware’s Senate passed SB 21, a committee in the Texas legislature was meeting to discuss potential changes to the state’s Business Organization’s Code, as discussed here. The changes under consideration include: codifying the business judgment rule; requiring a minimum ownership percentage for shareholders who seek to bring derivative lawsuits; prohibiting the award of attorney fees when derivative suits result in a “disclosure-only” settlement; and permitting companies “to seek an upfront determination from a judge regarding the independence of directors serving on special committees before those directors are called into question as part of a derivative claim.”
A prior bill introduced in February by a Texas legislator (S.B. 29) would, among other changes proposed to the Texas Code, enable parties to a transaction to seek advisory court opinions from the state’s newly constituted business courts, allowing the courts to provide advance clarity to corporations, controlling shareholders, and corporate directors.
In a March 7, 2025 post on the Harvard Law School Forum on Corporate Governance (here), Yale Law Professors Jonathan Macey and Roberta Romano praised Texas for being both disruptive and innovative.
Meanwhile, Nevada, the other state frequently mentioned as an alternative to Delaware for company incorporation, is paying attention. In a March 18, 2025, Financial Times op-ed piece (here) by University of Nevada Law Professor Benjamin Edwards notes that the Nevada legislature is currently considering a proposed constitutional amendment to set up its own dedicated business court, but observes that “Nevada must upgrade its legal infrastructure to continue to compete.” In other words, we can expect Nevada to pursue its own program to try to attract more company incorporations.
The new Delaware legislation has only just been passed, but I am already fielding questions about what the impact of the amendments will be on D&O insurance. Will the changes, the question goes, encourage D&O insurers to lower their premiums?
There are a lot of assumptions behind these questions about D&O insurance premiums. First and foremost, the question assumes that the new statutory provisions will affect Delaware corporate litigation sufficiently to reduce insurers’ anticipated loss costs. While I certainly expect the new amendments to have a positive impact on Delaware litigation (positive, that is, from the perspective of corporate defendants and their insurers), no insurer is going to cut its premiums based solely on possible future changes; the insurers will want time and experience to be able to see whether and to what extent the changed litigation environment will actually result in less litigation and better outcomes. It will be some time (in my view, more than just one year) for insurers to be sure of the benefits and to be able to quantify the benefits. I don’t see the insurers cutting their rates just because of the Delaware legislation before that.
There is another important reason insurers might hesitate to cut prices because of possible Delaware litigation benefits. That is, none of these various legislative changes under consideration have anything to do with securities class action litigation. Securities suits represent the largest severity exposure related to public company D&O insurance. This exposure is not going away. Given the anticipated securities litigation loss costs, the D&O insurers are likely to try to resist price reductions, even if there turns out to be an improvement in loss costs resulting from Delaware litigation.
There is yet another reason why D&O insurers likely will push back on pricing cuts due to the Delaware legislation, and that is the fact that the D&O insurance world is already in the fourth year of a soft market for D&O insurance. Premiums have already fallen compared to prices at the start of the period. The insurers are already trying to push back on further decreases, and the promise of improved future loss experience in Delaware litigation may not be enough to motivate them to make further pricing cuts.
Of course, all of that said, competition will be decisive here. If there is or are a player or players that convinces itself/themselves that their overall future loss experience is about to improve because of the Delaware legislative changes, that could drive the marketplace and could indeed result in a price decrease.
In any event, insurers should prepare themselves. They are going to start to hear from companies and brokers that the risks have changed, and prices should be going down.
Just like what is going to be happening in the Delaware courts, so with what is going to happen in the D&O insurance arena – it is going to be interesting to watch.