Stockholder Claims

The Delaware Court of Chancery dismissed a stockholder suit claiming that directors of B. Riley Financial breached their fiduciary duties by failing to catch problems with an investment that later went bad. The suit was framed as a Caremark claim, the label Delaware uses for lawsuits arguing that a board failed to conduct oversight. The Court reaffirmed why those claims are so hard to win: a board’s oversight duty is aimed at the company’s own internal compliance and risk systems, not at policing misconduct by outside parties the company does business with, even where the company has significant money on the line. A failed investment, on its own, is not evidence of bad faith, and stockholders cannot repackage hindsight criticism of a bad bet as a breach of duty. Delaware courts scrutinize process, meaning they evaluate whether the board informed itself and had systems in place, rather than whether that process led to a good outcome.

A Delaware Court of Chancery decision in Siegel v. Morse reaffirmed that courts will not entertain challenges to advance notice bylaws absent an actual, existing dispute. Even after the Delaware Supreme Court’s Kellner decision raised the bar for facial validity claims, the plaintiff attempted to reframe his challenge as an “as-applied” one, but the court found no ripe controversy since no stockholder had expressed an intent to nominate directors. The decision signals that bylaw litigation must be grounded in a real, concrete controversy and that generic concerns about defensive board behavior are insufficient without an active proxy contest or nomination dispute.

On March 25, 2025, Delaware Governor Matt Meyer signed significant amendments to the Delaware General Corporation Law that provide greater predictability and clarity for conflicted transactions. The amendments create statutory safe harbors under Section 144 that preclude equitable relief and damage claims when transactions involving controlling stockholders or control groups are approved through either a properly functioning special committee of at least two disinterested directors or an informed, uncoerced vote of disinterested stockholders (with both mechanisms required only for controller go-private transactions). The amendments also define key terms including “controlling stockholder” (with a one-third voting control floor), “control group,” and “disinterested director,” extend duty-of-care exculpation to controlling stockholders, and narrow stockholder books-and-records inspection rights under Section 220 to core materials while adding heightened requirements for accessing additional records. The amendments apply to acts and transactions regardless of when they occurred, but do not apply to legal proceedings or demands commenced on or before February 17, 2025.

The Delaware Court of Chancery threw out all twelve claims a group of Jenzabar stockholders brought against the company’s founder, his former spouse, and the board. The stockholders complained about two things: that the company had paid the founder’s appeal bond and legal fees in an earlier case where he was found to have taken a corporate opportunity worth US$81 million, and that a decade of generous stock and bonus awards had let the founder and his ex-wife grow their ownership from 18% to 91% while diluting everyone else. The court held that dilution claims like these belong to the company, not to individual stockholders, so they had to be brought as derivative claims on the company’s behalf.

The rest of the case failed on timing. The claims about the appeal bond and legal fees were filed too early, because the indemnification agreement required an independent lawyer to decide whether the founder was entitled to be reimbursed, and that process was still underway. The compensation claims were filed too late, since the events happened between 2012 and 2015 and Delaware applies a three-year clock. The practical lesson for founders and counsel is that indemnification and advancement are different promises with different timing, and that if your equity grants ever draw scrutiny, the clock starts running when stockholders have enough information to ask questions.

Delaware has long been the default jurisdiction of incorporation of high-growth emerging companies due to its advanced, and evolving, body of corporate law, a specialized Court of Chancery, and decades of corporate law cases and precedents. But that default assumption has now come into question.

In recent years, Delaware’s courts have issued a series of decisions that have left some founders of high-growth companies unsettled. See, for instance, the recent Tesla cases, following which Elon Musk publicly blasted Delaware and both Tesla and SpaceX reincorporated in Texas. Musk is not alone in this trend toward “DExit” – TripAdvisor, Dropbox, AMC Networks, and Roblox are among those reincorporating in Nevada, and Dillard’s joined Tesla and SpaceX by reincorporating in Texas. Even Meta publicly announced that it was exploring a move out of Delaware in 2025.

In response, Delaware’s legislature adopted major reforms in 2024 and early 2025 (SB 313 and SB 21) codifying safe harbors for conflicted transactions, narrowing books-and-records access, and strengthening management’s shield against litigation.

More and more founders and GCs of later-stage companies are now wondering if Delaware should still be the default.

So, should you care and, if so, where are companies moving?

“Y’all Street” as an Alternative?

In recent years, Texas lawmakers have aggressively reformed state law to attract corporations. The state’s pitch? A pro-business legal climate, big-market economy, and fewer stockholder hassles. In 2024, Texas launched a new statewide Business Court system modeled on Delaware’s Chancery Court, with specialized judges to handle complex corporate cases. This was quickly followed in May 2025 with sweeping legislated changes (SB 29) to the Texas Business Organizations Code, in a package branded as “Texas: Open for Business." Key provisions include:

Codification of the Business Judgment Rule:

Texas now explicitly codifies the business judgment rule and the high bar to rebut it, giving directors stronger protection when their decisions are challenged.

Limits on Derivative Lawsuits:

Allowing corporations to set a minimum ownership threshold (up to 3%) for stockholder-plaintiffs to bring a derivative suit. This threshold is higher than most states and drastically curbs the ability of small stockholders to sue on behalf of the corporation.

Records and Litigation Procedure:

Limiting what constitutes corporate “books and records” available for stockholder inspection. For instance, emails and electronic communications are excluded. It also allows companies to include provisions in their charters or bylaws waiving the right to jury trials in corporate disputes, meaning cases would be heard solely by judges (as they are in Delaware’s Chancery Court).

In addition to the changes effected by SB 29, Texas later enacted several additional measures to allow certain Texas-listed public companies to adopt higher thresholds for stockholder proposals and to authorize the board of directors to delegate more discretion to the corporation’s executives.

Pros and Cons of the Y’all Street

The Texas proposals seem very attractive, especially to issuers and their insiders, but, in practice, their effectiveness is hard to measure. The new courts lack Delaware’s decades of precedent, making Texas less predictable for companies. So, certainty with respect to a few specific matters is offset by uncertainty with respect to treatment of a myriad of others. Additionally, incorporating in Texas might expose a corporation to Texas venue for certain lawsuits.

Texas has certainly had some luck in attracting private and public companies as of late, and we are working with a number of companies exploring Texas as a potential alternative to Delaware.

The “Silver Sanctuary”?

Like Texas, Nevada’s appeal lies in providing certainty to companies and their insiders with respect to certain specific common transactions. It automatically offers directors and officers strong protections. Key features of Nevada’s corporate environment include:

Robust Liability Shields

Nevada law automatically exculpates directors and officers from personal liability for breaches of fiduciary duty (except in cases of intentional misconduct, fraud, or knowing law violations). In Delaware, by contrast, corporations must opt in to exculpation (and even then, it covers only duty of care, not loyalty, and only recently were officers allowed similar protection). Nevada’s default rule thus gives executives peace of mind that honest mistakes won’t easily lead to personal liability. Likewise, Nevada statutes make it easier to indemnify and protect managers, which can reduce D&O insurance costs.

Consideration of Other Interests

Nevada explicitly permits boards to consider long-term corporate interests and the impacts on employees, customers, the community, etc., when making decisions. Directors are not strictly bound to maximize immediate stockholder value at all costs. This allows directors to justify decisions that favor sustainable growth or other constituencies, without breaching their duty to stockholders. This contrasts with states like Texas or Delaware, where directors must generally act in the best interests of the corporation and its stockholders, with true stakeholder balancing available only if the corporation opts into a Public Benefit Corporation framework.

No Franchise Tax

From a financial perspective, Nevada imposes no corporate franchise tax and so may prove cheaper to operate in, especially for early-stage companies.

Pros and Cons of the Silver Sanctuary

Nevada offers what Nevada usually offers: more freedom to operate at the expense of less predictability. Nevada’s business courts were established in 2001, but those courts have not published nearly as many written opinions, or as routinely, as Delaware’s Court of Chancery. The law, while more insider-friendly, is also less modernized in other areas.

So, in the end, what should you do?

The answer is not clear-cut. For now, there is no mass flight out of Delaware, but certainly lots of discussions are taking place. No clear winner has emerged for the alternatives, but it does appear that more public companies are leaning towards Texas while more private companies are considering Nevada. But the vast majority of new incorporations are still taking place in Delaware.

It all comes down to perception, expectation, and, perhaps in the future, actual experience. To help your thinking, a chart summarizing some, but certainly not all, of the key features of the three regimes may be found here:

In a US$250 million acquisition, the buyer refused to pay one stockholder his merger proceeds unless he first signed a joinder agreement that included a sweeping release of any claims he might have against the companies. After trial, the Delaware court held that withholding payment on that condition breached the company’s charter. A stockholder cannot be forced to give up legal claims just to collect money he is already owed, unless he receives something extra in exchange for that release. The company eventually conceded the point.

Texas overhauled its business organizations code last year through Senate Bill 29, part of a broader effort to make the state a more attractive home for companies looking beyond Delaware. One of the changes lets certain corporations, including publicly traded ones and other opt-in companies with more than 500 shareholders, adopt a bylaw requiring a shareholder to hold at least 3% of the company’s stock before bringing a lawsuit on the company’s behalf against its own directors or officers.

A federal court has now applied that provision, dismissing a derivative case against Southwest Airlines’ board because the plaintiff held far too little stock to clear the company’s 3% bylaw. The court also rejected the argument that a pre-suit demand letter sent before the new rules took effect counted as starting the proceeding. For companies weighing where to incorporate, the case is an early signal that Texas courts are giving the state’s new corporate litigation protections real effect.

Texas Governor Greg Abbott signed Senate Bill 29, a sweeping overhaul of the Texas Business Organizations Code aimed at making Texas the “corporate law capital of America.” Key changes include codifying the business judgment rule for publicly traded corporations, creating a statutory framework for controlling shareholder transactions with special committee pre-approval procedures, allowing entities to waive jury trials in governing documents, narrowing books and records demands to exclude emails and text messages, imposing up to 3% ownership thresholds for derivative suits, eliminating mootness fees for disclosure-only supplements, and permitting alternative entities to fully eliminate fiduciary duties in their governing agreements.

A stockholder of a Delaware e-commerce company sent a formal demand to inspect company books and records while the company was being acquired. The company objected, claiming the demand was too broad and lacked a proper purpose, but offered to negotiate a narrower production. The stockholder did not respond. The merger closed a week later, cancelling the stockholder’s shares, and the stockholder filed suit to enforce her demand 12 days after that. The Delaware court dismissed the case: under the state’s books-and-records statute, often called Section 220, you must actually be a stockholder on the day you file the lawsuit, not merely on the day you send the demand. Once the merger wiped out her shares, she no longer qualified.

The court also refused to excuse the delay on fairness grounds, noting the company had never agreed to produce anything nor promised a schedule, so nothing it did invited her to wait. The court left open, without deciding, whether a fairness exception could ever apply, and cautioned companies that stringing a stockholder along before closing could weaken that defense.