Nevada v. Delaware: The New Market for Corporate Law

The Article provides the first comprehensive analysis of Nevada’s statutory amendments, legislative history, and case law. It shows that Nevada corporate law effectively forecloses shareholder litigation eliminating the shareholder rights and management accountability that have long characterized American corporate law. It reveals how plaintiff shareholders face an impossible bind: they must plead intentional wrongdoing to survive dismissal, yet Nevada uniquely bars access to the books and records necessary to meet this burden.

Nevada corporate law has become a central focus in corporate America. Nevada has emerged as Delaware’s principal competitor, second only to Delaware in attracting out-of-state incorporations while dominating reincorporations out of Delaware. Firms cite reduced litigation exposure as a key advantage of incorporating in Nevada. The competitive pressure from Nevada is evident: Delaware amended its law to reduce scrutiny of self-dealing transactions, moving closer to Nevada’s approach, and Texas has incorporated elements of Nevada’s statutory scheme.[1]

Nevada’s rise has sparked renewed debate. A decade ago, this author found that Nevada’s exculpation statute uniquely extends to duty of loyalty breaches and argued that Nevada was creating a no-liability regime.[2] Nevada Secretary of State Francisco V. Aguilar, UNLV law professor Benjamin Edwards, and several prominent commentators have challenged this characterization. Aguilar recently filed an amicus brief with the Delaware Supreme Court in support of Nevada’s law. Aguilar and others argue that the differences from Delaware in Nevada’s exculpation statute are not material, that Nevada is not a no-liability regime, and that academic arguments exaggerate and misrepresent the laxity of Nevada law.  Nevada merely makes different policy choices, they argue, protecting directors from liability for mistakes without fundamentally altering the balance between management and shareholders.

The Article findings contrast these contentions in turn:

1. Nevada’s exculpation statute departs significantly from Delaware and other states. Most states limit exculpation to duty of care violations, but Nevada extends it to duty of loyalty breaches, unless the conduct constitutes “intentional misconduct, fraud, or knowing violation of law.”

Nevada’s Secretary of State has argued that, nevertheless, the exculpation rarely shields directors from liability for breaches of the duty of loyalty because “Of Course, most violations of the duty of loyalty, such as self-dealing, are intentional.”

Yet the Article shows that Nevada courts require shareholders to plead particularized facts of intentional wrongdoing, a standard that Delaware does not impose for conflict-of-interest claims.

Nevada courts routinely dismiss cases involving clear conflicts of interest, even when the facts are extreme or outrageous. In MacFarland v. Long, for example, two executives each wrote their own compensation contract, which the other signed, for ten years.[3] They increased their combined ownership from 5% to 50% by awarding themselves stock. The trial court found that the executives “milked” the company and that the remaining director had “completely relinquished his duty.” Despite these findings, the trial court dismissed the case for failure to plead particularized facts of intentional wrongdoing.

If the Secretary of State was right that most violations of the duty of loyalty, such as self-dealing, are not exculpated, this case would have continued to trial.

2. No shareholder inspection rights: Nevada does not allow shareholders access to a firm’s internal documents, including board minutes. Given the structure of shareholder lawsuits, this access is essential to survive a motion to dismiss. Even in Delaware, where shareholders can access board minutes, proving intent is challenging. Doing so with no access to board minutes is virtually impossible.

3. Nevada legislative history demonstrates that Nevada corporate law does not reflect “different policy choices”; rather, it was shaped solely by what Delaware doesn’t provide. The Nevada legislature repeatedly amended the law to provide greater protections against liability than Delaware, and the legislative history makes this intent clear. Nevada seized each Delaware judicial scrutiny standard as an opportunity to differentiate with less scrutiny.[4]

4. These commentators repeatedly cite the Wynn Resorts litigation as a counterexample showing that Nevada is not liability-free. This Article demonstrates that Wynn Resorts actually supports the opposite conclusion. The case is an outlier that involved a heated public fight between company insiders. Information normally unavailable to shareholders was disclosed to the press, and the court relied on these public disclosures. The unique circumstances of public conflict overcame Nevada’s lack of inspection rights. Far from disproving the barriers to shareholder litigation, Wynn Resorts illustrates how extraordinary the circumstances must be for shareholders to prevail in Nevada.

5. The Article also shows that Nevada gives directors near-absolute latitude to use defensive tactics. Nevada replaces Delaware’s Unocal and Revlon standards with the business judgment rule. As a result, managers may sell the company to the lowest bidder simply because that bidder keeps them in office, with no intervention from Nevada courts. This effectively blocks the market for corporate control—the primary market force that disciplines managers. When shareholder litigation is foreclosed and the threat of takeover is neutralized, managers face virtually no constraint on self-interested behavior. The combination eliminates both internal accountability mechanisms (litigation) and external discipline (the takeover market).

6. The Article shows that Nevada’s own marketing materials contradict official claims about the state’s framework. The legal section titled “Why Nevada?” on the Secretary of State’s portal, Silverflume, explicitly promotes Nevada’s liability protections as advantages for directors and officers. These materials explain that in Nevada, unlike in Delaware, directors are liable for duty of loyalty breaches only if there is also intentional misconduct, fraud, or knowing violation of law—precisely the broad exculpation that Aguilar publicly claims does not exist. The contradiction is striking: on his own office’s website, the Secretary of State markets the very protections he elsewhere characterizes as exaggerated misrepresentations of Nevada law.

These findings have significant implications. As more firms incorporate in Nevada, more will be governed by this framework. Furthermore, Nevada’s law is also prompting changes in other states. Delaware faces pressure to relax legal constraints on managers and has begun responding. Delaware recently enacted S.B. 21, narrowing judicial scrutiny of self-dealing transactions. Texas amended its law to include Nevada exculpation as an opt-in liability limitation.[5] Whether or not firms leave Delaware, Nevada law is changing American corporate law.

The findings of this Article have implications for the race-to-the-top/race-to-the-bottom debate. Decades ago, Bill Cary warned that Delaware was leading a race to the bottom. Nevada’s emergence marks a fundamental shift: Nevada, not Delaware, now drives the competitive dynamic. This matters because Nevada’s incentives and institutional factors are less constrained than Delaware’s. Delaware faces significant pressure to respond—and is responding. The danger is greater than in Cary’s era: the market is fragile and at risk of cascading degradation. Nevada has already responded to Delaware’s changes by extending its exculpation to controlling shareholders.  Furthermore, as Delaware adjusts its standards to compete, it erodes its own advantages and accelerates the race to the bottom.

The study also has welfare implications. First, studies on the effect of the Nevada 2001 and 2017 amendments found that they had a negative effect on the value of Nevada firms.  Second, while some argue that differentiation in corporate law could lead to efficient self-selection, the evidence suggests otherwise. In prior work, David Smith and I found that Nevada attracts firms that use aggressive accounting methods and frequently restate earnings—suggesting relatively high agency costs.[6]

The Article’s findings have policy implications. Given the risk of continued degradation, it suggests reassessing the costs and benefits of federal intervention and exploring different forms such intervention could take. The Article proposes to consider a novel approach: adopting Delaware’s fiduciary duties, standards of review, and exculpation statute as federally mandated minimums. This approach would limit the race to the bottom while minimizing the typical costs of federal intervention. Adopting Delaware law as the floor would benefit from Delaware’s accumulated expertise and responsiveness while removing the competitive pressure that is pushing Delaware toward Nevada’s lax standards. Finally, the Article suggests that since reincorporations statutorily requires a shareholder vote, courts or federal law should require a supporting votes from a majority-of-the-minority (“MOM”) shareholders as a condition for reincorporation.