Elon Musk and Tesla Inc.‘s contentious exit from Delaware has the state scrambling to remain attractive to major businesses as Texas lures them south.
The paint is still drying on Texas’ fledgling business court system, propped up nearly seven months ago. But legislators there are already proposing an expansion with more judges, opening the doors to more cases, and rules to block the kind derivative attack that in Delaware scuttled the Tesla CEO’s record-setting compensation package.
“The Lone Star State is open for business,” Gov. Greg Abbott (R) said in a March 5 editorial in the Wall Street Journal. He went on to blast the Delaware Chancery Court for killing Musk’s $56 billion Tesla pay package—a move that prompted the world’s richest person to relocate the electric vehicle-maker to Texas.
Abbott “looks forward to working with the Legislature to sign legislation that strengthens these courts,” said Andrew Mahaleris, his press secretary.
Delaware legislators, meanwhile, are tackling an identity crisis that drove Musk out with a new law that would lower judge-made guardrails around insider deals, and strengthen the presumption that directors are independent of management and controlling stockholders. Gov. Matt Meyer (D) signed the law Tuesday.
“Delaware is slamming the brakes to do a 180 on its well-developed case law,” Michael Navarro of Munsch Hardt said. “Texas is stomping on the gas pedal.”
Delaware’s Dilemma
Meyer and other supporters of Delaware’s new corporate law amendments (S.B. 21) say they address concerns the state’s standards gave too much power to minority investors and made even routine corporate transactions onerous and unpredictable. They also restrict investor access to board directors’ emails and text messages during investigations of potential breaches of fiduciary duty.
Delaware has a lot to lose—two-thirds of Fortune 500 companies incorporated there generate $2 billion in annual fees that contribute to a third of the state budget.
Dallas-based Haynes Boone partner Greg Samuel said he’s been fielding calls from public companies concerned about their litigation risks in Delaware. The new law improves the status quo, he said, though language that disinterested directors must act “in good faith and without gross negligence” opens the door for investor litigation.
“I have to tell them this isn’t a panacea—we don’t know how this is going to be interpreted, and we’re back in the uncertainty camp,” he said.
The legislative debate may not reach all the decision-makers Delaware hopes to retain.
Chad Cummings of Cummings & Cummings Law in Bonita Springs, Fla., said the entrepreneurs and start-up founders he works with aren’t especially focused on the legislative debates in Delaware or Texas.
Their attitude, he said, is “Elon said it, that’s enough. Why are you asking me all these questions? Just get it done.”
Others are more concerned that their angel or early-stage investors don’t feel good about Delaware lately. They’ve told Cummings, “We don’t really understand it, but we’re trying to fund-raise, and we’re hearing it’s a stumbling block—we’ve got to get out of Delaware.”
Texas Court Expansion
The legislative debates in Texas are just beginning.
H.B. 40, the more comprehensive of two business court bills, has yet to be set for a public hearing. It could face headwinds in the Senate, where competing legislation would pause a business court expansion for at least two more years. Separately, H.B. 15 and S.B. 29 would prohibit derivative lawsuits from investors with a stake of less than 3%.
The legislative push is “a legitimate play to take away from Delaware what’s been its lifeblood for a long time,” said Lee Parsley, president of Texans for Lawsuit Reform, which pushed to create the business courts in 2023.
Lawyers have filed nearly 100 cases in Texas’s business courts, with three-fourths in Houston or Dallas, the state’s two largest cities. Many disputes involve oil or gas—industries more prevalent in Texas than Delaware. Courts in San Antonio, Fort Worth, and Austin have been particularly slow.
H.B. 40 would add courts in six rural areas, and add a third judge in Houston and Dallas. It also opens its doors to disputes around insurance, arbitration, intellectual property, and attorney and accountant malpractice.
“Nobody knows where all of that will land but certainly there will be a push from the proponents to open everything up,” said David Harper of Haynes Boone.
The bill also would lower the minimum monetary threshold in all matters to $5 million from $10 million, and it would permit injunction relief in non-monetary disputes involving an entity’s power structure. Additionally, certain complex cases could be transferred to the business courts even if litigation began prior to the courts’ opening in September 2024.
Carliss Chatman, a Southern Methodist University law professor, said the legislative proposals help Abbott argue Texas is serious about corporate charters.
“The Delaware instability question to me is really asking,” she said, “why is that teeny tiny state that’s the size of my neighborhood in Texas the place that gets to decide all of corporate law?”
To view the full article, click here.