Amid growing discontent with recent Chancery Court rulings, Texas lawmakers aim to challenge Delaware's dominance as the leading state for business incorporation by introducing reforms designed to create an exceptionally friendly commercial environment and establish Texas as a compelling alternative.
The race for corporate dominance is heating up, as Texas lawmakers aim to challenge Delaware’s long-standing reputation as the premier state for business incorporation. Should their efforts prove successful, the significant reforms under consideration could fundamentally transform the corporate governance landscape across the United States.
Discontent With Delaware Driving Texas Overhaul
Delaware has long been the go-to jurisdiction for businesses seeking to incorporate, due in large part to the Delaware General Corporation Law. Not only does the statute provide robust legal and liability protections for both companies and their investors, but it also facilitates significant flexibility, empowering businesses to tailor corporate structure and governance as they see fit.
Delaware is also home to the Court of Chancery, a specialized court of equity that focuses solely on resolving business disputes. Staffed by judges with deep expertise in both the General Corporate Law and broader business law, the Chancery Court offers a level of predictability often lacking in more traditional courtroom settings.
Given these advantages, it’s no surprise that about 65% of Fortune 500 companies have chosen Delaware as their state of incorporation. However, growing discontent among business leaders has opened the door for states like Texas to challenge its dominance. Recent decisions by the Chancery Court have introduced uncertainty, raising concerns about bias in favor of activist shareholders. High-profile controversies—particularly the judicial scrutiny of Elon Musk’s $56 billion Tesla compensation package—have only added to those anxieties.
Texas lawmakers obviously see an opportunity. By introducing Senate Bill 29—and its identical counterpart, House Bill 15— they are signaling their intent to create a commercial environment exceptionally favorable to corporations. According to one of its sponsors, Sen. Bryan Hughes, the goal is to ensure that business decisions “are made by Texas corporations, through their shareholders and elected boards, and not third-party activists.” Leveraging rising dissatisfaction with Delaware, Hughes and other proponents aim to attract more companies and entrepreneurs to Texas, spurring job growth and economic development while solidifying the state’s reputation as a corporate safe haven.
Key Provisions of Senate Bill 29
If enacted, Senate Bill 29 will introduce substantial amendments to the Texas Business Organizations Code, which governs both for-profit and nonprofit entities registered in the state.
Key provisions include:
Codification of the Business Judgment Rule
The Business Judgment Rule, a common-law principle adopted by most states, shields directors from personal liability for decisions made in good faith for the benefit of the company. Senate Bill 29 not only codifies this rule into statute, but also reforms it by shifting the burden of proof to plaintiffs in breach of fiduciary duty claims.
Limits on Derivative Lawsuits
The bill would require shareholders to own at least a 3% stake in a company to file a derivative lawsuit. This aims to deter opportunistic or small-scale shareholders from disrupting corporate governance with frivolous claims—a trend reportedly on the rise in Delaware.
Companies would also be allowed to seek an upfront ruling from a Texas judge regarding the independence of directors serving on special committees, preempting challenges during litigation. Additionally, in cases where a derivative lawsuit results in a disclosure-only settlement—one that does not include monetary damages—the law would prohibit plaintiffs from recovering attorneys’ fees.
Enhanced Protection of Corporate Records
The bill would clarify that shareholders demanding to inspect a Texas for-profit corporation’s records cannot access emails, texts, social media or similar communications unless they directly affect corporate actions. It also strengthens rules against inspection demands made for improper purposes. For companies listed on a national securities exchange or governed by the Business Judgment Rule, inspection demands tied to derivative proceedings or lawsuits involving the shareholder or their affiliates would be deemed improper.
Resolution of Internal Disputes
The bill would allow companies to designate the Texas Business Court—or another specified Texas court—as the sole venue for resolving internal disputes or governance-related claims. Governance documents could also include a clause waiving jury trials for such disputes, provided certain conditions are met.
What Texas Reforms Could Mean for Delaware
Even before Texas pursued its overhaul, some companies incorporated in Delaware were eyeing states they viewed as better aligned with their business interests. Elon Musk was among the first to make the move, deciding last year to reincorporate both Tesla and SpaceX in Texas after the Delaware Chancery Court struck down his compensation package.
In January, The Wall Street Journal reported that Meta—the parent company of Facebook, Instagram and WhatsApp—was considering moving its incorporation from Delaware to another state, possibly Texas.
The introduction of Senate Bill 29 marks one of the most serious challenges to Delaware’s dominance in recent history. With 20% of the state’s budget revenue coming from corporate fees, maintaining its status as the go-to incorporation hub is a critical economic priority. In response to the threat, Delaware lawmakers recently approved major amendments to the General Corporation Law, which will significantly reshape how transactions involving Delaware corporations are negotiated and litigated.
Signed into law by Gov. Matt Meyer on March 2, Delaware’s reforms:
- Clearly define the criteria for determining whether a director is disinterested and independent.
- Establish guidelines for when a significant stockholder qualifies as a “controller.”
- Specify which transactions require both a special committee and majority-of-the-minority approval to avoid entire fairness scrutiny.
- Narrow the scope of “books and records” requests under Section 220.
The newly adopted amendments represent Delaware’s most significant corporate law overhaul in a half-century, but it remains to be seen whether the reforms will be adequate to prevent the massive business exodus many have feared.
Bottom Line
It’s widely expected that the Republican-dominated Texas Legislature will approve the reforms proposed by Senate Bill 29. Once passed, the law is set to take effect Sept. 1, unless adopted by a two-thirds vote in both the Texas Senate and House, in which case it would become immediately effective. Companies considering incorporation or reincorporation in Delaware, Texas or elsewhere should closely monitor these developments and consult with legal counsel, as the enactment of Texas Senate Bill 29 would significantly reshape the risk-reward balance driving those decisions.
