On September 19, 2024, Governor Greg Abbott swore in the 10 inaugural judges to the new Texas business court during a ceremony at Texas A&M University School of Law in Fort Worth.

This Texas Business Court created by House Bill 19, will handle high-value business disputes, aiming to speed up legal processes and alleviate caseloads in traditional state courts. The first five divisions of the Texas Business Court opened in major Texas cities (Houston, Dallas, San Antonio, Austin and Fort Worth). Two business court judges were appointed in each division. The Texas Business Court is seen as a way to attract businesses to Texas through a judiciary with enhanced business specific legal expertise, a clear body of precedent in complex commercial matters, and increased efficiency.

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Read More: Fort Worth Report

Texas is set to launch its first new appeals court in nearly 60 years on September 1. This new court will focus on addressing complex business matters emerging from the existing 14 regional appeals courts. However, challenges to its authority are already in play. The outcome of this challenge may shape the new court’s future decisions and ability to influence litigation and business in Texas. #TexasLaw#YallStreet

In recent years, Texas has seen a notable uptick in companies choosing to redomicile from other states, particularly California and Delaware. This trend reflects broader shifts in the business landscape, as companies seek more favorable regulatory environments and operational advantages. High-profile examples of this shift include the recent announcements by Elon Musk that both SpaceX and X (formerly Twitter) will be relocating to Texas, as well as Tesla's redomiciling from Delaware to Texas. Understanding the implications of these moves requires a closer look at the differences between the Delaware General Corporation Law (DGCL) and the Texas Business Organizations Code (TBOC), as well as the nuances in fiduciary duties that these legal frameworks impose.

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Why Texas?

Texas offers a unique blend of benefits that are increasingly attractive to businesses. The state boasts a robust economy, a favorable tax climate, and a regulatory environment that promotes business growth and innovation. Additionally, Texas's legal system is perceived as more business-friendly compared to the more litigious environments in states like California. These factors, combined with a relatively lower cost of living and doing business, make Texas a prime destination for companies looking to relocate.
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DGCL vs. TBOC: Key Differences in Corporate Law

The Delaware General Corporation Law (DGCL) has long been the gold standard for corporate law in the United States. It offers a well-developed body of case law, predictability in corporate governance, and a specialized Court of Chancery that is highly experienced in handling complex corporate disputes. These features have made Delaware the preferred jurisdiction for incorporation, particularly for large, publicly traded companies.

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However, the Texas Business Organizations Code (TBOC) offers several advantages that are appealing to companies considering redomiciliation:

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1. Flexibility in Corporate Governance: The TBOC provides greater flexibility in corporate governance structures, allowing companies to tailor their bylaws and operating agreements to better suit their specific needs. This can be particularly beneficial for smaller, privately held companies that require more customized governance arrangements.

2. Simplified Regulatory Compliance: Texas has a reputation for being less bureaucratic and more straightforward in its regulatory requirements. This can result in lower administrative costs and reduced compliance burdens for businesses.

3. Protection Against Hostile Takeovers: The TBOC includes provisions that make it more difficult for hostile takeovers to occur, which can be an attractive feature for companies looking to maintain control and stability.

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Fiduciary Duties: Comparing DGCL and TBOC

One of the most significant differences between the DGCL and the TBOC lies in the interpretation and enforcement of fiduciary duties.

Under the DGCL, directors and officers owe fiduciary duties of care and loyalty to the corporation and its shareholders. The duty of care requires directors to act with the care that a reasonably prudent person would use in similar circumstances, while the duty of loyalty mandates that directors act in the best interests of the corporation, avoiding conflicts of interest.

The TBOC also imposes fiduciary duties of care and loyalty, but there are notable differences in how these duties are applied and enforced:

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1. Business Judgment Rule: Both Delaware and Texas recognize the business judgment rule, which protects directors from personal liability for decisions made in good faith and with reasonable care. However, Texas courts are often perceived as more deferential to the decisions of corporate directors, providing a broader shield against liability.

2. Exculpation Clauses: The TBOC allows corporations to include exculpation clauses in their certificates of formation that limit or eliminate directors' liability for breaches of the duty of care. Delaware law permits similar provisions, but Texas's approach can offer broader protections for directors, further encouraging companies to redomicile.

3. Interested Director Transactions: Texas law provides a more permissive framework for interested director transactions, provided that such transactions are disclosed and approved by a majority of disinterested directors or shareholders. This can facilitate more flexible business arrangements and reduce the risk of litigation.

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The Impact of High-Profile Relocations

Elon Musk's decision to relocate SpaceX, X (formerly Twitter), and Tesla to Texas underscores the state's growing appeal to high-profile tech companies and innovators. Musk's moves highlight the significant advantages Texas offers, particularly in terms of a business-friendly regulatory environment and favorable economic conditions. These high-profile relocations are likely to further cement Texas's reputation as a prime destination for businesses looking to optimize their operations and capitalize on a supportive legal framework.

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Conclusion

The movement of companies to Texas from jurisdictions like California and Delaware is more than a trend—it's a strategic decision influenced by the distinct advantages Texas offers in terms of corporate law, regulatory environment, and economic climate. The differences between the DGCL and the TBOC, particularly in the areas of corporate governance flexibility and fiduciary duty protections, make Texas an attractive destination for businesses looking to optimize their operations and mitigate legal risks.

As this trend continues, it will be important for businesses to carefully consider the legal implications of redomiciling and to seek expert legal advice to navigate the complexities of transitioning to the Lone Star State. At Scale LLP, our team is well-equipped to guide companies through this process, ensuring a smooth transition and helping them leverage the benefits of Texas's business-friendly environment.

Texas may have been immortalized in song as the place where "all my exes live," but for many businesses, it's becoming the place where their future resides.

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Texas Business Court Powers

The Texas Business Court has all of the power of the District Courts of Texas including the power to issue writs of injunction, mandamus, sequestration, attachment, garnishment, and supersedeas; and to grant any relief that may be granted by a district court. Sec. 25A.004.(a)

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‍Texas Business Court Jurisdiction

The Texas Business Court has concurrent jurisdiction with the District Courts of Texas for civil actions involving publicly traded companies or private entities in which the amount in controversy exceeds $5 million (excluding interest, statutory damages, exemplary damages, penalties, attorney's fees, and court costs) in the following actions:

(1)  a derivative proceeding (which is a lawsuit brought by a shareholder on behalf of a corporation against a third party, typically the corporation’s executives or directors) Sec. 25A.001;

(2)  an action regarding the governance, governing documents, or internal affairs of an organization;

(3)  an action in which a claim under a state or federal securities or trade regulation law is asserted (4)  An action against an owner, controlling person or manager, alleging wrongdoing (act or omission) in their official capacity.

(5)  an action alleging that an owner, controlling person, or managerial official breached a duty owed to an organization, including the breach of a duty of loyalty or good faith;

(6)  an action seeking to hold an owner or governing person of an organization liable for an obligation of the organization; and

(7)  an action arising out of the Business Organizations Code. 

Sec. 25A.004(b)-(c).

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Additionally, the Texas Business Court has concurrent jurisdiction with the District Courts of Texas for civil actions involving in which the amount in controversy exceeds $10 million in the following actions:

(1)  an action arising out of a qualified transaction (a transaction, under which a party pays, receives, lends or borrows at least $10 million)

(2)  actions arising out of a contract in which the parties agreed that the business court has jurisdiction; and

(3)  actions arising out of a violation of the Finance Code or Business & Commerce Code

Sec. 25A.004(d)

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Finally, the Texas Business Court may have supplemental jurisdiction over any other claim related to a case or controversy within the court's jurisdiction that forms part of the same case or controversy with the agreement of all parties to the claim and a judge. Sec. 25A.004(f)

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The Texas Business Court does not have jurisdiction (unless through agreed supplemental jurisdiction) of actions brought by a governmental entity, foreclosures, deceptive trade practices, estates, family law, insurance, real property, farm products or consumer products, medical liability, bodily injury or death, or legal malpractice. Sec. 25A.004(g)

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Texas Business Court Pleading and Case Initiation

Actions filed in the Texas Business Court must plead facts to establish jurisdiction and venue, which may be established as provided by law or, specified by written contract. Actions without proper venue or jurisdiction shall be transferred.  Sec. 25A.006(a)-(c).

If an action is filed in a district court or county court at law that is within the jurisdiction of the Texas business court, a party may remove the action to the Texas business court.  Sec. 25A.006(d).

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Appeals

Appeals from orders and judgments of the Texas Business Court shall be lodged with the Fifteenth Court of Appeals which has exclusive jurisdiction. Sec. 25A.007.(a)

Texas is establishing specialized business courts to handle complex commercial disputes more efficiently. These courts are set to commence operations on September 1, 2024, for cases filed on or after this date. 

The new specialized Texas business courts are authorized by Chapter 25A of the Texas Government Code.

Here are some summary points about the new Texas business courts:

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1. Jurisdiction and Cases:

• The Texas business courts will have original jurisdiction over disputes with an amount in controversy exceeding $5 million. This includes derivative actions, governance disputes, securities claims, and more. Publicly traded companies will fall under the business courts' jurisdiction regardless of the amount in controversy
• The Texas business courts will have original jurisdiction over most disputes involving publicly traded companies. 
• However, certain cases, such as those involving personal injury, death, legal malpractice, or claims under specific codes (e.g., Family Code, Estates Code), are excluded from the business courts' jurisdiction unless supplemental jurisdiction is agreed upon by all parties and the judge.

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2. Judges and Structure:

• Judges for the Texas business courts will be appointed by the governor for two-year renewable terms, subject to Senate confirmation. Candidates must have at least ten years of relevant legal experience and must reside in the court's division.
• There will be eleven business court divisions.
• Dallas, Austin, San Antonio, Houston, and Fort Worth will start September 2024. 
• The remaining six divisions, covering more rural areas, are expected to be established by the 2025 legislature.
• All appeals will be taken to the new 15th Court of Appeals, which will also start operations on September 1, 2024.

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3. Rules and Procedures

• The Texas Supreme Court has adopted Rules of Practice in the Business Court related to the administration and procedures for the business courts, which will be integrated into the Texas Rules of Civil Procedure and Rules of Judicial Administration. Click here for analysis of the new rules.
• All Appeals with conforming subject matter and parties will be transferred to the Fifteenth Court of Appeals on September 1, 2024. Parties are asked to confer and advise the Court if you believe your appeal is subject to transfer to the Fifteenth Court of Appeals.
• A new expanded Appellate Docketing Statement is designed to help parties assess whether their appeal is within the exclusive jurisdiction of the Fifteenth Court of Appeals. See Section XV 

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4. Advantages of Texas business courts:

• The Texas business courts are designed to provide more predictable and consistent application of business laws. This may lead to the development of a body of precedential case law that can provide predictability to businesses operating in Texas.
• The Texas business courts are expected to provided consistent and efficient case management.