The establishment of the Texas Business Court (“Business Court”) in September 2024 marks a watershed moment in corporate governance. As the “Dexit” phenomenon gains traction – with corporations considering an exit from Delaware as a state of incorporation – Texas positions itself as a bold option, and the Business Court as an attractive alternative to Delaware’s Court of Chancery.

High-profile cases like Tornetta v. Musk^[1], which scrutinized Elon Musk’s $56 billion Tesla compensation package, have spotlighted Delaware’s challenges in balancing executive accountability and shareholder interests.  While supporters of the Delaware legal system say those cases demonstrate its strength in enforcing fiduciary duties,  critics argue the cases expose vulnerabilities in that framework. They contend that the Business Court offers a fresher vision for corporate adjudication, promising more efficiency, impartiality, and adaptability. The question is whether this new court can rival Delaware as the gold standard for resolving complex corporate disputes. In a new paper, I explore this question by addressing critical issues such as judicial independence, procedural efficiency, jury unpredictability, fee-shifting, and precedent development.^[2]

Balancing Judicial Independence and Accountability

Judicial independence is crucial in corporate law matters, particularly in cases involving fiduciary duties, where the interests of management, shareholders, and the corporation itself may diverge. Delaware’s Court of Chancery benefits from a system where judges are appointed to 12-year terms, providing a significant degree of insulation from short-term political pressures.^[3]

In contrast, the Business Court’s judges will serve two-year terms, with the possibility of reappointment.^[4] This shorter term raises several concerns, including potential impacts on judicial independence, lack of continuity and expertise development, inconsistent decision-making, and reduced attractiveness for high-caliber judicial candidates.

To address these concerns, Texas should consider extending judicial terms, implementing a merit-based reappointment process, creating a specialized judicial selection committee, and providing robust continuing education for judges.^[5] By addressing these issues, Texas can work towards creating a judiciary for its Business Court that combines independence, expertise, and stability, enhancing its attractiveness as a forum for corporate litigation.

Navigating Efficiency and Constitutional Rights in Corporate Litigation

Delaware’s Court of Chancery is celebrated for rapid and efficient decisions. Complex disputes, including merger-related injunctions, are often resolved within weeks.^[6] The absence of juries is a big reason for this speed, which helps, maintain stability for litigants and financial markets.^[7] The availability of jury trials in the Business Court, however, introduces unique considerations for complex corporate litigation^[8] and could lead to substantial delays and unpredictability. Jury selection, deliberation, and the potential for appeals based on jury decisions prolong case resolution and can create outcome inconsistencies.^[9]

The 1985 Pennzoil v. Texaco case in Texas serves as a cautionary tale. It resulted in an unprecedented $10.53 billion verdict against Texaco and highlighted the potential for unpredictable outcomes in high-stakes corporate litigation.^[10]To address these challenges while maintaining the constitutional right to a jury trial, Texas should consider a specialized jury selection process, which would provide enhanced jury education, encourage bench trials for complex cases, implement bifurcated trials, and use special masters or neutral experts.

Delaware’s streamlined processes enhance its reputation for efficiency. Procedural rules in the Court of Chancery are designed to expedite high-stakes corporate litigation, with mechanisms like summary judgments and injunction hearings conducted on tight schedules. The Business Court, by contrast, must develop similar procedural innovations to ensure it can meet the time-sensitive demands of corporate litigants.

The Quest for Legal Certainty in a New Forum

Delaware’s dominance in corporate law rests primarily on its extensive body of legal precedents developed over two centuries.^[11] This vast repository of case law provides a high degree of predictability and certainty for businesses and their legal counsel.^[12] In contrast, the Business Court starts with few business law precedents, which could lead initially to less unpredictable and inconsistent rulings.

Several factors may impede the development of a robust body of precedent in Texas. In some cases, the potential for jury trials may limit the development of detailed, judge-written opinions that typically form the backbone of corporate law precedent.^[13] The shorter terms of Business Court judges (two years) may result in less consistent decisions. Additionally, the broader jurisdiction of the Business Court may dilute the focus on developing specialized corporate law precedents.^[14]

To address these challenges, the Business Court should prioritize detailed, written opinions, even in jury trials, and implement an efficient system for publishing and disseminating court decisions. Providing specialized training for judges and considering longer judicial terms could also help build a body of precedent.

Navigating the Fee-Shifting Minefield

The approach to fee-shifting in corporate litigation significantly affects shareholder suits and overall corporate governance.^[15] Delaware prohibits fee-shifting bylaws that would require unsuccessful shareholder-plaintiffs to pay a corporation’s legal fees, preserving shareholders’ ability to bring meritorious suits.^[16] Texas, however, has not adopted a similar prohibition, which could have several implications for corporate litigation in the state.

Texas’ more permissive stance on fee-shifting could deter shareholder litigation, potentially reducing corporate accountability and giving an advantage to well-resourced defendants.^[17] Conversely, it might lead to more carefully vetted cases and reduce frivolous litigation.^[18] The recent Tornetta decision highlights the importance of shareholder litigation in corporate governance and might have been less likely to proceed under more permissive fee-shifting rules.

To balance these concerns, Texas could consider a middle ground of implementing fee-shifting limitations for certain types of shareholder suits, creating a “loser pays” system with caps, establishing a review process for fee-shifting, and encouraging alternative fee arrangements. By carefully crafting its approach to fee-shifting, Texas can strike a balance between deterring frivolous litigation and maintaining robust mechanisms for corporate accountability through shareholder suits.

Texas vs. Delaware: Charting the Future of Corporate Law

The  Business Court represents a bold attempt to compete with Delaware in the realm of corporate law adjudication. However, the comparison reveals significant challenges that Texas must overcome to match the sophistication, efficiency, and predictability of Delaware’s Court of Chancery, particularly in cases involving fiduciary duty claims against corporate insiders. Those challenges include developing comparable judicial expertise and efficiency in decision-making, navigating the complexities introduced by jury trials, building a robust body of precedent, ensuring judicial, and balancing access to justice with fee-shifting.

Although the Business Court has the potential to become a significant forum for corporate litigation, it will likely take years to develop the institutional knowledge, depth of precedents, and judicial expertise that have made Delaware the preeminent jurisdiction for corporate law.

ENDNOTES

[1] Tornetta v. Musk, C.A. No. 2018-0408-KSJM, 2024 WL 343699 (Del. Ch. Jan. 30, 2024).

[2] Shane C. Goodwin, The Lone Star Docket: How the Texas Business Court Will Shape the

Corporate Landscape, available at https://papers.ssrn.com/sol3/papers.cfm?abstract id=5024710.

[3] Del. Const. art. IV, § 3.

[4] Tex. Gov’t Code Ann. § 25A.003 (West 2024).

[5] Stephen M. Bainbridge, The Competition for Corporate Charters and the Problem of Extraterritorial Regulation of Corporate Governance, 1 J. Corp. L. 1, 5-6 (2024).

[6] See Leo E. Strine, Jr., The Delaware Way: How We Do Corporate Law and Some of the New Challenges We Face, 30 Del. J. Corp. L. 673, 682-83 (2005).

[7] See Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 Nw. U. L. Rev. 542, 585-86 (1990).

[8] Tex. Gov’t Code Ann. § 25A.004 (West 2024).

[9] See The Lone Star Docket: How the Texas Business Court Will Shape the Corporate Landscape, available at https://papers.ssrn.com/sol3/papers.cfm?abstract id=5024710.

[10] Pennzoil Co. v. Texaco, Inc., 481 U.S. 1 (1987).

[11] William B. Chandler III & Anthony A. Rickey, Manufacturing Mystery: A Response to Professors Carney and Shepherd’s “The Mystery of Delaware Law’s Continuing Success”, 2009 U. Ill. L. Rev. 95, 97-98 (2009).

[12] Jill E. Fisch, The Peculiar Role of the Delaware Courts in the Competition for Corporate Charters, 68 U. Cin. L. Rev. 1061, 1064 (2000).

[13] John Armour et al., Delaware’s Balancing Act, 87 Ind. L.J. 1345, 1397-98 (2012).

[14] Tex. Gov’t Code Ann. § 25A.004 (West 2024).

[15] John C. Coffee, Jr., Fee-Shifting Bylaw and Charter Provisions: Can They Apply in Federal Court?—The Case for Preemption, 2014 Colum. Bus. L. Rev. 1, 5-6 (2014).

[16] Del. Code Ann. tit. 8, § 102(f) (2024).

[17] Albert H. Choi, Fee-Shifting and Shareholder Litigation, 104 Va. L. Rev. 59, 63-64 (2018).

[18] Sean J. Griffith, Correcting Corporate Benefit: How to Fix Shareholder Litigation by Shifting the Doctrine on Fees, 56 B.C. L. Rev. 1, 46-47 (2015).

This post comes to us from Shane Goodwin, the associate dean and a professor of practice at Southern Methodist University’s Cox School of Business and an adjunct professor at the university’s Dedman School of Law. It is based on his recent article, “The Lone Star Docket: How the Texas Business Court Will Shape the Corporate Landscape,” available here.