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Texas rewrote its business laws, hoping to capitalize on companies’ growing discontentment with Delaware. A bill enacted earlier this week makes it significantly harder for shareholders to bring lawsuits like the one that challenged Elon Musk’s $56 billion pay package in 2017 and caused the billionaire to move Tesla’s legal home from Delaware to Texas.
The new law lets companies adopt rules that would require shareholders to hold at least 3% of the stock to file a common type of lawsuit. It also would replace trial by jury — a big risk for companies, given their unpredictability — with a hearing by a judge in a special court for business disputes created last year.
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While Texas business law is largely untested, the slew of changes has caught the attention of top securities lawyers, some of whom expect clients will be enticed by the corporate-friendly mentality Texas is pushing.
Tesla is the biggest company incorporated in Texas and moved last week to adopt that 3% litigation threshold — at current prices, a $31.5 billion bar cleared only by Musk and a handful of passive index funds that are unlikely to ever sue. As the company’s board weighs a fresh pay package for the CEO, who has said he will soon refocus on Tesla, it can do so knowing it’s unlikely to be sued.
A separate bill under consideration could shield companies merely headquartered (rather than legally incorporated) in Texas, a much broader group that includes AT&T and ExxonMobil, from “gadfly” shareholder proposals by requiring minimum stock holdings of at least $1 million. Exxon has faced such proposals from climate activists and fought back aggressively.
And in a move sure to please both Musk and Jamie Dimon, Texas legislators are currently considering a bill that would regulate shareholder advisory firms like ISS and Glass Lewis by requiring them to only consider the financial interest of shareholders when making recommendations.
Where this leaves both active and passive shareholders is a larger question. Index funds like Blackrock and Vanguard are unlikely to be particularly opposed to reincorporation out of Delaware, one leading securities lawyer told Semafor. Activist investors, on the other hand, have come to rely on a familiar set of tricks afforded by Delaware law — including books and records requests, known as Section 220 demands in Delaware — to put pressure on companies.
Texas’ business code allows shareholders to request that information broadly, but puts guardrails on its scope by excluding emails and text messages from being obtained (to the chagrin of journalists, too.)
Notable
- Mercado Libre is asking shareholders to approve a move to Texas.
- Meta considered a Texas move, The Wall Street Journal reported, but ultimately didn’t put it before shareholders this year.
- Affirm and Roblox, both controlled companies, are seeking to move to Nevada.
- Southwest Airlines and a slew of energy companies are the only other big S&P 500 companies currently incorporated in the Lone Star State.