Delaware, the 2nd Smallest State with the Strongest Corporate Law Structure
Since the early 20th century, Delaware has been the undisputed, preeminent domicile and state of formation for business entities. Over 68% of Fortune 500 companies and over 65% of the S&P 500 companies are incorporated in Delaware, and the state is considered standard for venture-backed and high-growth startups. Many states have attempted to take its position and failed, as Delaware has a number of advantages resulting from its more than a century of focus in this area. Texas is among those states seeking to draw companies from Delaware; this article examines whether Texas represents a viable alternative to Delaware.
Delaware has been refining its business entity laws for many years. The specialized and seasoned attorneys of the Delaware Bar contribute annual recommendations, which the Legislature uses to make regular enhancements. To provide stability from political shifts, the Delaware Constitution specifically requires a two-thirds majority of each house of the General Assembly to amend the State’s corporate law, rather than a simple majority. All states, to a significant degree, try to draw upon and have mimicked Delaware’s law.
Texas law bears substantial similarity to Delaware law, with certain differences. But Texas’ law is undeveloped. Its meaning is unclear in application. Statutory law holds limited significance without case law interpretation, as judicial precedents and decisions clarify and shape its application in real-life situations. A case may hinge on a single sentence of statutory law drafted in the abstract and in isolation. It is the body of decisions that provides guidance as to the meaning of an otherwise generic sentence stating that, for instance, directors owe fiduciary duties to a company.
Texas has few cases where the courts interpret its laws, and those that do are not very innovative. Through its Court of Chancery, Delaware has developed a deep and rich body of caselaw over a century that provides companies with guidance and predictability in decision making and structuring transactions. Such guidance and foreseeability of outcomes are the very currency of strategic planning. Delaware case law is not only thorough and deep, it is decided by judges expert in the matter at the Court of Chancery. These precedents are not only applied in Delaware but are regularly adopted by other state courts or used as highly influential resources in informing the decisions of those other states’ courts. To date, Texas business entity decisions have been decided by judges who are not at all specialized in the matters or determined by juries without any precedent created as a guidepost for future planning.
Texas’ main claim for competition is its creation of Business Courts meant to hear various business cases, including those involving internal business entity matters. They are intended to serve a similar function, to a degree, as Delaware’s specialized Court of Chancery. The Delaware Court of Chancery is a specialized court staffed by Judges who are authorities in the field that hear and decide business entity cases. Texas’ Business Courts suffer from a number of drawbacks besides their inexperience and novelty.
The new Texas Business Courts have jurisdiction over various business matters, including internal business entity disputes, and are staffed by judges required to have a moderate level of experience in business law. The judges are appointed by Texas’ Governor and serve for two-year terms. Delaware’s Court of Chancery judges are also appointed by the State’s Governor but serve twelve-year terms. The Court of Chancery judges’ longer term is intended to insulate them from political whims, pressures, and influences.
The Texas Business Courts are also bound to permit either party to request a jury trial, rather than the Business Court judge, chosen for his or her expertise, to decide the case. This raises two main issues. First, choosing a jury trial could be used as a strategic decision depending on the strength, posture, and nature of a party’s case, circumventing the very purpose of the Business Court. A jury may be swayed by different arguments that a judge might disregard and will not have the experience in business and business entity law that the Business Court judge is meant to provide. In Delaware, the Court of Chancery judges, experts in business entity law and related matters, decide the cases before them without a jury trial option, providing greater predictability to outcomes. Second, cases heard by juries in Texas’ Business Courts do not result in a written decision. This deprives Texas of the development of a body of precedent, an area in which it is already at a great disadvantage as discussed above.
Like all states seeking to draw incorporations from Delaware, Texas is also offering tax breaks. Of course, these are initially attractive in a short-sighted sense; however, while these breaks are alluring, state legislatures rarely hesitate to draw upon sources of revenue once captive, and could be changed at any time without the two-thirds legislative protection offered by Delaware in amending the corporate law. Such a short-term reward is a gamble when sacrificing the stability, reputation, and widely understood (if not expected) use of Delaware as the jurisdiction of incorporation.
Without more, Texas’ attempts may prove no more successful than those of other states who have attempted the same measures to unseat Delaware.
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