(Bloomberg) -- A low-slung brick building across the street from a dingy parking garage in Wilmington, Delaware, is a legal address for nearly 300,000 businesses, including Walmart Inc., General Motors Co. and Goldman Sachs Group Inc.
The major draw for those companies — and hundreds of thousands of other corporations, LLCs and LPs incorporated in the tiny state — is a 15-minute walk away: the Delaware Court of Chancery.
It’s the world’s preeminent business court, but it’s now facing an unlikely challenge from Texas where officials are planning to launch their own version next week. Unlike Delaware’s venerable two-century-old commercial court, the Lone Star State’s version resembles a startup. There are no designated courtrooms and some staff still haven’t been hired.
Growing pains aside, Governor Greg Abbott and Texas boosters see a huge upside. The courts are just the latest sweetener to his business-friendly pitch that lured Charles Schwab Corp., Chevron Corp. and Elon Musk’s Tesla Inc. in the past few years.
Any state in the U.S. can create a specialty business court to handle disputes. About 20 other states, among them Nevada and Wyoming, have tried to mimic Delaware, with limited success. Although these courts have helped streamline corporate litigation in their respective locales, none has emerged as a true competitor to Delaware on the national stage.
But speculation is mounting that litigious newcomers like Musk could help Texas pull off what has so far been the impossible and dethrone Delaware as a court hub.
The world’s richest person, with a net worth of more than US$230 billion, abruptly initiated a shift of Tesla’s incorporation to Texas from Delaware earlier this year. Although Musk didn’t explicitly signal he would take advantage of the new business courts, the move came shortly after a Delaware Chancery judge tossed out his record-breaking $56 billion Tesla pay package, calling the sum “unfathomable.”
“Musk makes this a bigger deal than it probably would have been,” said Carliss Chatman, a corporate law professor at Southern Methodist University law school in Dallas. “There’s pressure on Texas to show itself and prove itself via Musk, because he is so litigious and he never settles.”
A representative for Musk didn’t respond to multiple requests for comment. Governor Abbott’s office said in a statement the new business courts are “further enhancing Texas’ reputation as the best state to do business,” adding that the judges “have a litany of experience in streamlining resolutions of business disputes.”
The ‘Texas Miracle’
With a hands-off approach to taxes and regulation, Abbott has been busily promoting the “Texas Miracle” and courting major corporations from around the country. The state economy has cooled recently, following a nearly $33 billion budget surplus last year, but Texas has managed to lure a bunch of marquee names, particularly from California.
The state is also cementing its reputation as a business-friendly center for litigation. Hedge funds and private equity firms are turning to federal courts in Texas to challenge regulators, in part because cases can be appealed to the conservative 5th U.S. Circuit Court of Appeals in New Orleans - which has quickly become one of the financial world’s most important venues.
Big companies are also looking to bankruptcy courts located in Texas to try to get in front of a judge perceived as more inclined to side with them. Plans for the startup Texas Stock Exchange were also unveiled in June, with the seemingly quixotic goal of challenging the New York Stock Exchange.
“Everything is bigger in Texas,” said Ryan Sullivan, an attorney at Reichman Jorgensen Lehman & Feldberg in Austin. “There’s a very real sense of Texas pride. Without being too tongue in cheek, I do think that will be a meaningful factor here.”
In the past decade, many public companies have adopted corporate charters or bylaws that include “forum selection” clauses, requiring shareholder lawsuits to be filed in a specific venue — typically the court within their state of incorporation.
But any company that operates in Texas could find themselves in a dispute before the business court, whether they are incorporated here or not. The court will have jurisdiction over shareholder suits and governance disputes and it will also resolve spats involving Texas corporate law.
Texas’ system could have a huge upside if it lures more firms to the state. Delaware has said that last year more than 2 million business entities had the state as their corporate home — significantly surpassing the number of people living there. That includes about 70 per cent of Fortune 500 companies and 80 per cent of U.S. initial public offerings.
Many businesses look to take advantage of Delaware’s well-tested statutes governing the actions of corporate executives and having judges who are business-law experts decide cases rather than juries. The court also has the capability to quickly set cases for trial, which can provide an edge in high-profile corporate disputes over merger and acquisition cases.
Scrapping plans
Still, the challenges for Texas are daunting. Officials have been planning the opening of the specialty court system, designed to resolve high-dollar corporate disputes, for more than a year. But, they only recently launched a website and visitors are told details about how to electronically file documents are “coming soon.”
As of Tuesday, the Office of Court Administration was still hiring for an accountant and a staff attorney to support one of the judges based in the Houston division.
Texas’ Office of Court Administration said in a statement that it is finishing testing the court’s case management system so it’ll be ready to accept filings starting Sunday.
“This court is being built from the ground up and implementation won’t end on September 1,” the state court administrator said in a statement. The plan is to continue to bring on staff throughout next month with judges taking office on Sunday.
Officials conducted an extensive search for courtrooms, even asking local law schools for help. The flagship University of Texas at Austin declined a request to house one of the courts. Some judges secured space for their chambers in a facility occupied by Texas A&M School of Law.
In the end, court organizers scrapped plans to commit to permanent spaces for courtrooms. Instead, in-person proceedings will use existing state courtrooms not being used for other types of cases.
It may be years before Texas knows if its gambit pays off and whether corporations and their lawyers start to see the business courts as a preferred destination. If it does, business court judges and in some cases ordinary Texans could find themselves at the forefront of key decisions on issues critical to global companies.
Judges and juries
Part of Delaware’s allure is the court’s 10 officials – one chancellor, six vice chancellors and three magistrates. Many are plucked from prestigious corporate law practices. Delaware’s governor nominates the chancellor and vice chancellors, who must be confirmed by the state senate for terms lasting 12 years.
Because the Texas business court will use juries in certain cases, ordinary Texans, not judges steeped in the intricacies of corporate law, will render some verdicts. To become a judge in Texas’ new system, candidates must have at least 10 years of experience in complex business civil litigation or as civil judges. They will serve relatively brief two-year terms, with the chance to be re-appointed.
“Almost no case gets fully litigated in two years,” said Sullivan, the attorney based in Austin. “If you are before one judge the entire time and halfway through the case you switch judges, that can have a profound impact on litigation strategy and how the parties view potential outcomes.”
Each of the five Texas business court divisions – in Austin, Houston, San Antonio, Dallas and Fort Worth — already has two judges appointed by Abbott, a prospect that all but guarantees the first jurists will reflect his business-friendly ethos. He tapped a top lawyer from his own office, Patrick Sweeten, and Melissa Andrews, a partner at Holland & Knight, to serve as judges in the Austin district, where many Musk cases could be tried.
Andrews said in an email that the courts will further bolster Texas as a business hotspot with a forum that is “tailor-made” for complex cases.
“Those of us appointed to serve on the court are working, individually and collectively, to put in place local rules, courtroom procedures, and internal processes that will enable our cases to move forward in the most timely and productive manner,” she said.
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