Texas is Disrupting Delaware’s Dominance through Innovation

Disruptive innovation has come to the jurisdictional competition for corporate charters.

For decades, the biggest obstacle facing states seeking to challenge Delaware’s dominance in the jurisdictional competition for corporate charters was their inability to replace Delaware’s massive inventory of highly developed case law precedent. This body of law, coupled with the promise that an elite cadre of sophisticated judges would interpret new legal disputes against the background of these precedents, allowed Delaware to offer what its competitor-states could not: certainty and predictability. Until now that is.

Delaware’s position seemed insurmountable because competing with Delaware required other states to match Delaware’s certainty and predictability. This certainty and predictability was possible because of Delaware’s large body of precedential case law and its specialized and exclusive trial court. While a state could alleviate an absence of controlling precedents by incorporating Delaware decisions into its case law, as Delaware did when it superseded New Jersey as the leading domicile state in the early Twentieth Century, that does not resolve the problem going forward of having judges with expertise deciding new issues as the business environment changes. Companies that wanted to do complex deals like public offerings of debt or equity, the pursuit of an active mergers and acquisitions program, the implementation of antitakeover devices and major restructurings relocated to Delaware because their advisors told them that the law in rival jurisdictions was too undeveloped and uncertain. Companies, and their officers and directors have a high demand for legal certainty when facing litigation risk and are willing to pay for it. And pay for it they did, by opting in to the high-fee, litigation world of Delaware corporate law.

It turns out, however, that incorporating in a jurisdiction with a large body of legal precedent and judges expert in construing that precedent is not the only way for a company to achieve the legal certainty craved by corporations and their advisors. Not only has Texas created its own Business court system but it may have come up with a better way to compete, as reflected in the latest salvo in the battle for corporate law dominance, fired on February 27, 2025 when Texas State Senator Bryan Hughes introduced Senate Bill No. 29. While the bill introduces a number of reforms aimed at shoring up Texas’ appeal for corporate chartering business, one stands out. The proposal allows Texas business courts to provide clarity to corporations, controlling shareholders, and corporate directors and officers by issuing advisory opinions.

SB 29 introduces the critical concept of advisory opinions to the world of corporate charter competition by adding new Section 21.4161 to the Texas Business Organizations Code. Section 21.4161 allows corporations who are trying to establish committees of independent and disinterested directors to petition a court “to hold an evidentiary hearing to determine whether the directors appointed to the committee are independent and disinterested with respect to any transactions involving the corporation or any of its subsidiaries and a controlling shareholder, director, or officer.”  The statute thus permits companies to seek a conclusive determination that directors approving transactions with controllers, directors and officers are “independent” for purposes of the statute.

The new Texas provision strikes at Delaware’s Achilles heel. It has long been extremely important for companies to have independent directors. Deals approved by a majority of directors who are independent receive highly deferential treatment from courts and avoid judicial second-guessing. In addition, when shareholders sue to challenge corporate deals, if a majority of the directors of the company doing the deal is independent, then the corporation’s board retains the authority to investigate the matter and decide whether pursuing the lawsuit is in the best interests of the corporation. In recent years, however, Delaware law has taken a turn for the worse, becoming something of a mess because the test for determining whether a director is independent has become vague and subjective. Major law firms advising companies incorporated in Delaware routinely face the embarrassing prospect advising clients that it is daunting to predict whether a particular director would be considered independent for purposes of avoiding litigation. As one major firm observed not long ago, “the Delaware courts’ view of what constitutes “independence” continues to evolve and has become a heavily fact-specific analysis, which requires careful consideration not only of the traditional “economic” conflicts but also of personal relationships and other non-traditional factors.”

With Delphic ambiguity Delaware judges warned lawyers that in evaluating director independence they “cannot ignore the social nature of humans or that they are motivated by things other than money, such as love, friendship, and collegiality.” Even with regard to decisions about routine issues like executive pay, law firms warned that if a CEO has significant “influence and control over the company’s board … as a practical matter, it may not be possible to consider the directors approving compensation for such a CEO to be independent.”

Delaware is not going down without a fight, though. Led by the Governor and state legislators, it is vigorously and pro-actively attempting to clean up the confusion and uncertainty surrounding who is an independent director by proposing to amend Section 144 of the Delaware General Corporation Law. If enacted, the reform will establish a presumption of independence for directors of a company whose shares are listed on a national stock exchange, and who are not actually a party to the act or transaction at issue, if (a) the board determines the directors to be independent, or (b) the director satisfies the relevant criteria for determining director independence under the applicable stock exchange rules.

On the one hand, the proposed amendment is supposed to create a strong presumption of independence where its conditions are met. The presumption can only be rebutted by “substantial and particularized facts” that a director has a material interest in the act or transaction or has a material relationship with a party having a material interest in the act or transaction. On the other hand, the same Delaware Chancery judges who are the authors of the current, amorphous set of independence rules will be responsible for interpreting the new provisions.

The critical question posed by the proposed Texas statute is whether advisory opinions represent the kind of disruptive innovation that affect the market for corporate charters in the same way that Uber disrupted the taxicab industry or Airbnb disrupted the hospitality and accommodation industry. Allowing directors to be determined conclusively to be independent and disinterested in an advisory opinion is a major innovation. One can imagine other legislation that would expand the scope of corporate law advisory opinions even further. For example, Delaware G.C.L. § 102(b)(7) famously allows Delaware corporations to exculpate their directors and officers from personal liability for damages resulting from such directors’ violations of their duties of care, but not for breaches of the duty of good faith. In recent years, in cases like Marchand v. Barnhill, Delaware courts have held that failures to implement reasonable systems of internal controls and monitoring or to utilize existing systems of monitoring and oversight are “act[s] of bad faith in breach of the duty of loyalty” and therefore non-exculpable under 102(b)(7). Obtaining an advisory opinion that a board is fulfilling its oversight responsibilities would be valuable to directors worried about things like consumer health and safety and legal compliance.

Similarly, Delaware law recently has been criticized for the vagueness and ambiguity associated with judicial determinations of whether a transaction is fair. The newly proposed Delaware statue attempts to address this concern by adding a statutory definition of what it means for a transaction to be “fair to the corporation.” Under the proposed law, a transaction is fair as to the corporation if it is “beneficial to the corporation, or its stockholders in their capacity, as such given the consideration paid to or received by the corporation or its stockholders or other benefit conferred on the corporation or its stockholders and taking into appropriate account whether the act or transaction meets both of the following: (a) It is fair in terms of the fiduciary’s dealings with the corporation and (b) It is comparable to what might have been obtained in an arm’s length transaction available to the corporation.” This standard is rather vague, and it is unclear how, if at all, the proposed statute changes current law. Perhaps advisory opinions would help in bringing certainty to determinations of deal fairness as well.

The advisory opinion innovation will only help Texas in the jurisdictional competition for corporate charters if it is workable. Under the proposed Texas statute, a company seeking an advisory opinion that directors are independent and disinterested must petition the court for an evidentiary hearing on the issue. In the petition, the corporation must designate a counsel for the shareholders (other than the shareholder and directors and officers involved in a proposed transaction), and provide notice to these unaffiliated shareholders. The Court is required to hold a hearing “promptly” but not sooner than 10 days after giving notice to identify appropriate legal counsel, which might or might not be the counsel identified in the petition. Counsel not designated in the petition may participate in the hearing and request to be designated as the company’s counsel. Although these procedural guardrails are an understandable effort to retain some of the value of an adversarial process, they may render the process of obtaining an advisory opinion longer, more costly and more complex than optimal. On the other hand, without this provision, the legislative initiative likely would meet fierce opposition from the plaintiffs’ bar.

After the court selects counsel for the unaffiliated shareholders, the court must promptly hold an evidentiary hearing. A determination that directors are independent and disinterested is dispositive in the absence of facts, not presented to the court, constituting evidence sufficient to prove that one or more of those directors is not independent and disinterested with respect to a particular transaction.

Advisory opinions, while unconstitutional under federal law due to the Constitutional requirement in Article III that federal courts render decisions only when there are live cases or controversies between opposing parties before it, have long been issued by state courts. Perhaps most famously, in 2004, in response to a request from the State Senate, the Massachusetts Supreme Court issued an advisory opinion that proposed legislation to legalize civil unions for same-sex couples was unconstitutional because full civil marriage and nothing “less or different” must be made available for same-sex couples.  In 2020 South Dakota issued advisory opinions clarifying that a conflict of interest provision in the State Constitution, which bars legislators from having an interest “directly or indirectly” in contracts with the state, prohibited state representatives from accepting federal Covid-19 relief funds. Delaware also permits advisory opinions of sorts, but not by private parties: federal courts, state Supreme Courts, and as of 2007, the U.S. Securities and Exchange Commission, can certify questions concerning Delaware law to the Delaware Supreme Court.

The recently proposed Texas legislation is noteworthy because it seeks to disrupt the status quo in the jurisdictional competition for corporate charters by innovating around the first-mover advantage contained by Delaware’s stockpile of cases. While this innovation is important, it may not be enough to make Texas an attractive home for corporation due to certain other deterrents for public companies considering reincorporating in Texas.

In particular, as a much larger state, the revenues from corporate charters cannot be as important to Texas fiscally, as they are to Delaware, which incentivizes elected officials to act when business conditions change and reverse or revise injudicious corporate law opinion. Given the different political dynamics, with Texas having the “strongest legislation in the country to end DEI (diversity, equity and inclusion) and its ideological framework”,   it is possible that directors and officers of publicly traded Texas corporations could be sued for breaching fiduciary duties to shareholders if corporate funds are used to promote DEI initiatives or other “woke” policies.

There also seems to be uncertainty as to the extent to which juries will be required in cases before the Texas business courts. The proposed new legislation attempts to give companies the power to waive jury trials. However, the Texas Constitution appears to guarantee the right to trial by jury, both in Article I Section 15 and in Article V, Section 10, which applies to “all causes in the district courts,” and the Texas Business Court is subject to the same rules and procedures as Texas district courts under the statute.

The competitive environment for corporate charters is rapidly shifting. We predict that other states will experiment with the fascinating innovation of using advisory opinions as a way to compete with Delaware. It is unfortunate that Delaware apparently cannot better leverage its own judiciary’s vaunted expertise in corporate law by enacting legislation similarly authorizing advisory opinions without amending the State Constitution.