Texas Legislature Approves Significant Changes to Its Corporate Law, Incentivizing Relocation to Texas and Listing on Texas-based Stock Exchanges, and Challenging Delaware’s Dominance as the Preferred State for Incorporation

Delaware has long been the jurisdiction of choice for corporations, but certain recent controversial judicial decisions have resulted in a number of high-profile companies reincorporating (or considering reincorporation) into other states—and new legislation out of Texas aims to get a piece of the action.

Texas Senate Bill No. 29

On May 7, 2025, the Texas Legislature adopted Senate Bill No. 29 (first introduced last February), which provides for significant amendments to the Texas Business Organizations Code (TBOC). The amendments have been sent to Governor Greg Abbott for signature and will become effective immediately upon signing.

The key changes proposed by SB 29 are summarized below.

Codifying the Business Judgment Rule – New § 21.419

• The proposed amendments would codify the Business Judgment Rule (BJR) similar to Nevada’s BJR statute, such that directors and officers of a Texas corporation that is listed on a national securities exchange or affirmatively elects to be governed by this provision in its governing documents will be presumed to be acting (1) in good faith, (2) on an informed basis, (3) in furtherance of the interests of the corporation, and (4) in obedience to the law and the corporation’s governing documents.
• Also similar to Nevada, under Texas’s proposed BJR statute, neither a corporation nor any of its shareholders would have a cause of action against a director or officer of a Texas corporation as a result of any act or omission in the person’s capacity as a director or officer unless (1) the claimant rebuts one or more of the BJR presumptions, and (2) it is proven by the claimant that: (A) the act or omission constituted a breach of one or more of the person’s duties as a director or officer, and (B) the breach involved fraud, intentional misconduct, an ultra vires act, or a knowing violation of law.

In other words, the BJR statute clarifies that—unlike in Delaware—gross negligence is not enough to find a breach of the duty of care. The amendments also provide that in alleging fraud, intentional misconduct, an ultra vires act, or a knowing violation of the law, a party must state with particularity the underlying circumstances.

Also notable is the fact that the amendments extend the statutory protection to officers (which the current TBOC does not permit) and the amendments do not specifically carve out a breach of the duty of loyalty (unlike Delaware law which does not permit a corporation to exculpate a breach of the duty of loyalty).

• The proposed amendments would also extend the BJR presumption and protections to limited liability companies and limited partnerships that are listed on a national stock exchange or that affirmatively elect to be governed by these provisions in their governing documents.

Derivative Proceedings – Changes to Subchapter L

• Beneficial Ownership Requirement: A new § (3) to § 21.552(a) would require that a shareholder desiring to bring a derivative action involving a corporation listed on a national securities exchange or a corporation that has made an affirmative election to be governed by the BJR statute and has 500 or more shareholders must at the time of bringing the proceeding beneficially own a number of shares sufficient to meet the required ownership threshold identified in the corporation’s certificate of formation or bylaws, provided that the required ownership threshold does not exceed 3% of the outstanding shares of the corporation.

This provision, if adopted, would be a welcome change for many corporations whose directors or officers face derivative actions from stockholders who may hold as little as one share.

• Independence Determination by Court: New §§ (c) and (d) to § 21.554 would provide a process for a corporation to petition the court in which a derivative proceeding has been instituted, or in the business court if no derivative proceeding has been instituted, before the corporation’s determination of how to proceed on allegations made in a demand or petition relating to a derivate proceeding, to request a determination as to whether the directors identified or appointed to make such determination on how to proceed are independent and disinterested with respect to the allegations made in the demand.

• No Attorney Fees for “Disclosure-Only” Settlement: New § 21.561(c) provides that in cases where a derivative lawsuit results in a “disclosure-only” settlement, no attorney’s fees would be permitted.

Texas as Exclusive Forum and Venue for Internal Disputes – Amended § 2.115(b)

• Under the proposed amendments, a Texas corporation would be permitted to specify in its governing documents that one or more courts in Texas having jurisdiction will serve as the exclusive forum and venue for any internal entity claims.

Ability to Waive Jury Trials – New § 2.116

• A new § 2.116 would permit a Texas corporation to include in its governing documents an enforceable waiver of the right to a jury trial concerning any internal entity claim.

Under the current laws in Texas, parties have the right to a jury trial when required by the Texas Constitution. Until now, this has been viewed as a potential drawback to Texas incorporation or reincorporation.

Restrictions on Books and Records Demands – Amended § 21.218

• The proposed amendments would clarify that e-mails, text messages, or similar electronic communications, or information from social media accounts are not consider “records” for purposes of a books and record demand.

Delaware also recently amended its books and records demand provision to limit the scope of materials that may be requested by stockholders to a specific list of items. Notably, the list does not include emails, text messages, or informal board communications, a pivotal change for Delaware corporations.

• The proposed amendments also clarify that a written demand for books and records may not replace discovery in certain actions.

Appointment of Committee of Independent and Disinterested Directors – New §§ 21.416(g) and 21.4161

• The proposed amendments would permit a board of directors of a corporation listed on a national securities exchange or a corporation that has made an affirmative election to be governed by the BJR statute, to form a committee of independent and disinterested directors to review and approve transactions, whether or not contemplated at the time of the committee’s formation, involving the corporation or any of its subsidiaries and a controlling stockholder, director, or officer, and provide a process for petitioning the court to make a dispositive determination that such directors 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 petition must be filed in the business court (or the applicable district court depending on the corporation’s principal place of business in the state) and the corporation must give notice to the corporation’s shareholders that such a petition has been filed, which may be accomplished by filing a current report with the U.S. Securities and Exchange Commission if the corporation is listed on a national securities exchange.

It remains to be seen whether corporations will actually take advantage of this provision, given that doing so would require them to publicly disclose the formation of a committee, which could, in turn, tip the public that a transaction is forthcoming.

Protections for Officers and Directors in Interested Transactions – New § (f) to § 21.418

• A new § (f) to § 21.418 would shield the officers and directors of a corporation listed on a national securities exchange or a corporation that has made an affirmative election to be governed by the BJR statute from any cause of action brought by shareholders for breach of duty with respect to the making, authorization, or performance of a contract or transaction because the director or officer had an interest in the transaction regardless of whether the transaction is approved by the majority of the disinterested directors or committee members or by the shareholders (as described in § 21.418), unless the action is permitted by the BJR statute (i.e., the plaintiff can establish a breach of a fiduciary duty, which involved fraud, intentional misconduct, an ultra vires act, or a knowing violation of law).

The Texas safe harbor afforded by this amendment differs significantly from an amendment recently adopted in Delaware which protects officers, directors and controlling stockholders and control groups from liability in connection with related-party (interested) transactions so long as the corporation complies with the specific processes described in the statute. The safe harbor provided by the Texas amendment is not subject to the corporation’s compliance with any procedural requirements. However, it should be noted that the safe harbor afforded to officers and directors by the Texas amendment does not specifically extend to controlling stockholders or control groups (unlike the Delaware amendment).

Elimination of Class Voting – Amendments to §§ 21.364 and 21.365

• The proposed amendments would allow a Texas corporation to waive in its certificate of formation any requirement for separate voting by class or series, including in connection with the increase or decrease of the aggregate number of authorized shares of the class or series and the approval of any fundamental action or fundamental business transaction.

Texas Senate Bill No. 1057

On May 6, 2025, the Texas Legislature adopted Senate Bill No. 1057. This bill has also been sent to the governor for signature and will become effective September 1, 2025, if approved.

SB 1057 would add a new § 21.373 to the TBOC permitting any “nationally listed corporation” that either (1) has its principal office in Texas or (2) is admitted to listing on a stock exchange that has its principal office in Texas and has received the necessary approval by the securities commissioner, to incorporate a provision in its governing documents that would impose stock ownership requirements on shareholders seeking to submit proposals to the corporation.

Specifically, in order to submit a proposal to the corporation (other than director nominations and procedural resolutions ancillary to the conduct of the meeting, which are not subject to this provision), a shareholder or group of shareholders must:

1. hold an amount of voting shares of the corporation, determined as of the date of submission of the proposal, equal to at least:$1 million in market value; or
     a. $1 million in market value; or
     b. 3% of the corporation’s voting shares;
   
2. hold the requisite shares:
     a. for a continuous period of at least six months before the date of the meeting; and
     b. throughout the entire duration of the meeting; and
   
3. solicit the holders of shares representing at least 67% of the voting power of shares entitled to vote on the proposal.

The stock ownership requirements proposed by SB 1057 are, of course, significantly higher than those imposed by Rule 14a-8 of the Securities Exchange Act of 1934 (Exchange Act), which requires only that the stockholder proponent must have continuously held: (A) at least $2,000 in market value of the company's securities entitled to vote on the proposal for at least three years; or (B) at least $15,000 in market value of the company's securities entitled to vote on the proposal for at least two years; or (C) at least $25,000 in market value of the company's securities entitled to vote on the proposal for at least one year.

The question of whether a state can impose a higher stock ownership requirement for submitting stockholder proposals is not entirely settled. Rule 14a-8(i) allows a company to exclude a proposal if it is not a proper subject for action by shareholders under state law or otherwise violates state law, although it does not speak specifically to eligibility requirements.

At least one SEC Commissioner has suggested, however, that a company could adopt its own standards in compliance with applicable state law, and that those standards would supersede the eligibility requirements set forth in Rule 14a-8(b), which should be viewed as the default standard when a company’s bylaws are otherwise silent. Other observers have similarly commented that Rule 14a-8 should be seen as addressing when information about a stockholder proposal (including the board’s intention for voting proxies that the company is soliciting with respect to such proposal) is required to be included in the company’s proxy statement (i.e., it is simply a disclosure requirement), but leaving to state law and private ordering in charter documents the question of whether a proposal is eligible to be actually voted upon at a stockholder meeting (e.g., many companies have long required that a stockholder actually appear in-person—or now virtually—at a meeting and present the proposal that was submitted).

SB 1057 would require any corporation looking to impose these stockholder ownership requirements to notify shareholders of the proposed adoption of these requirements in a proxy statement provided to them prior to adoption. Corporations would also be required to provide specific information about the process for submitting proposals in their proxy statement.

Notably, the bill would not apply to corporations formed in Texas, but with headquarters elsewhere (unless they happen to be listed on a stock exchange headquartered in the state).

For corporations chartered outside of Texas, we question whether this bill may be vulnerable on Internal Affairs Doctrine / Commerce Clause grounds. For example, it is questionable whether Texas could change the laws applicable to a Delaware corporation that happens to have its headquarters located in Texas or is listed on a Texas stock exchange. However, for companies incorporated and headquartered in Texas this may prove an attractive feature.

Takeaways

It is no secret that Texas is vying to replace Delaware (and even Nevada) as the preferred state for incorporation, and we expect that SB 29 and SB 1057, assuming the governor signs them, will add attractive features in the calculus for corporations that are already considering reincorporation to Texas.

But these are not the only bills the Texas legislature has proposed to woo corporations to the state. Additional bills being considered in Texas include:

• House Bill 40, which would authorize business courts in the remaining six geographic divisions of Texas, authorize the appointment of additional judges to the First and Eleventh Business Court Divisions, expand the jurisdiction of the Texas business courts, and authorize the Texas business courts to oversee civil actions commenced prior to September 1, 2024 that would otherwise be within their jurisdiction;
• Senate Bill 2337/House Bill 4079, which would attempt to regulate proxy advisors to public company shareholders by requiring they provide services based solely in the best financial interest of a company’s shareholders—and not on non-financial factors such as ESG or DEI principles, social credit, or sustainability scores;
• House Bill 5567, which aims to improve the processing time for expedited filings with the Texas secretary of state (currently, routine filings in Texas can take up to two months, with options to expedite the turnaround to time to two to five business days) (in Delaware, expedited filings may be processed in under an hour);
• Senate Bill 1875, which would repeal the requirement for most Texas entities to file public information reports with the Texas controller.

While Delaware continues to be the predominant jurisdiction of choice for corporations (approximately 64% of the S&P 500 companies are incorporated in Delaware) due to its well-developed fiduciary and commercial case law , responsive and knowledgeable judiciary, and user-friendly and timely secretary of state’s office, as well as the universal familiarity with Delaware law by corporations, lawyers, and investors, among other reasons, it has come under recent scrutiny as a result of certain judicial decisions that have imposed additional scrutiny (and risk) on decisions made by boards and management, particularly in the context of controlling stockholder transactions.

Delaware has attempted to address some of these concerns by adopting significant amendments to its General Corporation Law in 2024 and 2025, aimed at providing greater clarity and predictability to corporate fiduciaries, but it remains to be seen whether these changes will be enough for Delaware to maintain its reputation as the dominant state for corporate domicile, particularly in light of the significant changes underway and being proposed in Texas. The Council of the Corporation Law Section of the Delaware State Bar Association and the state’s legislature are considering additional updates to Delaware’s corporate law and would be well-served to consider revisions to effectively address some of the issues being addressed by Texas (and Nevada)—even if done by other means or with variations in the specifics.