Red states are outcompeting blue states economically, and no red state has been more serious in this effort than Texas. Its regulations are few and reasonable; the new Texas Stock Exchange is open for business on Y’all Street; and the state constitution prohibits the imposition of a personal income tax. All this explains why Apple, Tesla, Toyota, and Eli Lilly are expanding, building plants, and creating jobs in the Lone Star State. But Texas isn’t satisfied yet—it wants to be a one-stop shop for business, and because a company’s place of incorporation is legally separate from where it operates, the state is also moving to challenge Delaware’s dominance as the jurisdiction of choice for incorporations. Texas has thus revamped its corporate laws and created the Texas Business Court to challenge the famed Delaware Court of Chancery.
Though ambitious in scope, Texas’s push on the legal front has so far yielded only modest results. That remains true even after Delaware damaged its own franchise in 2024 and 2025 with several widely criticized decisions, most notably the Chancery Court’s striking down as unfair Elon Musk’s executive compensation package at Tesla. The Delaware General Assembly moved quickly to reverse these decisions. As a result, aside from Tesla, Dropbox, and Coinbase, only a small number of other public companies have left the state. And more relocated to Nevada than to Texas.
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Delaware’s greatest competitive advantage over other states has long been the Court of Chancery. Its recent missteps notwithstanding, the Court of Chancery, with its extremely well-developed body of case law and its sophisticated and dedicated judges, is rightly regarded as the world’s finest business court. Texas has selected excellent jurists for its new business court, but they can’t match the national and even global reputations of many of the Delaware judges—at least not yet. It will take decades for the court to produce a body of opinions on the wide range of important business issues on which Delaware already has well-established doctrines. One potential shortcut would be for Texas to announce that its courts will follow Delaware precedents (in the past, other states trying to challenge Delaware have tried this), but such a move would be counterproductive. Texas is trying to differentiate itself from Delaware. Presenting its business court as Chancery on the Rio Grande won’t accomplish that.
So how can Texas make its corporate laws more attractive to public companies than Delaware’s? The answer is statutory changes. These can be enacted quickly, and they can make a huge difference. That, apparently, was the reasoning behind Texas’s latest statutory revision, SB 29, which Governor Gregg Abbott signed into law in May 2025. Among other things, SB 29 allows the board of a public company to enact a bylaw stipulating that, to bring a derivative action against the directors, a shareholder must hold some minimum number of shares, with the threshold not to exceed 3 percent of the outstanding stock.
It is difficult to overstate how momentous such a restriction is. At most public companies, a large majority of the shares (commonly 80 percent or more) are owned by a few dozen large institutional investors, especially the “Big Three”: Blackrock, Vanguard, and State Street. In typical shareholder suits against directors, these institutions are not the plaintiffs. Rather, in Delaware, a shareholder need hold only one share to sue, and in a typical lawsuit the shareholder usually holds only a tiny number of shares. The real party in interest is the shareholder’s lawyer, who funds the suit and hopes to get a fee that would dwarf any recovery received by the individual shareholder. In the suit to void Musk’s compensation package at Tesla, for example, the shareholder plaintiff owned just nine shares. Nevertheless, after the Delaware Supreme Court overturned the Chancery Court decision, reinstated the compensation package to Musk, and awarded only nominal damages of just $1, the plaintiff’s lawyers walked off with a fee of $56 million.
For any company that adopts a bylaw of the kind now authorized by Texas law, suits like that are impossible. Plaintiffs’ lawyers teamed up with shareholders holding only tiny numbers of shares are now out of the game in Texas.
Unsurprisingly, companies incorporated in Texas acted quickly to take advantage of this new defense against derivative suits. In April 2025, before SB 29 became law, a shareholder of Southwest Airlines had served a demand on the board challenging its decision to abolish the airline’s famous “Bags Fly Free” policy. But once Governor Abbott had signed SB 29, Southwest adopted a bylaw requiring that any shareholder suing the directors hold at least 3 percent of the company’s stock. When the shareholder sued, the court dismissed the case because the shareholder held only 100 shares of Southwest stock, woefully short of the approximately 17 million shares needed to reach the 3 percent threshold. At then-current prices, 17 million shares would be worth about $600 million. In other words, only a shareholder owning more than half a billion dollars’ worth of Southwest stock had a right to sue.
Southwest does have such shareholders, including the Big Three and several other large institutional investors. And shareholders who individually don’t own 3 percent of the shares can team up to meet the threshold and sue as a group. But the practical implications of Texas’s new rule are clear: the directors of a public company incorporated in Texas can be sued only if some of the large institutional investors decide to sue. If Apple (market capitalization about $4.4 trillion) were incorporated in Texas and had a bylaw like Southwest’s, shareholders would need more than $130 billion worth of stock to bring a suit. Texas’s new rule ends the practice of unscrupulous plaintiffs’ lawyers suing in hopes of getting a settlement that produces no meaningful benefit for the shareholders but a tidy fee for themselves. And institutional investors are highly sophisticated, rational profit-maximizers; if they choose to bring a suit, very likely that suit will have significant merit.
It’s unclear whether Delaware will respond. Though Texas cannot easily replicate the case law or reputation of the Delaware Court of Chancery, the Delaware legislature can easily replicate statutory innovations by Texas or any other state. Whether it does so will likely depend on the market’s reaction to the new Texas rule—that is, whether public companies start moving to Texas. It may seem obvious that directors of public companies will want the added protection of the Texas rule, but the situation is more complicated. The flood of non-meritorious suits to which corporations are exposed in Delaware does not lead to liability or even much inconvenience for the directors; it amounts, rather, to a tax on corporations, payable in the form of nuisance fees to plaintiff lawyers and legal fees to defense lawyers. This reduces returns to the corporation’s shareholders, of course, but only by a very small amount. The real question, therefore, is whether this small tax on shareholders is counterbalanced by the obvious benefits of Delaware’s outstanding judges. My guess is that it is, but ultimately the market will decide.