Texas enacts bill to protect businesses from shareholder lawsuits

In the United States, Texas has recently updated its business laws to attract companies dissatisfied with Delaware's regulations. This change, finalized earlier this week, introduces a significant barrier for shareholders wishing to initiate lawsuits, particularly concerning executive compensation. Under the new legislation, shareholders must now own at least 3% of a company's stock to bring certain types of lawsuits forward. This requirement complicates the legal landscape for would-be litigants and aims to solidify Texas's position as a business-friendly state. As such legal challenges are potent tools for influence within a company, this law could fundamentally alter shareholder dynamics. The Texas law will also replace jury trials with hearings by judges in special courts designed for business disputes. This decision is seen as an effort to mitigate unpredictable jury outcomes, which companies often view as risky. The state's approach seeks to attract major corporations, exemplified by Tesla, which recently shifted its incorporation to Texas. This move allows Tesla's leadership to pursue compensation packages for executives, such as Elon Musk, with less fear of litigation, facilitating more favorable conditions for corporate governance. Furthermore, upcoming legislation is under review that could extend these protections to businesses merely headquartered in Texas. This broader scope would encompass large entities like AT&T and ExxonMobil, possibly shielding them from shareholder proposals by requiring a minimum investment threshold for those wishing to bring such proposals forward. This aspect of the law is particularly favorable for organizations that have previously faced pressures from shareholder activists, especially in contexts demanding climate accountability. The evolving business landscape in Texas is generating considerable interest among top securities lawyers who anticipate that clients will be drawn to the state’s more favorable legal climate, contrasting with Delaware’s established practices. In pursuing these changes, Texas aims to promote a corporate-friendly environment and attract various businesses, potentially leading to a significant realignment of corporate governance norms across the nation.