Texas business courts could draw companies

Texas on Sept. 1 launched its own business courts in a move that experts say could prove beneficial to both policyholders and insurers.

While Delaware’s Court of Chancery has long been the leader for rulings in corporate law and directors and officers liability insurance coverage disputes, Texas is seeking to make a name for itself as an alternative power center for corporate activity.

“The launch of the business courts seems to be a piece of a broader push by Texas to position itself as an attractive home for sophisticated business,” said Walker Newell, a securities lawyer and vice president of management liability at Woodruff Sawyer & Co.

He noted more California companies began migrating to Texas, which has a significant tech scene in its capital city of Austin, during the COVID-19 pandemic.

Elon Musk’s decision to move Space Exploration Technologies Corp. and Tesla Inc. from California to Austin could tempt other companies to find a home in Texas, said Matthew Bricker, an Austin-based insurance coverage partner at TittmannWeix LLP.

Mr. Bricker said it’s a great opportunity for Texas to attract more business and that many large states have business courts specializing in handling matters such as corporate law and shareholder derivative suits.

D&O insurers are sure to have taken notice of Mr. Musk’s moves as well, Mr. Bricker said.

“Companies are looking for a favorable jurisdiction, but if it is too favorable it could spook investors. D&O insurers are likely already weighing these issues when they issue policies and calculating how to price the risk going forward,” he said.

While the creation of the Texas business courts could be beneficial to companies already domiciled there, it is unclear if the courts will be a driving factor for a change of incorporation, said Kevin M. LaCroix, Beachwood, Ohio-based executive vice president of RT ProExec, a division of Ryan Specialty LLC.

The process is “no simple task” and “worth a healthy debate” between directors and shareholders on the differences between the laws of the states at issue, he said.

Mr. Newell said Texas may be trying to split the difference between Delaware, which has the most predictable and mature business courts in the country, and Nevada, which is taking a more “Wild West,” management-friendly approach to corporate law. Delaware has been facing increasing criticism from some quarters for rulings supposedly giving minority shareholders too many opportunities to extract settlements and fees from directors and officers, he said.

One significant difference between the business courts in Nevada and Texas is that Texas’ judges will issue written opinions that can act as guideposts for parties and better establish case law, Mr. LaCroix said.

Dallas-based business litigator David Harper of Haynes & Boone LLP said Texas has been trying to establish some form of business court for more than a decade and that Governor Greg Abbott and the state legislature created the courts to position Texas as being a business-friendly state.

House Bill 19, signed into law by Mr. Abbott in June 2023, provides for the creation of the business courts, each of which will initially be presided over by two appointed judges per division. The courts will initially consist of five divisions in Austin, Dallas, Fort Worth, Houston and San Antonio, with six more divisions to be considered in 2025. The business courts will also have their own Austin-based appellate court: the 15th District Court of Appeals.

Texas-based policyholders will benefit from the consistent body of law developed by the business courts and the designated appeals court, said Kaylan Dunn, a Houston-based litigation partner at Hunton Andrews Kurth LLP.

“This will be advantageous in the process of buying insurance because it allows a policyholder to negotiate for coverage consistent with the law surrounding corporate governance issues. Likewise, the consistency of outcomes will better inform parties to a dispute and their insurers of a case’s potential, the strengths/weaknesses of their positions, which may lead to earlier resolution of cases,” she said.

The business courts will also benefit insurers by potentially increasing predictability, thereby making it easier to quantify and pay claims, Mr. Bricker said.

“If the insurer is controlling the defense, predictability allows it to make better-informed decisions particularly if it has a large book in Texas or if it frequently deals with the jurisdiction. The insurer will also look at big-picture items like the financial impact on the book and claim trends,” he said.

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State’s commercial legal framework aimed at large disputes

Only select cases will proceed through Texas’ new business courts.

Business court judges will only decide cases concerning alleged breach of fiduciary duty and organizational disputes involving public companies or that exceed $5 million and transactional disputes exceeding $10 million.

“It’s really designed for the larger business cases,” said David Harper, a partner at Haynes & Boone LLP in Dallas.

Similar to lawsuits filed in state courts that are removed to federal court, lawsuits filed in Texas state courts can be removed to a business court if they meet those jurisdictional requirements, he said.

The business courts’ narrow focus, however, could spur additional litigation over whether a case belongs there, said Austin, Texas-based Matthew Bricker, an insurance coverage partner at TittmannWeix.

He also said there could be disputes over whether the $10 million amount in controversy requirement can be aggregated and whether supplemental jurisdiction can be exercised.

The costs of proceeding in Texas’ business courts are also high, Mr. Bricker said, with filing fees of $2,500 compared with $350 for most other actions.

The legislation creating the business courts also carves out litigation for insurance coverage disputes, Mr. Harper said.