Texas Governor Greg Abbott signed Senate Bill 29 (SB 29) into law, initiating sweeping changes to the Texas Business Organizations Code (TBOC). The bill, which garnered bipartisan support, introduces several reforms aimed at enhancing the state’s competitiveness as a leading jurisdiction for business incorporation, particularly in comparison to Delaware, which has long been the preferred state for forming corporations.
Overview of the Bill
SB 29 is a comprehensive overhaul of the TBOC, which governs the formation, governance, and management of business entities in Texas. The law’s intent is to provide greater clarity, flexibility, and efficiency for businesses operating in the state. Among the key provisions are updates to the business judgment rule, changes to derivative lawsuit provisions, and modifications to corporate governance structures, particularly for closely held businesses and limited liability companies (LLCs).
One of the central aspects of SB 29 is the codification of the business judgment rule, a legal principle that provides directors of a corporation with broad discretion in making business decisions, so long as they act in good faith and in the best interests of the corporation. By formally enacting this rule into Texas law, the bill offers greater legal protections to corporate directors, shielding them from personal liability in cases where they make reasonable, informed decisions that ultimately lead to unfavorable outcomes.
SB 29 also significantly curtails the ability of minority shareholders and equity holders to bring derivative lawsuits—legal actions taken on behalf of the corporation to remedy alleged wrongs. The reforms make it more difficult for shareholders to sue corporate officers or directors without demonstrating that they have exhausted all internal corporate remedies first. This change is expected to reduce the number of lawsuits filed against companies in Texas, making it a more business-friendly environment.
Another important provision is the expansion of the state’s “entity management” tools, which gives Texas corporations more flexibility in structuring their internal governance. The bill introduces provisions that allow companies to streamline their operations by adopting flexible internal dispute resolution mechanisms and providing clearer guidelines for the treatment of equity holders in LLCs.
Impact on Texas Corporations
The passage of SB 29 has been met with enthusiasm among the business community, particularly in sectors that rely on closely held businesses and corporate governance structures. One of the bill’s main goals is to make Texas a more attractive state for businesses considering where to incorporate. By providing clarity and legal protections for corporate directors, SB 29 is designed to reduce the likelihood of costly litigation and improve the overall ease of doing business in the state.
For many corporate attorneys and legal experts, SB 29 is seen as a victory for the Texas business environment. According to J. David L. Miller, a corporate law expert at Jones Day, “The changes are designed to give Texas companies more flexibility and certainty in how they operate. This will undoubtedly attract more businesses to Texas, especially those that are looking for a state with well-established and business-friendly laws.”
Reactions from Delaware and Other Jurisdictions
Texas’ move to update its corporate laws has not gone unnoticed in Delaware, which has long been the dominant jurisdiction for corporate incorporations. Delaware’s business-friendly legal environment, particularly its Court of Chancery, has made it the go-to state for large corporations looking to incorporate. However, with SB 29’s passage, Texas has thrown down the gauntlet, signaling that it is ready to compete for corporate incorporations.
Legal experts expect some companies, particularly those in the energy and technology sectors, to consider Texas as a viable alternative to Delaware, especially for businesses that are seeking a more straightforward legal framework for governance and dispute resolution. Several businesses have already expressed interest in moving their incorporation to Texas, citing the state’s growing role as a hub for tech companies and its favorable tax climate.
Some legal commentators, however, caution that while SB 29’s reforms are significant, Texas will need to continue refining its corporate laws to compete effectively with Delaware’s long-established reputation. “It will take time for Texas to gain traction as a destination for corporate incorporations, but the reforms are a good first step,” said Michael J. Green, a professor of corporate law at the University of Houston.
What This Means for Entrepreneurs and Investors
For entrepreneurs and investors, SB 29’s reforms represent a significant shift in how business entities in Texas will be governed. The enhanced flexibility in corporate governance structures, combined with increased legal protections for directors, is likely to attract startups and emerging companies that need a state where they can innovate without fear of constant litigation. The reforms may also help Texas retain more homegrown companies as they expand, especially in industries like technology, healthcare, and manufacturing.
SB 29 has the potential to position Texas as a formidable competitor to Delaware in the realm of corporate law. While it remains to be seen whether the state can fully unseat Delaware’s dominance, the changes signal that Texas is committed to ensuring its place as a leader in business law.
