Texas lawmakers have passed bills to reduce the influence of small shareholders.
Backers say the bills would attract companies, while critics call it a power grab by corporate insiders.
Lawmakers say ExxonMobil's board shake-up and Elon Musk's pay lawsuit inspired the legislation.
As Delaware rebukes Elon Musk over his pay package, Texas is now offering corporate America a path to sidestep legal challenges from most of its shareholders.
Over the past two months, lawmakers have pushed through a pair of bills they say would bring more businesses to the Lone Star State. Senate Bill 29 would make it harder for shareholders to sue companies, while Senate Bill 1057 would raise the bar for bringing resolutions at annual meetings.
SB 29 would apply to many big companies incorporated in Texas, like Tesla and Southwest Airlines. SB 1057 could apply to businesses that are merely headquartered in Texas, like AT&T and Waste Management, even if they're legally registered elsewhere.
They have moved quickly with virtually no organized opposition, with both measures now awaiting Gov. Greg Abbott's signature.
His office told Business Insider he wanted to strengthen businesses and would "review any proposal" lawmakers send to his desk. He has previously signaled that he would sign SB 29.
Chris Babcock, a Dallas lawyer who helped draft SB 29, told BI that a wide variety of businesses and experts shaped the bill, which he said he viewed as balanced. State Sen. Bryan Hughes, a Republican and a major backer of SB 1057, said it was meant to stop politicized attacks on Texas businesses.
Critics, meanwhile, said the bills could gut minority shareholder rights and make Texas a haven for corporate officers, such as Musk, who have unusually large ownership stakes and influence over their businesses.
"There's a famous quote from John Dingell, the former Michigan congressman, who said, 'If you write the substance and you let me write the procedure, I'll screw you every time.' That's exactly what's happening here," said Joel Fleming, a lawyer who represents investors in governance disputes.
In other words, Texas wouldn't be changing the standards corporate boards are held to, Fleming believes — but would make it very hard for regular shareholders to hold them accountable if they break the rules.
Texas lends a hand to corporate managers
If publicly traded companies opt in, SB 29 would give boards of directors significantly more legal protection and make it more difficult for investors to sue directors, effectively preventing high-profile shareholder lawsuits like the one that saw a Delaware judge strike down Musk's pay package.
Babcock called the Tesla case, which is on appeal, an "accelerator." Other decisions by the state's chancery court involving the companies Moelis and Activision "challenged long-standing corporate practices," he said, and also drove discussions.
"How can you have confidence in Delaware judges?" said Eric Lentell, the top lawyer at Archer Aviation who testified in favor of SB 29 and whose company is being sued in Delaware. "A shareholder vote was essentially ignored" when Tesla investors tried to ratify Musk's compensation, he said.
Musk and Tesla did not respond to requests for comment.
SB 1057, meanwhile, would raise the bar for shareholder resolutions. It would require shareholders to own a 3% stake or $1 million in stock and to gather support from holders of two-thirds of the company's shares before submitting a proposal.
James McRitchie, a small investor from California who opposes the bill, said Texas was "leading the race to the bottom." He said soliciting support from other investors could cost millions with a company like Tesla and deter all but the wealthiest investors.
Hughes cited the small hedge fund Engine No. 1's successful campaign to reshape Exxon's board of directors in 2021 as an influence, though SB 1057 doesn't apply to director nominations.
A spokesperson for Engine No. 1 declined to comment.
AT&T and Nasdaq registered support for SB 29. The Texas Stock Exchange, a startup trying to woo listings away from New York, backed both bills.
Another bill, Senate Bill 2337, which isn't as far along, targets certain recommendations from proxy advisors. Hughes said companies like ISS and Glass Lewis had recommended that institutional investors vote their shares for environmental- and diversity-motivated reasons that may not actually increase the value of their shares.
ISS and Glass Lewis didn't respond to requests for comment.
'Dexit'
Hughes said SB 29 would build on last year's creation of a specialized Texas business court. He referred to the bill as "Dexit" at a hearing, a nod to companies like Tesla and Tripadvisor moving out of Delaware.
Delaware's defenders say its laws are applied predictably and its courts are run by expert judges who are neither pro-management nor pro-shareholder.
"We think we're putting the last pieces together to make Texas an attractive place for doing business," Hughes said.
Brian Quinn, a law professor at Boston College, said the bills would give corporate managers too much power for investors to be comfortable. He said they would turn Texas into a "rogues' gallery" like Nevada, which has been criticized over its lax, pro-management corporate laws.
"Texas isn't competing with Delaware," Quinn said. "Texas is competing with Nevada."
Babcock said Texas would still have stricter shareholder oversight than Nevada, adding that Texas directors must remain loyal to companies and could be more easily removed by shareholders.
Glenn Hamer, who leads the Texas Association of Business, said at a hearing in March that "Delaware has blown it."
"We have the best economy in the galaxy," he said. "If you have an internal issue, are you going to be better treated in Delaware, or are you going to be better treated in a state that has become the economic engine of the United States of America?"
Correction: May 9, 2025 — An earlier version of this story misstated which school Brian Quinn is a professor at. It's Boston College, not Boston University.
