Texas Business Courts Launch: What Boards, Founders, and In-House Counsel Need to Know

Transcript

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Brian Elliott: Y'all Street Law is here to help you thrive in the Lone Star State. Why do we need business courts in Texas? Yeah, great question, really. You know, the business courts, Texas business courts were created to address the growing complexity of business litigation.

Chuck Kraus: I mean, that's at the basis. You know, over the last few years, Texas has become the headquarter of headquarters. More businesses are moving here and major companies are looking for and they demand services that are commensurate with moving their businesses to the state of Texas. So the idea is to create a court that can handle efficiently high stakes litigation and sophisticated business matters.

Brian Elliott: And it's a move, I think, that's in the right direction. It's a move to, you know, to take the best elements out of other business courts that exist around the country and to replicate the same here in the state of Texas. Interesting. So what types of cases specifically are going to end up in this business court as opposed to the existing civil courts?

Chuck Kraus: Yeah, there are three types of cases that the Texas business court will handle. And the first is corporate governance disputes, right? It's the that are going to be these are disputes that are based in the business organization code that are in excess of five million dollars. The second set of cases are going to be general business matters.

Brian Elliott: These are going to be cases that have qualifying transactions that exceed 10 million dollars. There are some exceptions to those. And then there's also supplemental jurisdiction that can apply. And that's when both parties agree that other claims that aren't that don't wouldn't that don't fall into the like a business governance dispute or a transaction dispute can also be heard in the business court.

Chuck Kraus: Interesting. So the first bucket, just to go into a little more detail, it sounds like the first bucket could be breach of fiduciary duty claims, could be shareholder claims against a company, possibly derivative claims, those sorts of sort of internal matters. But it sounds like the unifying idea is that the Texas Business Organizational Code is implicated and is the governing statute. Correct.

Brian Elliott: Yeah. And it's not for all corporate governance disputes, right? It's only for those that have an amount of controversy exceeding $5 million. So it's going to be something significant, right?

Chuck Kraus: But you can imagine that it will be, you know, shareholder derivative suits and investor disputes and other matters. Got it. And then the second bucket, more traditional adversarial, one business has a commercial dispute with another where the threshold amount of controversy is double what it was in the first bucket, $10 million. Yeah.

Brian Elliott: Again, and the idea here is to say this isn't for all business disputes. This is for the largest of the business disputes, right? You know, so looking at qualifying transactions under the jurisdictional statute excludes even things like loans from banks and credit unions and savings and loans. So you're looking at, you know, transactional disputes that are going to be complex in nature and are going to, you know, require a sophisticated court to look at the issues.

Chuck Kraus: Interesting. And I think, I think I heard that the, initially anyway, we're only launching some of these courts. Eventually there's going to be maybe 11, but, but now there's, there's only a few that have been launched. Is that right?

Brian Elliott: Yeah. 11 districts have been created for, for the business courts around the state. They, they originally launched in, on September 1st in five major cities, right? Dallas, Fort Worth, Houston, San Antonio, and Austin.

Chuck Kraus: Each of those locations have two appointed business court judges to start. And the, although the timeline isn't clear, the intention is to expand and, you know, build out the business courts throughout the rest of the jurisdictions. How should we think about the decisions that will be rendered by this new business court, as opposed to the traditional courts in terms of precedent and speed and some of these other things? Yeah.

Brian Elliott: So obviously, you know, speed is, is part of it, right? So part of this whole idea is to create a court that brings to, to it complex business efficiency, whatever that means, right? What we're looking for really is a development of business precedent, business law precedent in the court system. We don't really have today.

Chuck Kraus: Right now in our, in our system, we, the judges aren't required to, they sometimes do, but they're not required to create written opinions on, on decisions. So often we will bring a case and, you know, argue it for, you know, weeks and get a decision that just says, you know, granted or denied, and without any basis or reasoning that we can use then to take further. And it doesn't provide any sort of feedback to our clients, not direct anyway, on exactly what they can expect next time. So what we're expecting the business court to do is over time, and this will take some time, right?

Brian Elliott: But by bringing these cases, complex business matters, and by having a system that written decisions are required to create this body of business law precedent that folks can look at and rely on and give guidance to their clients. Yeah, that's really interesting. I hadn't focused on that initially, but there's been lots of comparisons between this business court and the Delaware Chancery Court, and I know we're going to get into that. But one of the things I think about coming in is if you're practicing in Delaware, or have a Delaware client, you both need to be very familiar with the DGCL, Delaware General Corporation Law, but you also need to look at the decisions because so much of the nuance is found in those decisions.

Chuck Kraus: So I guess coming in, it sounds like it's quite different with the state of Texas. You just don't have that same body of law to interpret what the statute says. Right, and that's really been a criticism of Texas business law, right? So when you look at places that you want to have, you know, you go for predictability and certainty, right?

Brian Elliott: We can't provide that here. We're not going to get that overnight in Texas, but the idea is that over time, we'll build that system of case law that should provide that guidance that we're looking for. Interesting. So while we're talking about Delaware Chancery Court, how does the structure of the court in Texas compare to that as an example?

Chuck Kraus: Yeah, a couple of big differences, really. You know, one is the judges, right? The judges in Delaware Chancery Court are appointed for 12-year terms in Texas. They're initially appointed for two-year terms, and they're eligible for reappointment at the end of two years.

Brian Elliott: And that's a significant difference. The other big difference is Delaware Chancery Courts don't permit jury trials. We're going to have jury trials in Texas. That's constitutionally guaranteed, so we're going to continue with jury trials, provided that, you know, the business dispute didn't otherwise waive the right to a jury trial or other things.

Chuck Kraus: But the potential for jury trials will exist in the Texas business court system, where it doesn't exist in the Delaware Chancery Court. Yeah, that's interesting. And thinking about these judges, so appointed, when I think of Texas judges, I think of them running for election, talk about that decision for the business court to have them appointed and how that'll be different. Yeah, so part of it is to...

Brian Elliott: Because the qualification for a Texas business court judge is that you have to have at least 10 years of experience and that that experience has to be in either as a practicing lawyer in complex business matters or as a former jurist. And the idea is to set the bar high and to make sure we get a high quality of judges at the Texas business court is part of the reason why they're being appointed. We'll have to see how that plays out because the Texas Constitution requires that judges be elected. So we'll see if that gets challenged and we'll report back.

Chuck Kraus: That's interesting. Do you think that ultimately, if this business court gets once it gets up and running, do you think there'll be more conversation about competition sort of between Texas business courts and Delaware courts or just generally more choice of jurisdiction discussions? Yeah, I think those discussions are already happening, right? But it's sort of the, you know, having an enhanced business court option in the state of Texas seems to me like table stakes these days, right?

Brian Elliott: If you want to, if the state of Texas wants to continue to attract headquarters and Fortune 500 companies to move into the state and create jobs and things like that, that's great. We can continue to do that. But then it's another step to have them, you know, localize their incorporation in the state of Texas. And we see that happening more and more with some high profile examples recently re-domiciling in Texas.

Chuck Kraus: And I think that in order to continue that trend and to have the state of Texas, you know, be a legitimate, you know, alternate choice to Delaware, we just have to have this business system. Got it. How do you think the Texas business courts will interact with the rest of the judicial system in Texas? Yeah, I mean, you want to start off with there's overlapping jurisdiction, right?

Brian Elliott: So you've got a system where you have to qualify your case to get in the texas business court but you might have companion claims that don't qualify so there could be strategic reasons to still bring a case that would otherwise be a texas business court qualifying case into the the regular system and we're gonna have to see how people you know make the decisions on where to bring cases it's a complex matter right and it also it gives you not only access to different judges and different kinds of judges but a different path to get to the texas supreme court so it's a wait and see uh as it folds out interesting any prognostication about strategy and taking a complex case that's sort of half in the court and half half not and and how that could be to your advantage yeah well i think they you know from from a you also have to look at geography i think is part of it right you know the these business courts are only in the five major cities right now right and that there could be a reason to uh to bring your case in a smaller venue right so if you have the opportunity to bring a case in midland or you know another place that doesn't have a business court that could be to your advantage if you're looking for a jury that's going to be you know comprised of folks in that area so i think these are it's going to continue this is one of the the the areas that we're going to watch closely as it unfolds uh to see how how people take advantage of the the different seats uh that they can have uh access to yeah that's interesting you know we're recording this uh today just outside of fort worth in the city of granbury lots of small business here how should small businesses think about the business courts i mean there's not there's not a designation for for more rural areas fort worth would be the closest how should small businesses here or across the state think about the business courts yeah i think i think that over time what what it's gonna the business court system in texas is going to benefit all businesses of every size right so even if you don't have the the big five million ten million dollar disputes you still have a body of case law that's being developed that is going to give um you know guidance to how you run your business uh so i think that's the that's a going to be a crucial um you know add uh advantage for small businesses throughout the state whether or not they have access to these five courts today or or even the jurisdictional limits going forward i guess that's right are there other examples of this when we look you know we talked about delaware are there other examples of states standing up uh separate business courts either successfully or unsuccessfully and you know how long have they been at it and what what lessons can we learn from all of that yeah sure i i think i mentioned before there you know more than 20 specialized business courts throughout the the country um a couple that i've practiced in including uh georgia and nevada have uh business courts um and they each those two states did a little bit differently uh nevada's business court emphasizes speed um speed to decision and they try to it's a rocket docket get things through very quickly um through very quickly um through very quickly um The criticism has been that it ends up with perhaps not well thought out decisions that are overturned on appeal quite often. So that's a criticism of that court. In Georgia, when they stood up their business court, they used a feedback from the business community and tried to design a system that would work well for Georgia. Included in that are some things like more advanced case management techniques, including monthly or at least regular check-ins with status conferences with the court to keep things on track and emphasizing resolution.

Chuck Kraus: And that seems to have worked quite well for Georgia. I think the examples across the country, the best examples are the ones that take advantage of the business climate in their area and try to develop a judicial system that matches what the needs of that state are. And do you see a bar developing similar to other states like Delaware where you have specialized trial attorneys that kind of specialize in that? Or do you think it'll be more general based on what you've seen in other states where you're a civil litigator, you're sometimes in business court, you're sometimes in other courts?

Brian Elliott: How do you see that playing out? I think there will be specializations. I think there already are. If you look at industry, we've got lawyers who specialize, for instance, in the energy industry.

Chuck Kraus: And that's going to be a big part of the Texas business courts is going to be resolving disputes with energy companies. I think that's going to continue. But I think certainly there'll be specialists who hold themselves out in that regard. All right.

Brian Elliott: Before we wrap up, are there any recent business court or litigation updates we should know about? Yeah. So it's brand new still, right? We've only had the business courts open for a couple of weeks.

Chuck Kraus: Things are progressing slowly. There aren't, you know, we don't have this huge volume of cases that meet these jurisdictional thresholds right away. Probably a couple of dozen cases have been filed so far. From the ones that I looked at, some of them are, you know, questionable whether or not they meet the jurisdiction.

Brian Elliott: So, you know, we'll see people are testing, like, what is going to be accepted and what's not going to be accepted in the business court. The one development, I think, is that the Texas Supreme Court recently looked at the constitutional challenge to the appeals section of the business court and gave that the green light and affirmed that the 15th Court of Appeals can continue. We expect that there will be additional challenges to things like, as we spoke before, about judicial appointments and, you know, the two-year term and things of that nature. So we'll have to see how that comes out.

Chuck Kraus: I think the other things that we're looking for, we don't have complete answers to, are exactly where these courts are. are going to practice. There aren't buildings dedicated to these new courts. So currently they're using the existing infrastructure of the other courts.

Brian Elliott: And we know that that was a little dicey when it came, as it came down to the wire on September 1st, exactly what the address of the court was going to be and where should we show up and things of that nature. But those are all things that are getting worked out and they'll be worked out in the coming months as well. Finer details, like where is this court? Where are we going to meet?

Chuck Kraus: Just details. Got it. So we're at the beginning stages, but it sounds like there's much more to come. It will be interesting to see how things evolve.

Brian Elliott: Yeah, it's an exciting time for Texas. This is a positive development for Texas courts and Texas businesses. And I think that we'll be back with more as we get more updates. Awesome.

Chuck Kraus: I can't wait to discuss the first decision. Yeah, let's do it. Thanks, Brian. For more insights and updates, visit www.scalefirm.com or follow us on LinkedIn.

Brian Elliott: .