Business Courts Deep Dive: Six Months In, Plus the Tan Parker Bills and Delaware's SB 21 Reaction

Transcript

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Brian Elliott: Y'all Street Law is here to help you thrive in the Lone Star State. How are you doing, Chuck? I'm doing great. It's been a flurry of activity since we last spoke, Brian.

Chuck Kraus: I think there's just so much changing constantly. It's been a lot to keep up with, and we're going to try, I think, in this episode to just keep our clients and listeners as up-to-date as possible. But the facts keep changing constantly, whether it's developments regarding tariffs, which I'm sure we're going to talk about, to legislative developments in Texas or the state of Delaware and everything that flows from that to updates on the business courts and what's going on there. Yeah, this doesn't slow down at all.

Brian Elliott: 2025 is shaping up to be quite the year, so let's get into it. Excellent. Why don't we start with something we have maybe a little bit of a better handle on that is moving at a slower pace. Let's talk about the business courts.

Chuck Kraus: I think Y'all Street Episode 1 was about the coming business courts. They're now launched. There's even been a few decisions. Let's just update listeners on what's going on there.

Brian Elliott: Yeah, no, glad to. Texas Business Courts, of course, were created or launched in September of 2024, and so we're just about six months into that, and things are going fairly well. A couple of key decisions came out in December and January related to jurisdiction, and this is one of the issues that was a little bit unclear at the launch. It was, you know, which cases, of course, would be eligible to be filed in the business court or, more importantly, removed.

Chuck Kraus: If they had already been filed, could you remove it to the business court? And while most commentators early on understood the statute to say only cases that were started after filed, initially filed after September 1st, 2024 would be eligible. A number of folks decided to go ahead and remove preexisting cases to the business court anyway. It tested the statute.

Brian Elliott: We talked all about jurisdiction, and three opinions came out that were fairly clear and consistent in this regard and said, no, if the case preexisted, it filed prior to September of 2024, it doesn't get removed. And even in one case, which I thought was great, the parties had made an agreement together by a Rule 11 agreement. They had agreed that they would try to remove it to the business court, and if jurisdiction was denied, they would dismiss the existing case and refile it in the business court. And despite their arguments of judicial efficiency and procedure and things like that, the court said, no, we're not going to let you do it that way.

Chuck Kraus: That's interesting. I mean, in essence, they're saying, look, let us come in this way. If not, we'll see you next week. We're going to come around the front door, but either way, we'll be back.

Brian Elliott: Interesting. So in the other examples, not where there was a Rule 11 agreement, but in the removal examples, did you see trends on whether it was the plaintiff or the defendant removing? No, I think it's the, no, not really a trend. Frankly, there aren't enough cases, I think, right now to spot a trend, but it's the party that feels like they would be most benefited by the business court rules.

Chuck Kraus: And that could be either party, of course. Yeah, whoever perceives to have the benefit, I suppose. Yeah, it's interesting. And what other developments are going on, either with cases or with, I know there's still some talk about, you know, supplementary legislation dealing with, for example, the terms of the judges.

Brian Elliott: I know that's, you know, that we'll talk about that later, perhaps in some of the other conversations, but any movement there? Yeah, I think what everybody understood as these courts came online is that there were a lot of details that would need to be worked out, right? So some of those details are being worked out. Some of them are going to be just purely administrative, but we have additional legislative initiatives in order to fill some gaps in what was going on, right?

Chuck Kraus: So one of the things we've got is a proposal to lower the threshold for the qualified transaction jurisdictional hurdle, right? From what is now a controversy in excess of $10 million down to a controversy in excess of $5 million. And that's the idea there is to give broader access. to the business courts and to acknowledge that there are complex legal business law questions that are often below that $10 million threshold that should be in the business courts.

Brian Elliott: So that's in the 2025 legislative session. And I think the one other thing that I wanted to bring up is the idea that as clients are considering whether or not to use the business court, whether to file just in your typical district court or to go to the business court, one thing that we didn't talk about in episode one is the filing fees. And there's a $2,500 filing fee to get in, which contrasts with a typical $300 filing fee, which may not be a big deal if you're looking at a $10 million case, but fees add up. And in addition, there's a motion fee in the business court.

Chuck Kraus: So every motion that you file has a $50 fee associated with it. And that's to compensate for the extra burden of processing those motions and having to write an opinion and things like that. When you look at it that way, it almost seems like a bargain, right? But it is a consideration when you've got fees that are to be considered.

Brian Elliott: And how do you think, how do you explain the reason for those sort of per motion fees? Do you think that's intended to motivate parties to file fewer motions, to consolidate things? Or is it just an ignored cost of business? And how does it compare to other jurisdictions?

Chuck Kraus: Yeah, I think that you really hear it's the idea is that it's the judges, because they have a higher burden on writing written opinions, right? They're going to use staff counsel more, right? So it's going to be a heavier use of resources. And I think it's an offset for that heavier use of resources.

Brian Elliott: I doubt that a $50 fee would dissuade anybody from filing the motions that they want to file. But so I think it's just purely an offset for the cost. Yeah, yeah. Interesting.

Chuck Kraus: And any movement on the tenure of judges that are appointed to the business courts? I know when we when we spoke in episode one, it was a two year appointment. And juxtaposed against that was the reality that most complex business suits are going to last more than two years. And so you were you were in a bit of a difficult spot, not knowing if the judge overseeing your case was even necessarily going to be around uh to see it through and and then all the perils that would come along with with that you know reappointment in the middle yeah let's say it it you know the the theory was you know get it started let's get some judges appointed and and kick the courts off um in the 2025 legislative session there's a proposal to extend the term of the judges from two years to six years um which you know is probably better but you know you may you may get to judge us at the end of their six-year term so you'd be in the same position anyway but at least it's more in line with a uh you know what we would hope would be a an average tenure of a judge on a sophisticated bench that's dealing with complex issues yeah some of the some of the commentary i've seen coming out of delaware that's you know in part contrasting i think uh some of this is is pointing out the benefit that the the appointments in delaware are 12 years um you know not not not too uh so at least it's a live issue that that folks are at least talking about if not considering well i think this is what we're going to see across the board right is is as the conversation delaware versus texas you know continues i think texas is going to be reactive to that and and make strategic changes to to address some of the some of the areas that are seen as as you know delaware positive pro delaware choices right and uh and that's smart um it's a it's a way to you know continue to attract business to the state of texas and um i think that uh you know hopefully these two initiatives get through the legislative session here and we continue on that path yeah well you're certainly seeing it on both sides you're also seeing as we'll talk about in a little bit you know some of the legislative proposals coming out of delaware that appear to be quite reactive and responsive to um you know what what's perceived to be um the legislature in delaware looking at a potential eroding tax base from from companies you know that may look to to read omicile out um and the impact of that on on the on the tax base in delaware and you know what came out of that is is some some legislation that you know came about in a in an unusual way normally there's a there's a fairly standard uh you know group that proposes all the changes to the dgcl and this time the legislature took it up directly and kind of bypassed that group and it has a lot of folks scratching their heads on why why why this legislation why so quickly um but i think you know as we'll talk about they're they're potentially in a rush to get something done before proxy season uh to try and quell the uh a potential exodus uh here as we're coming into to march april may and proxy season yeah it's going to be interesting i think uh we'll keep keep our eye on that what about uh chuck what's the deal with the texas stock exchange we talked about the Texas Stock Exchange and the creation of the Texas Stock Exchange, how that's going to have an impact on the state of Texas.

Brian Elliott: What new, if anything, is going on on that front? Yeah, what's happened since we first spoke about it is the Texas Stock Exchange, after a bit of a delay, did finally formally apply to the SEC. They filed a form, Form 1, I believe it's called, with the SEC. That has not yet been made public.

Chuck Kraus: So we still can't see the details of what's in their proposed listing standards. And I think people are still waiting for that to see how they will try and win business as a competitive exchange. They did say early on in a press release that their listing standards would be higher than existing NYSE or NASDAQ listing standards. And in fact, went so far as to say some percentage of currently listed companies wouldn't even qualify.

Brian Elliott: Under the Texas Stock Exchange standards. So we're still waiting to see that. What is interesting is we have seen the incumbent exchanges, particularly New York Stock Exchange, made an announcement that they were reincorporating NYSE Chicago and rebranding it as NYSE Texas. So a proposal to move the NYSE trading currently happens in Chicago to Texas.

Chuck Kraus: So that's, I think, an acknowledgement that Texas is a financial hub, that there is a center of activity here, and that it's good to have your exchanges close to that trading. So that's a development that's just happened very recently. That's interesting. Do we hear any timing on that?

Brian Elliott: Is that already underway? Yeah. In process, because it's an existing exchange, I think the move process is more streamlined. They already have their regulatory approvals to operate.

Chuck Kraus: It's just a matter of relocating. And so that can happen more quickly. But, you know, I guess wanting to be part of the conversation to the extent there's conversations about trading platforms in Dallas or in Texas more broadly, NYSE wanting to be part of that and recognizing that there is a market here. So I think that's a good sign for business in Texas.

Brian Elliott: Yeah, it's a reflection of sort of the momentum that we've seen over the last couple of years, and the exchanges are not immune to the magnet that Texas has become. Yeah, that's right. And I think, you know, the other thing that we can talk about a bit, maybe after the break, is some of the legislative proposals that are coming out of the Texas legislature, supporting corporate governance initiatives, updating the Texas Business Corporations Act to prepare for. um the the launch of the texas stock exchange so why don't we pick those up after the break yeah sounds great hey hey son how's the all right brian what sorry well we're we're back from the break apparently ready to go so uh i think what we thought we'd talk about now is uh some of the legislative updates in the 2025 legislative session uh that had to do with you know expanding the business environment in texas and and what kind of impact that's going to have on our clients um what do you see interesting this legislative session that you want to talk about yeah there's a couple of different proposals that have come forward there's a series of bills by senator tan parker uh that we should talk about first and then there's a more recent proposal uh that we can also talk about um from senator hughes so on february 3rd uh senator parker proposed a package of three bills um in the press release it said they were um to encourage the development of capital markets in texas and further strengthen the texas economy so clearly lining up to to align with uh the texas stock exchange and all the developments there um and really in in in all of the bills um sort of modernizations of the texas business organization code in the first one uh senate bill 1056 in essence what it does is establishes in the statute a presumption of good faith for directors and officers of domestic corporations certain domestic corporations and this is this is really interesting so it's a it's a built-in statutory presumption of good faith but who it applies to are corporations formed under the laws of texas that have a class of registered equity securities so you're a public company under the 34 act you are formed under the laws of texas and you are listed on a national securities exchange and either have your principal office in texas or are listed on a quote texas based exchange well there you go right so it's it's designed specifically uh for companies that um that either have their head office in texas a principal office in texas or that are listed on the coming uh texas stock exchange so this would not apply to private companies for example which you know it's is kind of interesting um from a governance perspective to have different different presumptions of of fiduciary duties depending on whether you're a public or a private company or you're you're you're you're you're you're you're you're you're you're you're you're different presumptions available.

Chuck Kraus: But basically what it establishes that is that for those companies that qualify, unless otherwise stated in the company's certificate of incorporation, so you can contract out of this via the charter, directors and officers are presumed to act in good faith on an informed basis and with the corporation's best interests. So often in securities litigation or in corporate litigation involving companies, the first allegation is a breach of fiduciary duty. And then the litigators will then, one of the sides will have to prove their case, either prove that they did act in accordance with those duties or that they did not. And what this is saying is that the initial burden will be on the plaintiff to fight a presumption that the directors did act in good faith.

Brian Elliott: And, you know, so what's interesting about it is we did a bit of research on this and, you know, Texas, this is not a new concept. This already exists in some jurisdictions. And so in a lot of ways, it's moving towards what is becoming a trend to presume good faith on behalf of directors. So I think a good move and one that will be supportive.

Chuck Kraus: And if you're a, you know, if you're a public company domiciled in another jurisdiction, I think you just, you add this to the column of potential positives on a, on a move, I guess, if, if you're, if you're a shareholder, maybe you don't, maybe you don't want this presumption. So we'll, we'll, we'll see how, how it gets debated. Well, important question. How does this compare with the current state in, in Delaware?

Brian Elliott: What does, where does the balance shift on that? Well, it's, so it's interesting. I'm going to defer, I'm going to defer on your question and answer it, answer it this way. The answer in the state of Delaware is not necessarily found in, in the statute, it's found in the case law.

Chuck Kraus: And I think one of the, one of the overarching themes that you're going to hear when, you know, as, as the compare and contrast goes on between Texas and Delaware, and even when we talk about SB 21 in Delaware is that, you know, Delaware corporate law is not just the statute, right? In fact, the statute, if you just read the statute, you don't have an understanding of Delaware corporate law. Delaware corporate law has developed historically. out of common law, um, judicial interpretations, right?

Brian Elliott: And you really need to be familiar with those cases in order to, uh, to understand. So there is a concept in, in, in Delaware law called the business judgment rule, right? And so if you, unless you are disqualified from, from the business judgment rule, then there is a presumption, uh, of, uh, that, that directors have acted in accordance with, you know, their fiduciary duties, but where you can get outside of the business judgment rule situations where there's, you know, a conflicted controlling transaction, for example, or a potential, uh, change of control transaction where there's different consideration being paid. So, um, this in Texas, uh, really codifies in, in the statute, uh, a presumption of good faith uh, right in the, the words of the statute, which is not something that, that you would have necessarily in, in the state of Delaware.

Chuck Kraus: Yeah, that's, um, that's where we have to use as a starting point is our statutes because we don't have a well-developed body of business case law yet, but that's coming. Um, any, any, uh, any prognostication on a chance of success? Yeah, I think that, I think the chance of success is high. Um, I think one of the reasons the chance of success is high is that this is not, um, sort of really unique legislation.

Brian Elliott: This does exist in, in a number of other jurisdictions. So, uh, I think the chances of, of passing are quite high. Right. I think, you know, I think it is an interesting debate and we're still looking into it as to, you know, other jurisdictions, whether they have this apply only to public companies or whether it, you know, whether it should apply more broadly.

Chuck Kraus: Um, you know, when you deal with non-corporate entities like LLCs, you can completely basically, you know, contract out of your fiduciary duties. Um, so we are talking about a narrow subset that is only corporations and then only corporations that are publicly traded. Um, so interesting development do think it, it, it like has a high likelihood of passing. Great.

Brian Elliott: All right. Well, we'll follow that one. Um, what else are, is on the horizon this legislative session in Texas? Yeah, the next interesting one is, is another of the, the bills by Senator Parker, uh, Senate bill 1057.

Chuck Kraus: And so it's a bill that would address the requirement to submit shareholder proposals for Texas entities. So again, the bill applies to corporations that are formed under the law of Texas that have a class of securities registered under the 34 act. So it's a, a Texas corporation publicly listed, uh, sorry, registered with the sec, um, is list. on a national stock exchange either has its principal office in texas or are listed on a texas-based exchange.

Brian Elliott: So again, same requirements as the prior bill, particularly for Texas stock exchange listed companies. And basically what it requires is particular requirements needed by a shareholder or group of shareholders to submit proposals for approval at a shareholder meeting. So it would include holding no less than the lesser of 1 million in market value of the company's securities or 3% of the voting securities. So the lesser of a million dollars worth or 3% of the total voting securities.

Chuck Kraus: And you have to maintain that ownership for at least six months. So no short-term shareholding, not just buying, for example, you've seen this in some cases, right? Where you buy one share in order to make a shareholder proposal. And then you've sold the share by the time, you know, the meeting has come about.

Brian Elliott: So you kind of fabricate your ownership. You don't really want any economic exposure to the company, but you have strong views that you think the board should consider, put in its proxy, et cetera. At last year's AGM, ExxonMobil came out swinging hard at this, very hard, and wrote to the SEC and said, the SEC needs to do something about this because these types of proposals are literally wasting millions of dollars and taking the board's focus off very important matters to have to deal with, you know, proposals by people who aren't even invested in the company. So I think this is a, live issue.

Chuck Kraus: And, and again, I, I think this one has a high likelihood of passing. You know, there's already a movement afoot to, to give companies more power under federal securities laws to exclude certain matters from, from having to be addressed in, in, in proxies and basically giving access to a company's proxy to, to an activist shareholder, a shareholder that wants to make a proposal. So it's like an effort to, to streamline governance and, uh, to, to simplify processes, to, uh, to get out, get, get, you know, to clear some, some room for companies to operate without, um, without these activist shareholders, uh, taking control and bogging down the system. Yeah.

Brian Elliott: That's exactly right. That's exactly right. So I think that one, again, has a high likelihood of passage. The other two bills of the four in Senator Parker's, I don't think we'll go into as much detail.

Chuck Kraus: There was a proposal to amend the Texas Tax Code to add some subsections allowing certain entities to exclude payments from their total revenue calculations. Those businesses that are exchange members and are conducting securities transactions. So, again, I think just laying some of the groundwork for what will be the Texas Stock Exchange and and all the business that's going to come on from there. So it's rolling out the red carpet saying, look, we're we're going to be putting in this new tech stock exchange.

Brian Elliott: We're making the rule changes to make it more attractive for you to be here. This is a come to Texas package of bills. Yeah, that's that's exactly right. The other the other bill is is an amendment.

Chuck Kraus: It's a it's a proposed joint resolution to amend Article 8 of the Texas Constitution to add a new section, Section 30, that would prohibit the enactment of a law imposing an occupation tax on registered securities market operators or taxes on certain securities transactions conducted by those market operators. So, again, addressing sort of laying the groundwork for Texas really being a home for security. So the all street that is is the name of this podcast and is is on everybody's mind. So, you know, I think I think you're just seeing you're seeing informed legislators who who understand the benefit that that bringing capital markets to Texas will have and they're they're wanting to lay the groundwork and put down some incentives for that to happen.

Brian Elliott: So that's the that's the package of of tan parker bills. Well, we'll see how they how they progress through the legislature. I think that all of these are, you know, sound like positive steps in the right direction. Certainly, we've had, you know, the the large business migration to Texas, even without all of this.

Chuck Kraus: Right. And once once there's some of this gets enacted, you you start attracting capital markets activities are attracting the stock exchange activity. It's it's going to be a whole new ballgame. So it's a it's an exciting time to to be be part of the Texas economy.

Brian Elliott: Yeah, that's right. And there's another bill that was just proposed recently. Why don't we take another break and we can come back and talk about that in a minute? Perfect.

Chuck Kraus: Great. Chuck, we're not done with a busy 2025 legislative session yet. There's another. All right.

Brian Elliott: Back from the break. Chuck, we're not done yet with a busy 2025 Texas legislative session dealing with changes to the business code and other things. One thing we should talk about, I think, is Texas Senate Bill 29, which is proposed by Senator Hughes. And that has a few interesting portions to it.

Chuck Kraus: It's sort of an omnibus bill looking at a bunch of different things. Why don't you give us your comments on that? Yeah, this one was really interesting to see because it is touching on a number of issues that corporate clients need to be aware of when they're thinking about where to incorporate and just generally how they interact with their constituents. So a couple of things in this bill.

Brian Elliott: So number one, these are all amendments to the Texas Business Organization Code. It would add a provision in section 1.056 that specifies that the plain meaning of the Texas Business Organization Code prevails over any out-of-state law or court ruling. So essentially saying that the text of the TBOC governs, you read the plain meaning of it. You don't import definitions from other jurisdictions, not even the first state.

Chuck Kraus: You just follow what the statute says. So that's number one. It says managerial officials may consider other states' practices, but they are not required to follow them. And a decision not to does not breach Texas law or fiduciary duties.

Brian Elliott: This is a codification of the phrase, don't California my Texas. That's true. Yeah, I think that's exactly right. So that's number one.

Chuck Kraus: Number two is embodying a forum selection for what are referred to as internal entity claims. So these would be amendments to section 2.115 and 2.116. So it would allow domestic entities, so Texas entities, to include a forum selection clause in their governing documents, designating that only Texas courts as the exclusive forum for disputes that are considered internal entity claims. So that's really interesting.

Brian Elliott: Basically, would explicitly, and then in addition, would explicitly permit a waiver of the right to a jury trial for those internal claims, if stated in the governing documents. So think bylaws, think operating agreement, and any person who joins or acquires shares after the provision is in place. is deemed to have consented to the waiver. So two very powerful things that again, so you'd know if you're investing in a Texas entity that has a provision that says only Texas courts can adjudicate, maybe even only Texas business courts can adjudicate, you know where your dispute is going to be resolved and you know whether or not that dispute is going to be subject to a trial by jury.

Chuck Kraus: One of the interesting things about the Texas business courts is that they do permit trial by jury. So this is a way to say, all right, if you're one of those, you know, corporations who would prefer to not be subject to a jury, you can opt out of it in your governing documents. Seems like it's going to be a drafting exercise for a lot of business lawyers if this gets passed to review their clients' organizational documents and see where improvements can be made. Yeah, I think that's right.

Brian Elliott: If this passes, you know, I think, I think you would, you would be well served to notify your clients that this has, that this has passed and that there's an ability to, to make a proposal to amend, you know, either, either charter document or, or bylaws, which, you know, in some cases could be amended just by the board to, to make provision for this. And then anyone who acquires shares shares after that's in place would be deemed to have consented to the waiver of the jury trial. So the next item deals with shareholder inspection rights. So this would clarify that shareholder demands for inspection do not automatically include emails, text messages, social media posts, et cetera, unless a specific communication affects a corporate action.

Chuck Kraus: So no more fish, fishing expeditions into, you know, all the email communications, all the text messages, uh, between, you know, corporate directors or officers. Um, and then for certain publicly traded corporations, if the shareholder demanding the records is already involved or expects to be involved in a derivative suit or civil lawsuit against the corporation, the corporation, the corporation may refuse to comply, um, for, to, to a demand under certain specified conditions. So big picture, putting, putting some more rules in place around the extent of, uh, demands, uh, for corporate records that can be, uh, that can be served on a Texas corporation in, in, in Delaware law, this is referred to as a, as a section 220 demand, a demand for books and records. And what's interesting, there's a bit of competition going on here.

Brian Elliott: We'll talk about it in a little bit, but Delaware has just made some similar proposed amendments to its, um, books and records. legislation that would similarly curtail what is required to respond to a Section 220 demand. Everybody knows it includes board minutes, but all the plaintiffs' lawyers would say, well, there's nothing in the board minutes. What I really want is the texts that were being sent during the board meeting or before the board meeting or after the board meeting, because that's going to tell me what people really thought, not the formal board minutes.

Chuck Kraus: So very interesting. I think this is one of those issues where you're starting to see, you know, a bit of both jurisdictions addressing an issue that needs to be addressed and sort of racing to find the best solution for the benefit of their corporations. Yeah. And then when you layer on that, the advancements in technology and decentralized corporations and, you know, the ability of a board to meet virtually at a moment's notice and things like that, this really does put a limit on what's going to be considered a corporate record, right?

Brian Elliott: A discoverable corporate record. So that'll be interesting. Yeah, exactly. Um, to preauthorize committees of independent and disinterested directors to review or approve transactions with controlling shareholders, directors, or officers.

Chuck Kraus: So again, what's interesting is it's in legislation setting out the framework that can be used to, to approve a, um, you know, a controlling shareholder or a conflicted, uh, transaction. And of course, this is, this is the- The topic of the day in light of some of the Tornetta v. Musk findings, some of the facts in that case where the decision that's now on appeal basically found that because of a finding of control and because of the Delaware law on point, there needed to be both an independent board or committee ratification and a fully informed shareholder ratification, not just one or the other, to cleanse the transaction. And in that case, the court found that it was not satisfied because they said even if the shareholders approved it, they weren't fully informed because there were particular facts that weren't disclosed.

Brian Elliott: So this is laying out in statute, not in case law, but in the actual statute, a path to follow to satisfy the approval requirements. Yeah, and to the point you made before, Chuck, this is a, I think it's an effort to distinguish Texas in terms of providing clarity for some of these rules that we don't need to know all of the case law because we can see it in the statute. Of course, there's going to be interpretations of the statute, but it's less subjective and more black and white if we've got a statutory basis for the rule. Yeah, that's exactly right.

Chuck Kraus: The next one is sort of similar to the proposal that we talked about earlier by Senator Parker. It's a presumption for directors and officers of good faith. It's worded a little bit differently than what Senator Parker had proposed. But again, for publicly traded or opt in corporations, okay, so it's expanded the potential scope directors and officers are presumed to act.

Brian Elliott: And this is where it goes into more detail in good faith on an informed basis in furtherance of the corporation's interest and in obedience to law and the governing documents. So it goes into more detail than Senator Parker's bill and just saying presume good faith that goes into these other elements and says that the directors are presumed to act in all of those things. And that shareholders seeking to sue have to rebut those presumptions and must prove fraud, intentional misconduct. An act that didn't have authority and act outside authority or a knowing violation of law.

Chuck Kraus: So really setting the hurdle high to saying directors will be entitled to this presumption unless you... rebut them to prove, again, fraud, intentional misconduct, an ultra-virus act, or a knowing violation of law. Yeah, and then, you know, put that side by side with the, you know, narrow definition of what a corporate record is that a shareholder would have access to. You know, it makes proving those a little bit more difficult, but that's obviously the intention behind this, Bill.

Brian Elliott: Yeah, I think that's right. And, you know, the thing I like about this legislation is it would apply to non-public companies that opt into it. I had a little bit of a hard time in my mind squaring why a presumption of good faith did only apply to a public company. Like, there are some very large, very sophisticated private companies to which this, I think, should also apply.

Chuck Kraus: I don't know why you would want different governance standards necessarily for a company, just depending on whether its securities are broadly distributed or not. And so this would allow a private company to include in its governing documents a statement that affirmatively elects in to be governed by this section for the presumption of good faith. So not mandatory, but you can opt into it even if you're a private company. Another point on the checklist for redrafting organization documents.

Brian Elliott: Yeah, it's going to be a busy year coming up. And then the next one that we should talk about is some amendments regarding derivative lawsuit thresholds and procedures. So our colleagues that specialize in derivative suits and litigation like that will be keenly interested. So this one would state that a corporation with publicly traded shares or that opts in may impose an ownership threshold up to three percent of outstanding shares for a shareholder to bring a derivative suit.

Chuck Kraus: And it adds a process for the corporation to request an early judicial review of whether directors handling a derivative demand are independent and disinterested. There's often a lot of a lot of, you know, initial wrangling about that. And it clarifies that a mere addition, a mere additional or amended disclosure to shareholders in response to a lawsuit does not qualify as a substantial benefit justifying attorney's fees in a derivative proceeding. So it's looking at prior cases where we've had, you know, we've had these sorts of situations and maybe there was, you know, we'll, we'll make, we'll make an amended disclosure in light of some derivative suit that's alleged.

Brian Elliott: And, and the lawyers bringing it say, well, we're entitled to, you made an amendment, that's an admission, you know, that we were right. Even if it's only a clarifying amendment, we want, we want attorney's fees. as a result. So I think, again, addressing some of the perceived abuses in derivative suit proceedings and giving more deference to boards, and I think importantly, requiring that there be that skin in the game for those that want to bring these suits.

Chuck Kraus: Yeah, raising the floor 3%, I mean, that's still a fairly low hurdle to get over. Yeah, that's exactly right. So that's an exciting bill that we also need to watch and see how it progresses. Again, there's a few things in there relating to the Texas Stock Exchange, but then there's just some general things for corporations, even private, that may want to incorporate in Texas or for existing Texas corporations that may want to opt into these if and when they're passed.

Brian Elliott: Yeah, yeah. I think it's a, this is a, you know, a sign of what's the mood in the Texas economy and Texas business law circles right now, which is let's get serious about, you know, modernizing, addressing the issues that are out there. Let's, let's take a, take a shot at, at making Texas, you know, really an accommodating place to come and do business. I think that's exactly right.

Chuck Kraus: And it's a good transition, Brian, to the last topic we wanted to touch on. You know, while, while none of, neither of us are Delaware law experts, we represent a lot of companies that are Delaware incorporated. I think every corporate lawyer has a, you know, has a working familiarity with, with Delaware law. And everybody's talking about these recent proposals that we alluded to at the top of the podcast that came by way of, of SB 21 in Delaware.

Brian Elliott: And I'm not going to go through the details of it. It, it's, they're, they're very monumental changes, not only in how they would change Delaware law, but the manner in which they were proposed. They didn't go through the typical proposal process. The legislator, legislature took this up on their own.

Chuck Kraus: I think the, the, the interesting thing to talk about on this podcast is the fact that it's a real shift among Delaware practitioners or among in Delaware law to really codify a clear path for something to be approved in the legislation itself. As we were saying at the outset, Delaware law is, is the DGCL, but it's also all the case law that interprets it. And, you know, there's good reason for that, you know, that every, every decision has to be made based on particular facts and circumstances. That's great.

Brian Elliott: But I think what, what some companies are finding is that, that. Lack of clarity is leading in some cases to outcomes that no one expected. And so I think, you know, the consideration is, should we approach it differently? Should we just make the statute more explicit, make the rules easier to understand?

Chuck Kraus: There's still going to be case law interpreting it, of course. But this is a bit of a seismic change in the way at least conflicted controller transactions would be handled in Delaware. Because based on this proposal, there would be a very clear path to having them approved that seems to be much more clear than what is in existence today. Well, and this is obviously a direct reaction to Tornado v.

Brian Elliott: Musk, right? It's squarely on point, and it's the Delaware legislature taking notice of the seismic shift that's going on and reacting to it. Yeah, and one of the great examples of that is it would say, it has a bright line that says, if you are a shareholder that holds less than one third of the outstanding stock, you're deemed not to control. So that's really interesting.

Chuck Kraus: There's going to be a fight over it because the Delaware legislature recently also specifically authorized shareholder agreements to deal with some of these governance matters. And so you can see a set of facts where you hold less than one third, but you have a bunch of control rights and a shareholder agreement. Right. And you can kind of do it, you know, an end around there.

Brian Elliott: So, you know, as with anything, you know, when the rules are written down, then you can design, you know, you can creatively design your ways around them. But I think the interesting commentary for purposes of the Yall Street podcast and in light of these Delaware proposals is you're really seeing, I think, a shift in approach from the Delaware legislature to write what it's intending to be some very clear guidelines and rules to follow. So in the context of conflicted controller transactions, I think, trying to encourage other companies that haven't left that may be considering it in light of what's perceived to be, you know, uncertainty about how transactions will be dealt with in the courts. There's now laid out a clear path for these things to try and to try and give confidence that what may have happened before will not will not happen again.

Chuck Kraus: Well, it's. It's good to see the effort, right? So good for them for stepping up. Yeah.

Brian Elliott: So we're continuing to have to monitor this. There's constant posts about it, interpretation. There's even now, as we're recording this, I know there were some amendments proposed just in the last 48 hours that people are still trying to interpret. So by the time we release this podcast, there'll be another proposal that we're going to come back and comment on.

Chuck Kraus: It's almost as many changes as following the Corporate Transparency Act. Do you have a bead on what's happening there? You want to give an update? You know, I think that, look, this is the act that just won't stop, right?

Brian Elliott: You wait five minutes and something else will happen. I think the latest on the Corporate Transparency Act, we're on hold once again. Perhaps indefinitely this time, but we'll see, right? And it's a, you know, they're re-evaluating the beneficial ownership information requirements and which companies it'll apply to.

Chuck Kraus: And it's a, we're, we are currently on the off again pendulum swing. But not, but not because of a court this time, which is interesting, right? This is, this is not a result of, of an injunction, which we had throughout 2024. This is as a result of the Treasury Department, the new Trump administration, Treasury Department saying, hold on, we're revisiting the cost benefit of all of this.

Brian Elliott: We're suspending enforcement right now, and there will be no penalties for failure to file. And then they made a statement that, that they're intending to propose a revision to the legislation that appeared to only focus on foreign, foreign companies. So if that's the case, you know, if you use the existing legislative sort of hook, it would be foreign companies that have qualified to do business in the United States, not domestic entities at all. So, yeah, I mean, like, you know, ostensibly the reason for, for this, uh, from the beginning was to crack down on, on fraud and, um, and, uh, and, and, and, but what they ended up doing is they cast a very, very wide net, perhaps the widest net one could possibly imagine casting.

Chuck Kraus: Let's, let's, let's include just about every small business across the country, right? And, uh, in order to weed out potentially, um, you know, some bad actors, right? And it's in certain, it certainly doesn't seem to be, didn't seem to be. very targeted approach.

Brian Elliott: And I hope that's where they're heading now is to develop a little more rational, targeted approach to how they would do it. It's a valiant objective, but a big burden to small business. Well, what was interesting about it is, of course, the BOI filing was requiring more information to be given to the federal government about the entity than even the state under which the entity was created. So if you create an entity, you don't necessarily have to file with the state who all the major shareholders are of that entity, yet you were having to, for this reason, give all of this information to the government.

Chuck Kraus: So we will see, but the update as of 3.40 p.m. on March 6th is we're off again. And we'll see if that changes. What else, Brian?

Brian Elliott: What else is on the list for today? Well, we could touch on tariffs. Do you want to touch on tariffs? Yes.

Chuck Kraus: Oh, yeah. Forgot about tariffs. Sure. Look, this is the big topic, right?

Brian Elliott: You can't get away from it these days, right? You know, every news cycle, the Trump administration is applying more tariffs, reversing their position on tariffs, extending deadlines for tariffs, right? And it leaves Texas businesses and businesses across the country in a, you know, a little bit of a, what do we do now? And how do we address this, right?

Chuck Kraus: There's no question that, you know, tariff wars and trade wars in general are disruptive to supply chains. They're disruptive to businesses that are not, you know, that have any extension outside their local area. And that's just about every business these days, right? So nobody's immune from it.

Brian Elliott: And, and I think that, you know, Texas, you know, our Texas is three largest trading partners are Mexico, Canada, and China. And those are the top three that are on the administration's target list for tariffs. So it impacts, you know, Texas businesses very squarely. Yeah, that's, that's exactly right.

Chuck Kraus: And it does seem like it's, it's continuing to change. You know, we just had the imposition of the 25% tariffs on, on Mexico and Canada a couple of days ago. This morning, there was an announcement that the automakers were getting a temporary reprieve. See now that there's, there's a broad delay on, on tariffs on Canada and Mexico, if, if the goods are otherwise USMCA compliant.

Brian Elliott: So if they were, if they were subject to treatment under, under the, the, successor to NAFTA, then they're going to remain that way. So it seems like the conversation is getting more nuanced as we go through the day. And even as an example, I think a lot of companies are grappling with, well, who ultimately is going to pay this tariff? And the answer is, it's just unclear right now how much of this gets picked up through the supply chain, how you even calculate it in the supply chain, if value is added in one jurisdiction, but the good ultimately had an origin in another jurisdiction, and how much of this is going to be passed on to consumers.

Chuck Kraus: You know, certainly the perspective from a lot of the Canadian clients I talked to is that ultimately, a lot of these tariffs are going to hit the pocketbook of US consumers as much as anything. So it's just a, it's a wild, it's a wild space right now. And it's just created, I think a bunch of, a bunch of uncertainty. Early 2025, not seeing any real end or possibility of an end to this anytime soon, right?

Brian Elliott: There, there are a couple of things that I think our clients and Texas businesses in general need to be thinking about, right? And one is, is planning for uncertainty, right? And, and there are a couple of ways that we can do that. And one way is you can take a look at your, um, your supply chain and take a look at the contracts that you have in place there and really tighten them up, right?

Chuck Kraus: Like now, now's the time to be, to be looking at that, reviewing your supply chain agreements, understanding, uh, where you have, uh, where you don't have redundancy, you know, where your, your possible sources are and, uh, and getting the best deal you can on those and then see if you can't get some, some certainty locked into those contracts. Yeah. I think that's, that's really wise, uh, wise advice. You know, it's going to take, it's going to take months, uh, for the impact of these, these tariffs to take hold, even assuming they, you know, they stick day one because companies are going to have a certain amount of inventory that they need to burn through, uh, before they're placing the next order.

Brian Elliott: And it would only be that next order that, that may be subject to it. Uh, so totally agree, uh, reviewing your contracts, reviewing your supply chain, understanding exactly, um, who you have exposure to, um, and who has exposure to you and what they might be, you know, what they might be thinking. So if you can position yourself, um, to be the winner in all of that, uh, for someone, you know, to be the solution provider for someone else, I think there's, there's opportunity there. I think the, you know, you're exactly right.

Chuck Kraus: And it, the retaliatory, retaliatory tariffs are going to play a big part too, right? So, but you have exposure to your export revenue and, and you have to be able to, to adjust there. So this is going to be important for companies to, you know, really understand where. you know, where that revenue is coming from and how much of it's going to be at risk and, and take a good look at those relationships.

Brian Elliott: I think the, the, the other thing that comes out of this though, is, is, is that this, all this disruption, you know, it leads to, you know, broken transactions and broken relationships and broken transactions lead to litigation, right? So, so this is, this is something that everyone needs to keep in mind. It's not just about the, you know, 25% more that might be passed on to the consumer, or, you know, your cost of goods is going to rise that, and you have to make a decision on how you pass that through your, your organization, but it's also, you know, insulating yourself and protecting yourself against what we see as a very real and growing litigation risk when inevitably some of these relationships break down and have stress on them. Yeah, I think, I think that's right.

Chuck Kraus: They, there will be situations where, where the relationship breaks down. Again, I think, I think there's an opportunity there. If you can find a way to be, to, to, you know, to, to mend the relationship or to, to step into a situation where there's a broken relationship and pick up market share, I think, you know, understanding, understanding these rules, understanding how your company can offer a solution to pain that others are experiencing and positioning yourself to be there. I think, you know, whenever you have volatility like this, you have people who enter at the low point and those are the ones that make, you know, that make great returns.

Brian Elliott: Um, so I think there are, it's, there are opportunities here need to not, not be scared by them and, and just deal with, deal with issues head on and look for opportunities, uh, to, to gain market share through the, through the disruption. Exactly. It'll be, it'll be interesting. Okay.

Chuck Kraus: Well, um, that was a whirlwind covered a lot of territory. Uh, I'm looking forward to, uh, to catching up in, uh, in short order and, uh, and we'll have some more updates, uh, soon. There's always a lot to talk about. Love doing it.

Brian Elliott: Thanks, Chuck. Excellent. Thank you, Brian. We'll talk to you soon.

Chuck Kraus: Thanks for tuning in to the scale LLP y'all street law podcast. We hope you enjoyed today's episode and found it valuable. We'll see y'all later.