Texas is throwing down a legal challenge to Delaware


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Joe Jamail might be smiling somewhere. Jamail was a successful Texas lawyer starting in the 1950s who specialised mostly in personal injury disputes. But in the mid-1980s, through happenstance, Jamail starred as a central figure in one of the most sensational mergers and acquisitions disputes in history. 

He convinced a Houston jury that his client Pennzoil had been cheated after Texaco (by then a New York company) had “tortiously interfered” in Pennzoil’s signed deal to buy rival Getty Oil. Pennzoil initially won an astounding $10bn judgment (later reduced to a few billion) that had stemmed from Texaco’s illicit rival bid for Getty. 

Jamail was said to have taken home hundreds of millions in fees from the case. As for Texas, it cemented a reputation as a place where companies would actively avoid blockbuster commercial litigation over worries of risky and unsophisticated jurisprudence.

The Lone Star State, 40 years later, is now ready to flip that script. The Texas governor last year signed legislation to create the Texas Business Court to hear commercial cases worth more than $5mn or $10mn, depending on the type of dispute. Specialised state and federal courts are not unusual in the US. But in business matters, Delaware and New York state law remain pre-eminent. Texas advocates, however, believe they can not only build from scratch a court to challenge the incumbents, but that it is a worthy use of their resources to do so.

Since the pandemic especially, Texas has seen a significant influx of big companies moving either their headquarters or major operations to the state driven by what is perceived as a welcoming environment: low taxes, cheap worker housing and minimal regulation. In particular, Wall Street banks and investment firms have migrated to Texas, making it a surprising finance hub.

“The new court sets Texas apart from others and I believe will draw even more business to the state, says Christina Sautter, a law professor at Southern Methodist University.

The new court is mandated to have expert, experienced judges who will have clerks and render written opinions. The aspiration is to over time build a respected case law, where precedent decisions demonstrate sound legal reasoning.

One vice-chancellor of the Delaware Court of Chancery, perhaps surprisingly, welcomed the competition when asked by the Financial Times, citing how much work he had. In its recent annual report, the Delaware court noted that its caseload remained “staggeringly high”, even after it had added new judges and shifted some matters to other parts of the Delaware court system.

Delaware now dominates incorporations. Between franchise fees and a vibrant legal community, it is an important driver of the small state’s economy. Its jurisprudence is considered not just sophisticated but also mostly even-handed when deciding disputes between companies and shareholders. 

Typically, the most contentious disputes that Delaware hears involve companies controlled by a large shareholder and feature the conflicts in dealmaking that result. Companies such as Elon Musk’s X and Charlie Ergen’s Dish Network are incorporated in Nevada where boards face less scrutiny. Greg Maffei’s Liberty TripAdvisor is also seeking to move to the state.

A high-profile lawsuit involving the online dating site Match Group that is pending in front of the Delaware Supreme Court may end up easing the requirements to pass legal muster on such conflicted deals. Some observers wonder if the Delaware justices will let the ongoing competition for lawsuit venue enter their thinking.

Critics in Texas of the new court have worried that it may tilt too sharply towards corporate interests and that its creation may even violate the state constitution. A federal bankruptcy court in Houston actively became a haven for large Chapter 11 cases only to fall into a corruption scandal recently.

And while Texas has tried to promote a pro-business landscape, its Republican leaders have simultaneously prioritised public attacks on corporate moves on environmental, social and corporate governance issues as well as supporters in business of diversity, equity and inclusion initiatives.

“You don’t want to be targeted as the next Disney facing a judge selected by Greg Abbott,” said Ann Lipton, a law professor at Tulane University, referring to the entertainment company caught up in the culture wars and the firebrand Republican governor of Texas.

Wilson Chu, a prominent Dallas-based M&A lawyer, has been an enthusiastic supporter of the new Texas court. “Delaware is not quaking in its boots yet. But may be in the future,” he said. “We will have to build a reputation of being sophisticated and impartial.”  


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