Introduction

In the modern era, corporate law has traditionally been viewed as nonpartisan. Most states maintain similar corporate codes, and differences based on party affiliation are typically minor. Delaware, the dominant jurisdiction for corporate law, has historically built nonpartisanship into its design, requiring a two-thirds majority for legislative changes and maintaining a politically balanced judiciary. However, Texas has recently begun to position itself as a competitor by offering an explicitly conservative corporate governance platform. This strategy has attracted significant companies such as Exxon, Dell Technologies, and Coinbase. The shift suggests a move away from a technocratic approach towards one where corporate law embeds specific political preferences.

Corporate governance goes partisan

The rise of institutional investors in the 1980s enabled concentrated power to be exerted over multiple firms. In response, the United Nations and other bodies promoted environmental, social, and corporate governance (ESG) integration. This conception frames social responsibility as a financial analysis tool to determine long-term profitability. However, this sparked a backlash from critics who accused managers of abandoning profitability in favour of personal political commitments. High-profile incidents, such as Florida’s investigation into Bud Light’s parent company and legal challenges against American Airlines regarding its 401(k) plan’s inclusion of BlackRock funds, illustrate this growing politicisation. Commenters have accused Delaware of elevating a liberal agenda, particularly following a court decision to rescind Elon Musk’s $56 billion pay package.

Texas’s new corporate law

Texas has revised its Business Organisations Code to create a distinct alternative to Delaware, focusing on providing a conservative governance environment.

Limits on shareholder litigation

The most dramatic changes involve placing new limits on the ability of shareholders to bring lawsuits against boards. Under the amended code, a shareholder must establish that a director or officer’s conduct involved “fraud, intentional misconduct, an ultra vires act, or a knowing violation of law” to challenge self-dealing. Furthermore, public companies can now require that shareholders suing the corporation hold a minimum of 3% of the company’s stock. For a large corporation like Tesla, this equates to a threshold of $30 billion to $40 billion merely to file a lawsuit. Texas also restricts access to internal information, denying shareholders access to emails and text messages intended for use in lawsuits.

Limits on shareholder voice

Texas has authorised public companies organised and headquartered in the state to require that shareholder proponents hold either $1 million worth of stock or 3% of voting shares. Proponents must also solicit votes from holders of at least 67% of the company’s voting power—a significantly higher bar than federal rules which require a proponent to hold no more than $25,000 worth of stock. Additionally, a first-of-its-kind law regulates proxy advice. If an advisor takes into account “nonfinancial factors” such as ESG goals or DEI principles, they must disclose that the advice subordinates the financial interests of shareholders to other objectives, including sacrificing investment returns.

The costs and benefits of politicisation

Technical flaws

The report notes that many of Texas’s new laws appear to be drafted by politicians rather than practitioners, leading to ambiguity and vulnerability to legal challenges. For instance, the definition of “nonfinancial factors” is so broad that it potentially sweeps in traditional governance matters like executive pay packages. The lack of clarity has already led to a preliminary injunction against the enforcement of the proxy advisor law on First Amendment grounds. Furthermore, while focusing on culture wars, the legislature has not addressed important modern developments such as the authorisation of shareholder agreements.

Political advantages

Despite technical drawbacks, several boards have chosen to reincorporate in Texas after facing unfavourable shareholder lawsuits in Delaware. Examples include Coinbase, eXp, and Dell. Reincorporating in Texas provides a form of “political branding” that can attract like-minded consumers and investors while potentially offering regulatory forbearance or more favourable treatment from a partisan judiciary.

Political risks

However, reincorporating in a partisan jurisdiction presents risks. Firms that adopt a liberal political identity or produce products popular with liberal audiences may find themselves legally vulnerable in Texas. There is also the risk that the state may use its power to rescind corporate charters for political reasons, as seen in the Attorney General’s recent attempts to rescind the charters of certain non-profits. Additionally, corporations in Texas are subject to general jurisdiction, meaning they face the risks of political litigation across any kind of dispute.

The centre cannot hold

The “internal affairs doctrine,” which dictates that the state of incorporation governs corporate governance, exists only through the grace of other states. If corporate law becomes overtly partisan, other jurisdictions may question why a chartering state should be able to dictate conduct that occurs elsewhere. This fragmentation could eventually lead to disputes over jurisdiction or calls for a uniform federal corporate law to remove governance from state hands entirely.

Conclusion

While the turn toward partisan corporate law might be viewed as a restoration of an older order of state-led economic regulation, it challenges the stability provided by Delaware’s nonpartisan model. As corporate law directs the allocation of trillions of dollars, the emergence of partisan divisions in this field appears increasingly inevitable.