Y'all Street Law Podcast

Heather C [00:00:00]:
The Scale LLP Yalls Street Law Podcast is intended to be your go to podcast for legal and business developments in the state of Texas. You'll stay informed about the latest developments that impact your business, plus get insights on market trends and strategies tailored to the Texas landscape. We also share actual case studies of local businesses and provide expert insights from our Texas based attorneys. Yall Street Law is here to help you thrive in the Lone Star State. You can find more about Y'all street law content@www.scalefirm.com y'all street also linked in our bio. Now let's get into today's topics.

Brian [00:00:51]:
Welcome to the Yall Street Law Podcast. Hey, how are you doing Chuck?

Chuck [00:00:55]:
I'm doing great. It's been a flurry of activity since we last spoke, Brian. 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, you know, updates on the business courts and what's going on there.

Brian [00:01:36]:
Yeah, this doesn't slow down at all. 2025 is shaping up to be quite the year, so let's get into it.

Chuck [00:01:44]:
Excellent. Why don't we start with something we have maybe a little bit of a better handle on and is moving at a slower pace? Let's talk about the business courts. I think y'all street episode one 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 [00:02:04]:
Yeah, no, glad to. Texas business courts of course are, you know, were created or launched in September of 2024. And so we're just about six months into to that and things are going fairly well. The 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 was, you know, which which cases of course would be eligible to be filed in the business court or more importantly removed 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 1, 2024 would be eligible, a number of folks decided to go ahead and remove pre existing cases to the Business court. Anyway, it tested the statute. 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 pre existed, it filed prior to September of 2024. It doesn't get removed. And even in, in one case, which, which I thought was great, it was a, the, the parties had, had made an agreement together. They, by a Rule 11 agreement, they, 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 in the, in the business court and despite their arguments of judicial efficiency and, and, you know, procedure and things like that, the, the court said, no, it's, we're not gonna, we're not gonna let you do it that way.

Chuck [00:03:57]:
That's interesting. I mean, in, in essence they're saying, look, let us, let us come in this way. If not, we'll, we'll see you next week. We're going to come around the front door.

Brian [00:04:06]:
Exactly.

Chuck [00:04:06]:
But either way, we'll be back.

Brian [00:04:08]:
Yeah.

Chuck [00:04:08]:
Yeah, interesting. So, so in the other examples, not where there was a Rule 11 agreement, but in the, in the removal examples, did you see trends on whether it was the plaintiff or the defendant removing?

Brian [00:04:27]:
No, I think the, it's, it's the. No, not really a trend. You know, 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. And that could be either party, of course.

Chuck [00:04:52]:
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. Yeah, I know that's, you know that. We'll talk about that later perhaps in some of the other conversations. But any movement there?

Brian [00:05:17]:
Yeah, I think the, the, what everybody understood when the, as these courts came online is that there were a lot of details that would need to be worked out.

Brian [00:05:26]:
Right.

Brian [00:05:27]:
So some of those details are being worked out. Some of them are going to be just a purely administrative strategy. Administrative. But we have additional legislative initiatives in order to fill some gaps in what was going on.

Chuck [00:05:38]:
Right.

Brian [00:05:38]:
So one of the things we've got is a proposal to lower the threshold for the qualified transaction jurisdictional hurdle.

Brian [00:05:49]:
Right.

Brian [00:05:50]:
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, you know, are often below that $10 million threshold that should be in the, in the business courts. So that's in the 2025 legislative session. And, and I think the, the one other thing that I wanted to, to bring up is, is the, the idea that as clients are considering whether or not to use the business court, whether to file like just in your typical, you know, district court or to go to the business court. One thing that we didn't talk about in episode one is the filing fees.

Brian [00:06:46]:
Right.

Brian [00:06:46]:
And it's a, there's a $2,500 filing fee to get in, which contrasts with a typical $300 filing fee, which, you know, may not be a big deal if you're, if you're looking at a $10 million case, but, you know, fees add up.

Brian [00:07:02]:
Right.

Brian [00:07:03]:
And in addition, there's a motion fee in the business court. So every, every motion that you file has a $50 fee associated with it. And that's, you know, to compensate for the extra burden of, of processing those motions and having to write a, an opinion and things like that. When you look at it that way, it almost seems like a bargain.

Brian [00:07:21]:
Right.

Brian [00:07:22]:
But it is a consideration when you've got, you know, fees that are, you know, to be considered.

Chuck [00:07:31]:
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, you know, to file, file fewer motions, to consolidate things, or is it just an ignored cost of business? And how does it compare to other jurisdictions?

Brian [00:07:52]:
Yeah, I think that really here it's, the idea is that it's the judges, because they have a higher burden on, on writing written opinions. Right. There they use, they're going to use staff counsel more.

Brian [00:08:06]:
Right.

Brian [00:08:06]:
So it's going to be a heavier use of resources and I think it's an offset for that heavier use of resources. I doubt that a $50 fee would dissuade anybody from filing the motions that they want to file.

Chuck [00:08:19]:
But.

Brian [00:08:19]:
So I think it's just purely an.

Brian [00:08:21]:
Offset for the cost. Right?

Chuck [00:08:23]:
Yeah. Yeah. Interesting. And any, any movement on the, the tenure of, of judges that are, 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 in a bit of a difficult spot not knowing if the judge overseeing your case was even Necessarily going to be around to see it through. And then all the perils that would come along with that reappointment in the middle.

Brian [00:09:09]:
Yeah, that's a it.

Brian [00:09:12]:
You know, the theory was, you know, get it started, let's get some judges appointed and, and kick the courts off. In the 2025 legislative session. There's a proposal to extend the term of the judges from two years to six years, which you know, is probably better. But you know, you may, you may get a judges at the end of their six year term, so you'd be in the same position anyway. But at least it's, it's more in line with a, you know, what we would hope would be an average tenure of a judge on a sophisticated bench that's dealing with complex issues.

Chuck [00:09:44]:
Yeah, some of the, some of the commentary I've seen coming out of Delaware that's, you know, in part contrasting. I think some of this is, is pointing out the benefit that the appointments in Delaware are 12 years, you know, not, not two. So at least it's a live issue that, that folks are least talking about if not considering.

Brian [00:10:05]:
Well, I think this is what we're going to see across the board.

Brian [00:10:08]:
Right.

Brian [00:10:08]:
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.

Brian [00:10:25]:
Right.

Brian [00:10:26]:
And, and that's smart. It's a way to continue to attract business to the state of Texas. And I think that hopefully these two initiatives get through the legislative session here and we continue on that path.

Chuck [00:10:41]:
Yeah, well, you're certainly seeing it on both sides. You're also seeing, as we'll talk about in a little bit, some of the legislative proposals coming out of Delaware that appear to be quite reactive and responsive to what's perceived to be the legislature in Delaware looking at a potential eroding tax tax base from companies that may look to re. Domicile out and the impact of that on the tax base in Delaware. And what came out of that is some legislation that came about in an unusual way. Normally there's a fairly standard group that proposes all the changes to the dgcl and this time the legislature took it up directly and bypassed that group. And it has a lot of folks scratching their heads on why, why, why this legislation, why so quickly. 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 to try and quell the, a potential exodus here as we're coming into March, April, May and proxy season.

Brian [00:11:53]:
Yeah, it's going to be interesting. I think we'll keep, keep our eye on that. What about Chuck? We, we talked about the Texas Stock Exchange and the creation of the Tech Stock Exchange, how that's going to have an impact on the state of Texas. What, what new, if anything, is going on on that front?

Chuck [00:12:12]:
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 one, I believe it's called, with the SEC that has not yet been made public. 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, you know, to see how they will try and win business, you know, as a, as a competitive exchange. They did say early on in a press release that, that their listing standards would be higher than existing NYSE or NASDAQ listing standards and in fact went so far as to say, you know, some percentage of current listed companies wouldn't even qualify under the, under the Texas Stock Exchange standard. So we're still waiting to see that. What, 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, the NYSE trading currently happens in Chicago to Texas. So that's, I think, an acknowledgment that that Texas is, is a financial hub, there is a center of activity here, and that it's good to have your exchanges close to, to that trading. So that's a development that's, that's just happened very recently.

Brian [00:13:48]:
That's interesting. Do we hear any timing on that? Is that already underway or.

Chuck [00:13:53]:
Yeah, in, in process. It's, you know, because it's an existing exchange, I think the, the move process is, is more streamlined. You know, they already have their regulatory approvals to operate. 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 [00:14:29]:
Yeah, it's a reflection 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.

Chuck [00:14:39]:
Yeah, that's right. And I think, you know, the other thing that, that we can talk about a bit maybe after the, 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 the, the launch of the Texas Stock Exchange. So why don't we pick those up after the break?

Brian [00:15:05]:
Yeah, sounds great.

Chuck [00:15:08]:
Hey, son, how's the. All right, Brian. What? Sorry.

Brian [00:15:18]:
Well, we're, we're back from the break.

Brian [00:15:20]:
Apparently ready to go.

Brian [00:15:21]:
So I think what we thought we'd talk about now is some of the legislative updates in the 2025 legislative session 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. What do you see interesting this legislative.

Brian [00:15:41]:
Session that you want to talk about?

Chuck [00:15:42]:
Yeah, there's a couple of different proposals that have come forward. There's a series of bills by Senator Tan Parker that we should talk about first. And then there's a more recent proposal we can also talk about from Senator hughes. So on February 3rd, Senator Parker proposed a package of three bills. In the press release, it said they were to encourage the development of capital markets in Texas and further strengthen the Texas economy. So clearly lining up to align with the Texas Stock Exchange and all the developments there. And really, in all of the bills, sort of modernizations of the Texas Business Organization Code in the first one, 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, actually. 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 for companies that, that either have their head office in Texas, a principal office in Texas, or that are listed on the coming Texas Stock exchange. So this would not apply to private companies, for example, which is kind of interesting from a governance perspective to have different presumptions of fiduciary duties depending on whether you're a public or a private company, or different presumptions available. But basically what it establishes 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, you know, often in, in securities litigation or in, in corporate litigation involving companies, the, the first allegation is a breach of fiduciary duty. And, and then, you know, the, the litigators will, will, then, you know, one of the sides will have to prove their case, either prove that they did act in, in, 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. And you know, so what's interesting about it is, is actually we did a bit of research on this and you know, Texas, this is not a new concept. This, this already exists in, in some jurisdictions. And so in a lot of ways it's, it's moving towards what is becoming a trend to presume good faith on behalf of, of directors. So I think a good move and, and one that, that will be supportive. And, 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.

Brian [00:19:59]:
Right?

Chuck [00:20:00]:
So we'll, we'll see how, how it gets debated.

Brian [00:20:03]:
Well, important question. How does this compare with the current state in, in Delaware? What does, where does the balance shift on that?

Chuck [00:20:13]:
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. 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 SB21 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 is developed historically out of common law judicial interpretations. And you really need to be familiar with those cases in order to understand. So there is a concept in Delaware law called the business judgment rule. And so unless you are disqualified from the business judgment rules, and there is a presumption of 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 change of control transaction where there's different consideration being paid. So this in Texas really codifies in, in the statute a presumption of good faith. Right. In the words of the statute, which is not something that you would have necessarily in the state of Delaware.

Brian [00:22:03]:
Yeah, 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. Any prognostication on chances of success?

Chuck [00:22:19]:
Yeah, I think that. I think the chance of success is high. I think one of the reasons the chance of success is high is that this is not sort of really unique legislation. This does exist in, in a number of other jurisdictions. So I think the chances of passing are quite high.

Brian [00:22:38]:
Right.

Chuck [00:22:38]:
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. You know, when you deal with non corporate entities like LLCs, you can completely basically, you know, contract out of your fiduciary duties. So we are talking about a narrow subset that is only corporations and then only corporations that are publicly traded. So interesting development. Do think has a high likelihood of passing.

Brian [00:23:18]:
Great. All right, well we'll follow that one. What else is on the horizon this legislative session in Texas?

Chuck [00:23:25]:
Yeah, the next interesting one is another of the bills by Senator Parker, Senate Bill 1057. 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 Texas corporation, publicly listed, sorry, registered with the sec, is listed on a national stock exchange, either has its principal office in Texas or are listed on a Texas based exchange. So again, same same requirements as the prior bill, particularly for, for Texas stock exchange listed companies. And basically what it, what it requires is, is a, 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, 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, where you buy, you buy one share in order to make a shareholder proposal and, and then you've sold the share by the time, you know, the meeting has come about. 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, etc. At last year's AGM, Exxon Mobil came out swinging hard at this, very hard actually, and actually 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, this is a live issue. 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 having to be addressed in proxies and basically giving access to a company's proxy to an activist shareholder, a shareholder that wants to make a proposal.

Brian [00:26:39]:
So it's like an effort to streamline governance and to simplify processes to get, you know, to clear some room for companies to operate without, without these activist shareholders taking control and bogging down the system.

Chuck [00:26:59]:
Yeah, that's exactly right. That's exactly right. So I think that one again, has a, has a high likelihood of, of passage the other two bills of the four in, in Senator Parker's. I don't think we'll go into as much detail. There was a proposal to amend the Texas tax code to add some, 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.

Brian [00:27:43]:
So it's rolling out the red carpet saying, look, we're, we're going to be putting in this new tech stock exchange. We're making these rule changes to make it more attractive for you to be here. This is a Come to Texas package of bills.

Chuck [00:27:56]:
Yeah, that's. That's exactly right. The other. The other bill is. Is an amendment. 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 securities. So the Yall 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 understand the benefit that bringing capital markets to Texas will have, and they're wanting to lay the groundwork and put down some incentives for that to happen. So that's the package of Tan Parker bills.

Brian [00:29:03]:
Well, we'll see 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. Right. Once. Once this, 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 ball game. So it's a. It's an exciting time to. To be. Be part of the Texas economy.

Chuck [00:29:35]:
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?

Brian [00:29:43]:
Perfect. Chuck, we're not done with a busy 2025 legislative session yet. There's another. All right, 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. It's sort of an omnibus bill looking at a bunch of different things. Why don't you give us your comments on that?

Chuck [00:30:30]:
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. 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. 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 [00:31:48]:
This is a classification of the phrase don't California my Texas.

Chuck [00:31:54]:
That's true. Yeah, I think that's exactly right. So that's number one. 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. Basically would, 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.

Brian [00:33:28]:
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, 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, their clients organizational documents and see, see where improvements can be made.

Chuck [00:33:55]:
Yeah, I think that's right. If this passes, you know, I think, I think you would, you would be well served and 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 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. This would clarify that shareholder demands for inspection do not automatically include emails, text messages, social media posts, etc. Unless a specific communication actually affects a corporate action. So no more phishing expeditions into, you know, all the email communications, all the text messages between, you know, corporate directors or officers. 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 may refuse to comply for to, to a demand under certain specified conditions. So big picture putting, putting some more rules in place around the extent of demands for corporate records that can be, that can be served on a Texas corporation. In Delaware law, this is referred to as a section 220 demand, a demand for books and records. And what's interesting, there's a bit of competition going on here. We'll talk about it in a little bit. But Delaware has just made some similar proposed amendments to its 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 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. 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, that needs to be addressed and sort of racing to find the best, the best solution for the benefit of their corporations.

Brian [00:36:46]:
Yeah. And then, but when you, when you layer on that the, you know, advancements in technology and decentralized corporations and, you know, the, the ability of a board to, to meet virtually at a moment's notice and things like that. This really does put a, put a limit on, on what's going to be considered a corporate record. Right, a discoverable corporate record. So that'll be, that'll be interesting.

Chuck [00:37:13]:
Yeah, exactly.

Brian [00:37:15]:
Foreign.

Heather C [00:37:20]:
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Chuck [00:38:04]:
And then we get into the next topic is expressly permitting the expanded use of independent committees and court approval. So there's amendments. Again section 21 of the Business Organization Code, it would permit the board of a publicly traded company or those that opt in to pre authorize committees of independent and disinterested directors to review or approve transactions with controlling shareholders, directors or officers. So again, what's interesting is it's in legislation setting out the framework that can be used to approve a controlling shareholder or conflicted transaction. And of course this is the topic of the day in light of, you know, some of the, some of the Tornetta v. Musk findings, some of the facts in that case where, you know, the, the, the decision that's now on appeal basically found that because, because of a finding of control and because of the, 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, to cleanse the transaction. You know. And in that case the, the, the court found that, 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, that weren't disclosed. 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.

Brian [00:40:08]:
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 actually 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.

Chuck [00:40:35]:
Yeah, that's exactly right. 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. So it's expanded the potential scope. Directors and officers are presumed to act 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 in just saying presume good faith that actually goes into these other elements and says that 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, an act outside authority, or a knowing violation of law. So really setting the hurdle high to saying directors, directors will be entitled to this presumption unless you can rebut them to prove again, fraud, intentional misconduct and ultravirus act or knowing violation of law.

Brian [00:42:08]:
Yeah. And then, you know, put that side by side with the, you know, narrow, narrow definition of what a corporate record is that a shareholder would have access to. You know, it makes, it makes proving those a little bit more difficult. But that's obviously the intention behind this bill.

Chuck [00:42:24]:
Yeah, I think that's right. And you know, the thing, the thing I like about about this legislation is it 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 should only apply to a public company. There's some very large, very sophisticated private companies to which this, I think, should also apply. 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.

Brian [00:43:19]:
Another point on the checklist for redrafting organization documents.

Chuck [00:43:23]:
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 ops in may impose an ownership threshold up to 3% of outstanding chairs for a shareholder to bring a derivative suit. 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. Because 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, oh, we'll, we'll make, we'll make an amended disclosure in light of some derivative suit that's alleged. 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 attorneys 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, for those that want to bring these suits.

Brian [00:45:22]:
Yeah, raising the floor 3%. I mean, that's, that's still a fairly low hurdle to get over.

Chuck [00:45:28]:
Yeah, that's exactly right. So, so that's, that's an exciting bill that we also need to watch and see, see how it progresses. Again, there's, there's a few things in there relating to the Texas stock exchange, but then there's just some general, 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 [00:46:01]:
Yeah, yeah. I think this is 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 making Texas, you know, really an accommodating place to come and do business.

Chuck [00:46:26]:
I think that's exactly right, 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. 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. I think the, the interesting thing to talk about on this podcast is the fact that it's a real shift among Delaware practitioners, among. In Delaware law to really codify a clear path for something to be approved in the legislation itself. As we're saying at the outset, Delaware law is the dgcl, but it's also all the case law that interprets it. And there's good reason for that, that every decision has to be made based on particular facts and circumstances. That's great. 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? There's still going to be case law interpreting it, of course, but this, this is a bit of a. 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, a very clear path to having them approved. That. That seems to be much more clear than what was in, what is in existence today.

Brian [00:48:55]:
Well, and this is, this is obviously a direct reaction to Tornado v. Musk. Right. It's a, it's squarely on point, and it's, it's the Delaware legislature taking notice of the seismic shift that's going on and, and reacting to it.

Chuck [00:49:12]:
Yeah. And one of the, 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. 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, 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.

Brian [00:49:52]:
Right.

Chuck [00:49:53]:
And you can kind of do it, you know, an end around there. So, you know, as, as with anything, when, you know, when the rules are written down, then you can, you can design, you know, you can creatively design your ways around them. But I think the interesting commentary for purposes of the y'allstreet 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 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.

Brian [00:50:59]:
Well, it's, it's good to see the effort. Right. So good for them for, for stepping up.

Chuck [00:51:05]:
Yeah. So we're, you know, we're continuing to have to monitor this. There's, 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, that people are still trying to interpret. So by the time, by the time we release this podcast, there'll be another proposal that we're going to come back and, and comment on. It's, it's almost as much 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?

Brian [00:51:46]:
I think this is the act that just won't stop. Right. 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 reevaluating the beneficial ownership information requirements and which companies it'll apply to. And it's a, we are currently on the off again pendulum swing, but not.

Chuck [00:52:22]:
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. 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.

Brian [00:53:19]:
So, yeah, ostensibly the reason for this from the beginning was to crack down on fraud. But what they ended up doing is they cast a very, very wide net, perhaps the widest net one could possibly imagine casting. Let's include just about every small business across the country. Right. And in order to weed out potentially, you know, some bad actors. Right. And it's in certain, it certainly doesn't seem to be, didn't seem to be a very targeted approach and I, I hope that's where they're, they're heading now, is to develop a little more, you know, rational, targeted approach to how they would do it. It's a, it's a valiant, you know, objective but, but a big burden to small business.

Chuck [00:54:15]:
Well, and what, what, what was interesting about it is, of course, the, the BOI filing was requiring more information be given to the federal government about the entity than even the state under which the entity was created. So, you know, if you, if you create, create an entity, you don't necessarily have to file with the state who all the, who all the major shareholders are of that entity. Yet, yet you were having to, for this reason, give, give all of this information to the, to the government. So we will, we will see. But the, but the Update as of 3:40pm on March 6th is we're off again and, and we'll see if that changes. What else, Brian, what's, what else is on the list for today?

Brian [00:55:05]:
Well, we could touch on, on tariffs. You want to touch on tariffs?

Chuck [00:55:08]:
Yes, let's. Oh, yeah, forgot about tariffs.

Brian [00:55:12]:
Sure. Look, this is, this is the, this is the big topic. Right. You can't get away from it these days. Right. You know, every, every news cycle, the, the Trump administration is applying more terrorists, reversing their position on terrorists, extending deadlines for tariffs. Right. And it leaves Texas businesses and, and businesses across the country in a, you know, a little bit of a, what do we do now and how do we, how do we address this? Right. There's no question that, you know, tariff wars and trade wars in general are disruptive to supply chains, are disruptive to, to businesses that are not, you know, that have any, any extension outside their local area. And that's just about every business these days. Right. So nobody's immune from it. And I think that, you know, Texas, you know, our Texas's 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.

Chuck [00:56:20]:
Yeah, that's, that's exactly right. And it does seem like it's continuing to change. You know, we just had the imposition of the 25% tariffs on Mexico and Canada a couple of days ago. This morning, there was an announcement that the automakers were getting a temporary reprieve. I see now that there's a broad delay on tariffs on Canada and Mexico if the goods are otherwise USMCA compliant. So if they were subject to treatment under 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, you know, the good ultimately had an origin in another jurisdiction. And how much of this is going to be passed on to consumers. You know, certainly that the, the perspective from the Canadian clients I talk 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.

Brian [00:58:00]:
So in early 2025, not seeing any real end or possibility of an end to this anytime soon. Right 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 planning for uncertainty. Right. And there are a couple of ways that we can do that. One way is you can take a look at your, your supply chain and take a look at the contracts that you have in place there and really tighten them up. Right. Like now is the time to be, to be looking at that, reviewing your supply chain agreements, understanding where you have, where you don't have redundancy, you know, where your, your possible sources are and, and getting the best deal you can on those and then see if you can't get some, some certainty locked into those contracts.

Chuck [00:58:52]:
Yeah, I think that's, that's really wise, wise advice. You know, it's going to take, it's going to take months 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 before they're placing the next order, and it would only be that next order that that may be subject to it, so. Totally agree. Reviewing your contracts, reviewing your supply chain, understanding exactly who you have exposure to and who has exposure to you and what they might be, you know, what they might be thinking. So if you can position yourself to be the winner in all that for someone, you know, to be the solution provider for someone else, I think there's opportunity there.

Brian [00:59:40]:
I think you're exactly right. And if the retaliatory tariffs going to play a big part too, right. So you have exposure to your export revenue, and you have to be able to adjust there. So it's going to be important for companies to really understand where that revenue is coming from and how much of it's going to be at risk and take a good look at those relationships. I think the other thing that comes out of this, though, is, is that all this disruption leads to broken transactions and broken relationships and broken transactions lead to litigation. So this is something that everyone needs to keep in mind. It's not just about the 25% more that might be passed on to the consumer or your cost of goods is going to rise and you have to make a decision on how you pass. Pass that through your organization. But it's also 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.

Chuck [01:00:59]:
Yeah, I think that's right. There will be situations where the relationship breaks down again. I think, I think there's an opportunity there if you can find a way to be. To mend the relationship or to step into a situation where there's a broken relationship and pick up market share. I think 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. 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 to, to gain market share through the. Through the disruption.

Brian [01:01:58]:
Exactly. It'll be interesting.

Chuck [01:02:02]:
Okay, well, that was a whirlwind. Covered a lot of territory. I'm looking forward to catching up in short order and we'll have some more updates soon.

Brian [01:02:16]:
There's always a lot to talk about.

Brian [01:02:17]:
Love doing it.

Brian [01:02:18]:
Thanks, Chuck.

Chuck [01:02:19]:
Excellent. Thank you, Brian. We'll talk to you soon.

Heather C [01:02:22]:
Thanks for tuning in to the Scale LLP y'all Street Law podcast. We hope you enjoyed today's episode and found it valuable. If you liked what you heard, don't forget to subscribe and leave us a review. For more insights and updates, visit www.scalefirm.com or follow us on LinkedIn. Until next time. We'll see y'all.