Texas going blue portends big changes in corporate power

In 2023, the Republican-majority Texas legislature created a new set of regional courts to handle complex commercial disputes, and a new statewide 15th Court of Appeals to hear cases from those courts (as well as any lawsuits against the state). Texas has been trying to persuade more businesses to incorporate there, and dedicated business courts are seen as a lure because the judges presumably know what they’re doing and are less likely to deliver weird decisions than generalist local courts.

With state government firmly in the hands of Republicans, there was also reason to believe that these courts would be "business-friendly," which in this context means friendly to management. The state was already engaged in a crusade against money managers and other financial firms for hassling corporations about "woke" things like not dealing with a warming climate. Some very prominent firms — ExxonMobil Corp. and one-time trillionaire Elon Musk’s empire among them — shifted their corporate domicile to Texas.

You can probably guess what’s coming next. On Tuesday, Texas voters tossed out the three judges that Republican Gov. Greg Abbott had appointed to the 15th Court of Appeals and replaced them with Democrats. The 10 Texas Business Court judges don’t face election and Abbott reappointed all of them this summer to two-year terms, but he lost on Tuesday as well and Democratic Gov. Gina Hinojosa will get to pick the judges in 2028. Every other statewide election went to Democrats, as did the majority in the Texas House of Representatives. The state Senate and Supreme Court remain majority Republican, for now, but Attorney-General-elect Nathan Johnson is a Democrat with a background in commercial litigation who has pledged to scrutinize the business dealings of Musk in particular.

As Boston University law professor Madison Condon put it on Bluesky the day after the election: "congrats to Tesla, Exxon, Dell, Oracle, SpaceX, Coinbase you are now incorporated in a blue state with very little court precedent."

Hinojosa, Johnson and the new judges on the 15th Court of Appeals aren’t going to be trying to drive businesses away from Texas, but they will have very different priorities from the Republican state leadership of recent years. And along with other changes signaled by Tuesday’s election results across the country I think we can expect:

• A strengthening of the hand of Delaware, which has been the primary home of U.S. corporations for more than a century but has been under assault since 2024 from Musk and other tech-industry titans.
• A weakening of the position of the tech-industry titans and others who have been pushing for a corporate governance in which insiders call all the shots.

The Delaware angle is simple. Its heavy dependence on revenue from the businesses domiciled there (corporate franchise taxes and similar fees paid by limited liability companies and limited partnerships generated 26.6% of net state revenue in the fiscal year that ended in June) "precommits the state to not welching on its corporate customers by radically revising its corporate law policy to the detriment of their interests," Roberta Romano of Yale Law School wrote in 1985. In Texas, where the revenue directly traceable to firms incorporating there isn’t even broken out in state accounts and is likely an infinitesimal share of the state budget, there is no such precommitment.

How Tuesday’s political sea change will affect the eternal struggle for power between corporate insiders and outside shareholders is harder to know and to summarize. The best short version may just be that the era of founder-dominated corporate governance — or at least this particular era, which began in the early 2000s — appears to have peaked.

Why do I think that? Delaware’s corporate legal tradition is more shareholder-friendly than that of other states, so any relative strengthening of its position will strengthen outside shareholders. Dual share classes that allow company founders to retain control even as their ownership share dwindles, leaving outside shareholders largely voiceless, will come under increasing scrutiny as the tech companies most likely to use them do (15 of 31 tech initial public offerings last year had such shares, according to Jay Ritter of the University of Florida). 

The multistate Republican campaign to punish asset-management giants BlackRock Inc., Vanguard Group and State Street Investment Management for monitoring corporate environmental and governance risks may founder as its biggest state checks out. Federal securities-law enforcement and financial regulation will inevitably rebound from their current extreme low point.

Dual-class share fan and vociferous Delaware critic Elon Musk will reap the whirlwind of his extremist rhetoric, deep entanglement with President Donald Trump’s administration and massive political spending in Texas and elsewhere on behalf of a political party that seems likely to be on the outs for a while. And all of these shifts will be supercharged if the current Nasdaq correction turns into a sustained bear market.

Musk is an amazingly resilient fellow, and I’m not entirely convinced that shareholder-dominated governance is always better than insider-dominated governance. But things are definitely going to be different now, in Texas and a lot of other places.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Justin Fox is a Bloomberg Opinion columnist covering business, economics and other topics involving charts. A former editorial director of the Harvard Business Review, he is author of "The Myth of the Rational Market."