Texas Business Courts: A New Tool for In-House Counsel

What Are The New Texas Business Courts?

In June of this year, the Texas Legislature enacted legislation to create a court system focused solely on business litigation. While the legislation becomes effective in September 1 of this year, the new business courts will not open until September 1, 2024, and some may not open without further authorization from the Texas legislature as discussed below.

How Texas Business Courts Came to Be

The formation of these courts is in line with Texas wanting to become more business friendly and with the increase in corporations moving their corporate headquarters to the Lone Star state. As anyone who has litigated in Texas can attest, unlike the Delaware Chancellery Courts, Texas district courts are not required to issue written opinions (and many do not) leaving the corporate jurisprudence of Texas largely to the appellate level. Further, as Texas practitioners are well acquainted, there are significant differences in the level of business experience in Texas district courts and the dockets of these courts are filled with criminal and civil cases in addition to business cases.

The addition of these new business courts are important for in-house practitioners for several reasons. First, these courts hold the promise of Texas business law developing in a more robust and logical fashion over time. While Texas is very business friendly, proponents of the business courts argued that having a court dedicated to business disputes would help make Texas even more business friendly by ensuring that business disputes are tried before judges with significant commercial experience. Further, with the significant increase in companies relocating their business headquarters to the Lone Star state, it is time for the court system to also start to cater to the business community. Second, the business courts will allow judges knowledgeable about business to handle business disputes. These include not only contract disputes over $10 million, but also disputes regarding corporate affairs of over $5 million. Most importantly, these business affair lawsuits are not limited to just Texas organized companies. Indeed, the scope of business affair lawsuits which will be heard by the Texas business courts is extensive as discussed below. Thus, the days of having a lawsuit triggered by M&A activity being heard along with slip and fall and criminal cases in Texas district court are over.

Jurisdiction of the Texas Business Courts

The Texas Business Courts (TBC) have concurrent jurisdiction with the Texas District Courts. The jurisdiction of the TBC falls into two separate categories with different minimums. First, the TBC has jurisdiction over the following actions exceeding $5 million (excluding interest, statutory damages, penalties, attorney’s fees, and court costs):

  • Derivative actions;

  • Actions regarding governance and governing documents of any organization regardless of where formed or incorporated (which includes certificates of formation, articles of incorporation, articles of organization, bylaws, partnership agreements, company or operating agreements, shareholder agreements, voting or voting trust agreements, and transfer restriction agreements);

  • Federal and state securities actions asserted against an organization, Board of Directors/Manager/General Partner, and Officers, for acts or omissions by the organization, controlling persons (e.g., Board of Directors, Managers, Management Committee, General Partner), or managerial officials (e.g., officers); underwriters of securities and auditors of the organization;

  • Actions by the organization against its owners, controlling persons, or managerial officials alleging acts or omissions in such capacity;

  • Actions alleging an owner, controlling person, or managerial official breached a duty owed to the organization by reason of such persons status to the organization, including a breach of a duty or loyalty or good faith;

  • Actions seeking to hold an owner or governing person liable for an obligation of the organization; and

  • Actions arising out of the Texas Business Organizations Code.

Second, the TBC has civil jurisdiction over the following actions with an amount in controversy exceeding $10 million (excluding interest, statutory damages, penalties, attorney’s fees, and court costs):

  • Actions relating to transactions where a party pays or receives, or lends, advances, or borrows, consideration of at least $10 million (excluding transactions with banks, credit unions, or savings and loan institutions);

  • Actions arising out of contracts or commercial transactions in which the parties have agreed that the TBC has jurisdiction, except insurance contracts; and

  • Actions arising out of violation of the Texas Finance or Business & Commerce Code (with certain exceptions).

In addition to its direct jurisdiction, the TBC also has supplemental jurisdiction over any other claim related to a case or controversy within the court’s jurisdiction that forms part of the same case or controversy. With respect to supplemental jurisdiction, these claims can only proceed in the TBC if all parties (by contract, agreement, or otherwise) and the TBC judge agrees; otherwise, they will proceed in a court of original jurisdiction concurrently with the related claim proceeding in the TBC. This could be a trap for the unwary. If a contract provides for actions which qualify to be heard by the TBC and the contractual language does not reach supplemental claims, a party could find themselves having to litigate in two different forums simultaneously. For example, some supplemental claims could be a form of offset or a counterclaim arising out of the same facts, but if the contractual language does not reach to these supplemental claims, it is possible that a party could have two different results on the same facts. It is not clear from the statute whether res judicata or claim preclusion would necessarily apply.

There are exceptions to the TBC jurisdiction. For example, the TBC does not have jurisdiction over personal injury claims, medical claims, or legal malpractice claims even if they fall with the TBC’s supplemental jurisdiction scope.

The statute also provides that the Texas Supreme Court shall adopt rules for the issuance of written opinions by the TBC. This is important as it allows for commercial law in Texas to be established by the TBC in addition to the appellate courts.

Texas Business Courts - Filing of Actions; Removal

The statute provides that an action that is within the jurisdiction of the TBC may be originally filed in the TBC as may be established by law; or if contractual, in the TBC where the contract provides. If a party files an action in a Texas district court and the TBC would have jurisdiction over the matter, a party (or the district court judge) may remove the action to the TBC. If a party is unilaterally seeking removal, the motion must be filed within 30 days after the party discovers, or reasonably should have discovered, facts establishing the TBC’s jurisdiction. Otherwise, if the parties agree during the litigation to have the TBC hear the action (and it qualifies), the parties may remove an action to the TBC at any time during the pendency of the action.

Formation of the Texas Business Courts

The statute provides that there will be 11 TBC districts corresponding to the 11 district court Administrative Districts in Texas. There is a twist, however, which in-house counsel need to be aware. Certain of the TBC districts will not be staffed if not authorized during the 2025 Texas legislative session (and will be abolished on September 1, 2026 if not authorized in the 2025 Texas legislative session). These TBC courts are the 2nd, 5th, 6th, 7th, 9th, and 10th.

Here is a map of the Texas district court administrative districts:

Texas-District-Court-Administrative-Districts

Source: https://www.txcourts.gov/media/1441425/ajrs-04_25_18.pdf (last visited August 16, 2023)

In addition to the Texas Business Courts, the statute also establishes a new court of appeals, the 15th Court of Appeals, which will have exclusive jurisdiction over appeals from the TBC, but, if it is not established in the 2025 Texas legislative session, appeals will be to the court of appeals with appellate jurisdiction of civil cases for the county in which the case could have been filed under Texas administrative procedures.

Why In-House Counsel Should Consider Using the Texas Business Court

In our view, there are a number of benefits to using the TBC, including, but not limited to, the following:

  • Experienced Judges: The TBC will be staffed by appointment of the Governor with attorneys who have 10 years of experience in business transactions, complex litigation, or have served as a Texas civil judge in Texas. Since the judges will be appointed and not run for office, the most experienced persons can be appointed who have the requisite business experience. Further, since judges are appointed for 2 year terms, judges which do not live up to the business community’s expectations can be replaced when their term expires.

  • Written Opinions: The fact that the Texas Business Courts will issue written opinions will help litigants better understand the reasoning for a decision and will ultimately help in the fuller development of Texas business law – esp. in the corporate governance area.

  • Removal from Texas District Courts: By allowing corporate securities and governance matters to be removed to TBC without both parties agreeing, corporate defendants will receive quicker resolution of significant corporate governance, affairs and complex business issues with judges who have experience with these kinds of issues.

  • Predictability and Consistency: By having judges who only try commercial disputes and issue written opinions and a single appellate court to hear appeals, we would expect more consistency and predictability of resolution of disputes. Further given that each TBC district will have only one or two judges, inside that district we would expect more consistency.

Key Takeaways of the TBC

There are some key takeaways. First, any organization can remove an action of more than $5 million if the action relates to the organization’s governance, organization, or securities matters. As a client found out when it engaged in a public M&A transaction, public M&A transactions will usually be followed by the inevitable one or more shareholder lawsuits. Prior to the creation of the Texas Business Courts, the race to the courthouse might include a Texas district court. Those actions would initially be heard in the district court. Although the client had a forum selection provision which required actions to be heard in Delaware, we still had to litigate the forum selection provision in Texas district court. Under the new Texas Business Courts, we would have been able to remove the action to the TBC without the plaintiff’s consent. This is significant help to corporate defendants to have a court well versed in these matters decide whether the forum selection clause was binding. For Texas organizations, while the organization will be able to remove the matter from a district court to the relevant TBC, it is important to include in the forum selection clause that the matter will be heard in the TBC if Texas is to be the forum.

Second, organizations with agreements that are to be governed by Texas law will want to consider adding appropriate forum selection language to trigger Texas Business Courts jurisdiction. Namely, to include the relevant TBC to be the forum to hear disputes which exceed the $10 million dollar threshold and otherwise qualify for TBC jurisdiction. Without such a provision, the company will require the counterparty to agree post-filing of the lawsuit to TBC jurisdiction – which may be difficult. Since the TBC will have juries just like Texas district courts and unlike Delaware Chancellery Court, it is important to also consider whether the company wants to waive jury trials in the TBC and, if so, to get the waiver in writing in the operative agreement.

Third, since the Texas Business Courts can have supplemental jurisdiction over related claims, it is imperative that any contractual language includes all claims which would qualify as supplemental claims under the statute. Since supplemental jurisdiction requires the TBC judge to agree, language should include an affirmative obligation on the part of the parties to seek the judge’s approval.

Fourth, in selecting an appropriate TBC district, a company should take into account that some TBC districts may not be authorized (although we suspect that the likelihood of that is low). If one of the TBC districts that may not be authorized is the appropriate Texas Business Court district, in-house counsel will want to draft its forum selection clause to have one of the TBC districts which do not require authorization be the TBC district.

Fifth, while the Texas Business Courts will not become functional until September 2024, it is important to start including language now in contracts as disputes typically will take some time to arise. The language should take into account that some districts may not be authorized.

Sixth, if your company is sued in Texas and the facts indicate, or reasonably could be construed to indicate, that the TBC has jurisdiction, you should seek removal within 30 days of being served the action. In-house counsel should add this to the items to be immediately considered upon receipt of an action.

Sample Contractual Provisions

[If Located in Initial Five Texas Business Court Divisions]

Any claim, charge, allegation, demand, suit, cause of action, action, complaint, dispute, or controversy (“Claim”) arising out of, relating to, or in connection with, this Agreement or any conduct related to, arising out of, or in connection with, the performance or nonperformance of this Agreement (“Direct Matter”), or, with the consent of the judge of a business court in the Business Court Division of the State of Texas (and the parties shall have an affirmative obligation to seek such judge’s consent), any Claim which is related to, arises out of, or is in connection with, the Direct Dispute that is within the jurisdiction of a business court in the Business Court Division of the State of Texas (“Supplemental Matter” and together with the Direct Matter, the “Matter”), shall be exclusively brought before a business court in the [First, Third, Fourth, Eighth, or Eleventh] Business Court Division of the State of Texas (“Texas Business Court”) if the Matter meets the jurisdictional requirements of such Texas Business Court and such Texas Business Court is then accepting new case filings; and, if the Matter does not meet the jurisdictional requirements of such Texas Business Court or the Texas Business Court is not then accepting new filings, then the Matter shall be exclusively brought in [the Texas state district court or federal district court in the county of ________________].

[If located in Six Future Divisions]

Any claim, charge, allegation, demand, suit, cause of action, action, complaint, dispute, or controversy (“Claim”) arising out of, relating to, or in connection with, this Agreement or any conduct related to, arising out of, or in connection with, the performance or nonperformance of this Agreement (“Direct Matter”), or, with the consent of the judge of a business court in the Business Court Division of the State of Texas (and the parties shall have an affirmative obligation to seek such judge’s consent), any Claim which is related to, arises out of, or is in connection with, the Direct Dispute that is within the jurisdiction of a business court in the Business Court Division of the State of Texas (“Supplemental Matter” and together with the Direct Matter, the “Matter”), shall be exclusively brought before a business court in the geographic proximity to [city] (“Texas Business Court”) if the Matter meets the jurisdictional requirements of such Texas Business Court and such Texas Business Court is then accepting new case filings; and, if the Matter does not meet the jurisdictional requirements of such Texas Business Court or the Texas Business Court is not then accepting new filings, then the Matter shall be exclusively brought in [the Texas state district court or federal district court in the county of ________________.

For more information about business litigation, see our Business Litigation and Complex Commercial Disputes and Industry Focused Legal Solutions pages.

This article has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligations on you and your company. © 2023 Klemchuk PLLC

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