Rewriting the rulebook: Corporate governance and the Texas temptation

As US companies increasingly seek to reincorporate in Texas, investors must carefully weigh the implications – not just for strategy, but for long-term governance and wider ESG standards.

Texas has been busy positioning itself as the new US hub for corporate (re)incorporation. The last few years have seen a number of legislative changes, including the establishment of a dedicated business court, and the passing of new laws as it seeks to compete with Delaware, the historic centre of US incorporations.

Quietly, companies started moving back in 2020 [1]. Citing lower taxes and operational costs, there was no evident reason to oppose the moves and only some companies are  required by their articles of association to seek shareholder approval via a vote.

Tesla changed this with their high profile move in 2024. The Delaware courts had ordered the repeal of Elon Musk’s 2018 compensation plan (valued at US$55.8bn [2]) in January of that year – finding that Musk had exercised control over the plan, the board was insufficiently independent and the company had failed to prove the plan was fair to shareholders. Fast forward to the AGM in June and the company sought approval (as required by their articles) to move their headquarters to Texas and to re-approve Musk’s compensation plan. Royal London Asset Management voted against both proposals.

Delaware’s court is renowned for its expertise in corporate law and its consistent rulings, with a legal predictability that is not easily replicated. Texas by contrast is still building its judicial infrastructure and lacks a depth of precedent. There is greater uncertainty for businesses and investors alike. The new laws are offering companies greater protection from shareholder lawsuits, reduced accountability and transparency, and enhanced protection for corporate boards. These measures weaken mechanisms for shareholders to hold management accountable – an essential pillar of good governance.

The new laws are offering companies greater protection from shareholder lawsuits, reduced accountability and transparency.

The most recently passed bill in June 2025 goes even further, seeking to interfere in the proxy voting process [3]. The bill requires proxy advisors to provide extensive disclosures and analyses of their clients' investment objectives and policies [4]. This is challenging because proxy advisors are not equipped to handle these demands [5].

It also focuses (and effectively seeks to limit) voting recommendations based on ‘non-financial factors,’ which they have defined as any environmental, social or governance matter, or considerations of diversity and inclusion.  While some debate the financial materiality of environmental and social factors, the financial relevance of governance factors has long been accepted. In our view, any suggestion that these are non-financial defies logic.

Mercadolibre, a South American competitor to Amazon, tabled a vote in June to move its headquarters from Delaware to Texas. Despite the company’s arguments for the move which included the more business-friendly legal environment in Texas and tax savings, the reduced shareholder rights and legal uncertainty led us to submit a vote against. A few days before the AGM, the proposal was withdrawn without explanation. We can hope that investor pushback contributed to this decision, alongside the reputational risks of being seen to avoid shareholder accountability.

We expect companies to continue moving to Texas or other states as they pass more business-friendly laws, potentially with or without requiring shareholder approval. The broader implications of this are significant. Coupled with the current rejection of certain ESG issues in the US, there’s real risk of a race to the bottom, leaving shareholders with more limited means of influence. We will continue to hold companies to account with our voting and engagement, but it remains to be seen how far reaching the consequences of these changes may be. 

Voting position MercadoLibre AGM 17 June 2025

Voting position Tesla AGM 13 June 2024

Our voting always aims to be pragmatic, reflective of local best practice and evolving market insights, and in the long-term interests of our clients. Alongside voting, our engagement, research, and advocacy also help to add value and meaning to our investment decisions. Voting and engagements may not always apply to any specific Royal London Asset Management fund or strategy, as each will have different investment objectives. Please check your prospectus for details on specific product objectives.

References

[1] More than 100 Companies Have Relocated to Texas Since 2020

[2] Del. Court of Chancery Orders Rescission of Musk’s $55.8B Tesla Compensation Plan

[3] Texas Senate Bill 2337 Regulates Proxy Advisors on ESG Disclosure

[4] Glass Lewis Response to TX SB 2337

[5] Regulatory framework for proxy advisory services, Texas Governor | ICGN

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