Securities litigation (I’m including derivative litigation as part of this general idea) is one of the most interesting and important areas of commercial litigation — it is how investors seek to protect their investments from fraud and self-dealing. While costly to businesses, it is hard to deny that this type of litigation is an important mechanism for accountability.
It is arguably the reason why the United States has been able to attract more capital via foreign investment than any other country in the world. Indeed, America is the destination of choice to invest money securely — which is largely due to our fair, well-regulated, transparent and predictable capital markets.
Dallas has long been a center of finance. Dallas is now home to more finance firms — investment banks, fin tech, family offices and private equity funds — than any other city save for New York. Also, 24 Fortune 500 companies are headquartered in the Dallas-Fort Worth area, and another 27 in Texas overall, many of which are served by Dallas’ financial hub.
Dallas has recently been making moves that are likely to result in it becoming a new center for securities-related litigation. As a securities litigator, this author is excited about the prospect.
Specifically, Dallas has positioned itself as a contender for hosting a new stock exchange and serving as a hub for emerging financial technologies (read, alternative investment vehicles like crypto currencies and who knows what else). None of us was around at the time, but there already was a Dallas Stock Exchange — the DSX — in the 1920s, though it was eventually merged into the American Stock Exchange, which then merged with the New York Stock Exchange.
To contend with or, perhaps, stamp out a burgeoning Dallas Stock Exchange, the NYSE has announced it plans to bring the former Chicago Stock Exchange to Dallas and reincorporate it as the NYSE Texas. The NYSE bought the Chicago exchange in 2018 and rebranded it NYSE Chicago. For years, it has been a fully electronic trading center, without the need for a raucous floor — so the question is “what exactly is the NYSE moving to Dallas?” We’ll see.
The significance of a stock exchange (or two) in Dallas to securities litigation is this: Right now, the Southern District of New York in Manhattan hosts almost 60 percent of all federal public securities litigation in the country. There are 45 federal judges in that district who became experts as lawyers at handling some of the most complex securities matters. Why the SDNY? Primarily because both the NASDAQ and NYSE are in Manhattan, and having shares trading on the exchange allows the SDNY to have personal jurisdiction over those cases. That jurisdiction is not exclusive, but it is there.
Once shares are trading on an exchange in Dallas, one can only expect more cases to be brought here, defraying the glut of cases in Manhattan. While the SDNY dismisses 44 percent of securities cases at the 12(b)(6) stage.
Two other complementary trends are likely to help increase securities litigation in Dallas.
First, Texas recently created the Texas business courts to handle complex business disputes. Most notable about the business courts’ jurisdiction is that it includes any case involving securities or corporate governance challenges against a publicly traded company. Therefore, any publicly traded company reincorporating in Texas can be sued for any derivative action (and can force suit to be) in the Texas business courts, which can be venued in Dallas if the shares are on a Dallas-based exchange.
Currently, the Delaware Chancery Courts and the Manhattan Commercial Division host an overwhelming number of derivative actions due to the outsized number of businesses incorporated in Delaware, or who are traded on a Manhattan-based exchanges or otherwise have a New York nexus. Their state of incorporation again gives Delaware automatic general jurisdiction and so a Delaware business can be sued for any reason there. The Chancery courts are also experts and, having practiced in front of several judges on the judges Delaware Chancery Court (called vice chancellors), I can understand why so many go there to resolve disputes — something I hope develops here in Texas.
Secondly, perhaps due in part to the creation of the Texas business courts, many companies — including Elon Musk’s companies — are reincorporating in Texas. In January, the secretary of state’s office reported that the number of Texas business entities filed with the state had almost doubled in the last 10 years, going from 1.47 million to 2.93 million, and had risen 5 percent since the end of last year.
The reason for this influx no doubt has a lot to do with Texas’s cost and legal structure. It is pretty clear from his tweets that Elon Musk believes that a Texas business court would have been more favorable to him than the Delaware Chancery Court — e.g., the one that struck down his $55 billion pay package (twice) as being contrary to shareholder rights. The fact that he donated millions to judicial races in Texas to unseat appellate judges viewed as too friendly to plaintiffs (even though few are especially plaintiff friendly), suggests that the judicial landscape is important to the world’s richest man.
No doubt others are following suit for the same reason, as well as to take advantage of the lower costs of doing business in Texas (cheaper rent, cheaper land, lower taxes, lower workforce cost, less regulation — and a business-friendly judiciary probably doesn’t hurt).
Whatever the driver, Delaware’s loss is Texas’s gain!
Mazin A. Sbaiti is the founder of Sbaiti & Company, a nationwide litigation boutique law firm based in Dallas, Texas. Mr. Sbaiti has litigated state and federal securities disputes and derivative actions for the last twenty years, appearing in state and federal courts in New York, California, Texas and Delaware. He has also defended SEC investigations, and tried matters before FINRA and other arbitral panels.