7 www.loubar.org May 2026 Don’t leave anything to chance. Sure, there is a chance you’ll never need us. But why take that chance? Lawyers Mutual is dedicated to Kentucky lawyers and makes your work our priority. Call (502) 568-6100 or visit LMICK.com for more information on how you can cover and protect your practice. We want you to focus on what matters. Lenders, especially in the commercial real estate space, require their borrow- ers (or their borrower’s sole members) to be an SPE, or Special Purpose Entity/ Single Purpose Entity, which requires it to only engage in the business of owning and operating the property that secures their loan. An SPE also has separateness requirements, to ensure the entity is inde- pendent and to avoid having its assets be substantively consolidated with the assets of an affiliate in connection with that af- filiate’s bankruptcy. Delaware has ample case law on these topics, which makes the lenders more comfortable knowing the outcome should things go awry with the loan. These requirements are often included in the borrower’s operating agreement but can also be included in the loan agree- ment or mortgage entered into between the lender and borrower. Lenders also require various legal opinions from their borrowers including certain corporate opinions from the state of formation, opinions regarding the Delaware LLC statute, an Authority to File Voluntary Bankruptcy Petition opinion and, depend- ing on the loan amount, a Substantive Non-Consolidation opinion, all of which concern Delaware law. With the strong backing of case law and es- sentially knowing outcomes, the lenders are most comfortable having Delaware law apply for a borrower’s state of formation. “DExit” Begins While Delaware has been the go-to for more than a century, other states are making a push to take over as a strong state for com- pany formations. Nevada is among the states that have tried, and some companies, including TripAdvisor and Dropbox moved their in- corporations to Nevada in 2023 and 2025, respectively. However, Texas has started to gain the most traction. Two of Elon Musk’s com- panies, SpaceX and Tesla, have moved to from Delaware to Texas after Musk claimed the Chancery Court was unpre- dictable after ruling against his corpo- rate compensation plan in 2021. Musk and others felt that the Chancery Court substituted its judgment for the business judgment of the directors/stockholders of the companies. Coinbase also moved to a Texas incorporation in 2025, per its filings with the SEC. Texas established a rival to the Chancery Court by creating the Texas Business Court (the “Business Court”) on September 1, 2024. Per the Business Court’s website, it is “a statewide, specialized trial court created to resolve certain complex business disputes.” The Business Court will eventually have two judges appointed to 11 divisions; however, only five of those divisions currently have judges appointed by the governor, while the other six divisions remain without judges until at least July 1, 2026. The governor appoints judges who have some subject matter expertise, including at least 10 years’ experience in the aggregate in complex civil business litigation, transac- tional law and/or serving as a civil judge in Texas. Such appointees are to be confirmed by the Texas Senate. Two glaring differences between Delaware and Texas exist: (i) Delaware’s judges receive 12-year terms, while Texas’ judges only have two-year terms with the possibility of reap- pointment, and (ii) Delaware has a century more case law and precedent to help provide certainty in the corporate landscape. The large precedent helps the Chancery Court move quickly and adjudicate things efficiently, with judges who have developed deeper expertise in that specific section of the law over their extended tenure on the court. The Business Court’s limited jurisdiction will limit the number of cases heard and may help cases get to resolu- tion quicker. But its lack of precedent and certainty on how it will rule due to the potential regular turnover of judges every two years raise issues of lack of continuity and expertise development in the limited scope of the court. Delaware Fights Back Delaware saw the tides begin to change, starting a push to reform their laws in or- der to keep companies formed in the state and encourage new companies to look to Delaware as their state of formation. This includes changes to Section 144 and 220 of the 1899 Law, which, among other things, (i) allows company boards of directors to clear conflicts with controlling stockhold- ers or interest directors by following the procedures laid out in the law, (ii) aims to reduce litigation by shareholders and clarify directors’ independence and (iii) restricts shareholder access to the com- pany’s books to “core” documents. Will Texas Overtake Delaware? Given the youth of the Business Court and the lack of strong settled case law on Texas’ corporate laws, Texas likely has work to do to overtake Delaware as the powerhouse of entity formation. Texas continues its legislative push to establish a business- friendly atmosphere, including codifying the Business Judgment Rule. Many entities may continue to make the jump and move their entity formations to Texas. However, it may take lenders a while to see Texas as Delaware’s equal, with consistent, clear case law precedent to protect them (depending on how the Business Court rules and what precedent it creates). Drew Teague is a real estate attorney licensed in Kentucky with a national practice, representing lenders in commercial real estate financing. He is a senior associate at FBT Gibbons and vice- chair of the LBA’s Corpo- rate Law Section. n (Continued from previous page) HAYNIE & REYNOLDS FAMILY LAW MEDIATION Judge Hugh Smith Haynie (ret.) Rebecca C. Reynolds FOR SCHEDULING, PLEASE CONTACT [email protected], OR CALL (502) 354-5049. ✓ CCo-mediators specializing in the most complex divorce and custody cases ✓ NNo charge for preparation of your case ✓ W We will simultaneously draft the agreement for you, saving you and your clients time and money
