Corporate Governance Foundations.

Section 1The classical model of corporate governance

Public-company governance rests on a simple three-step chain: shareholders elect directors; directors hire and supervise managers; managers run the business. That structure has been stable for over a century.

Each link in the chain has a different legal character and a different accountability mechanism:

• Shareholders are the residual claimants and ultimate principals. They hold legal title to shares, vote one share per one vote (DGCL § 212(a); TBOC § 21.366), elect directors at the annual meeting, and approve fundamental transactions (mergers, charter amendments, dissolution).
• Directors owe fiduciary duties (care, loyalty, good faith) to the corporation and its shareholders. They set strategy, hire and oversee the CEO, and approve major transactions. They are accountable through annual elections, derivative litigation when fiduciary duties are breached, and the market for corporate control.
• Officers (the CEO and executive team) manage daily operations under board direction. The scope and application of officer fiduciary duties vary by jurisdiction and role; in Delaware, officers owe the same tripartite duties of care, loyalty, and good faith as directors (see Gantler v. Stephens, 965 A.2d 695 (Del. 2009) (en banc)), and they are in any event accountable to the board, which can hire and fire them.

This is the baseline architecture for standard public corporations under state corporate law. It is the architecture the SEC and federal securities laws layer on top of. It is also the architecture this Initiative's Reincorporation Index uses as its baseline reference: every cohort firm is governed by a variant of this delegation chain, irrespective of incorporation state (Delaware, Texas, Nevada, or New Jersey).

Section 2The external governance ecosystem

The chain doesn't operate in a vacuum. Regulators, auditors, lenders, exchanges, insurers, proxy advisors, and the courts that hear shareholder suits all influence the company from the outside — none of them, however, ordinarily exercises day-to-day managerial authority. Click any node in the diagram below for a plain-English explanation with a real example, the black-letter authority, and primary-source citations.

The diagram captures the load-bearing point: most external forces on the perimeter have a defined channel through which they reach the corporation. The SEC enforces disclosure under Section 14(a) of the Securities Exchange Act and the proxy antifraud rules.¹ State corporate law sets the chartering rules.² PCAOB-registered auditors provide financial-statement assurance under U.S. GAAS / PCAOB AS. Lenders enforce covenants. D&O insurers price the litigation environment, and underwriting practice appears to be evolving toward retentions and exclusions tied to forum-selection and threshold provisions; the empirical picture is still developing.³ Stock exchanges enforce listing standards. Proxy advisors recommend votes; Texas SB 2337's proxy-advisor disclosure regime is in active litigation as of the editorial cutoff (procedural posture and primary-source links in footnote 4).⁴ Customers, competitors, and stakeholders discipline the firm through markets and reputation. None of these actors ordinarily exercises day-to-day managerial authority; each acts through a defined channel.

Two external actors are different. Contingency-fee stockholder-plaintiffs' firms often identify the case, finance the litigation, draft the complaint, control much of the litigation strategy, negotiate the settlement, and seek a court-approved fee. The named shareholder is real and the claim is legally a shareholder claim, but in many representative cases the functional initiative runs from counsel rather than from an economically meaningful shareholder principal. Adjudicating courts are the gate through which private enforcement becomes governance pressure: in representative and derivative cases they decide demand-futility, approve settlements, allocate fees, set fiduciary standards, and issue prospective conduct rules in the form of judicial opinions that bind future boards. Both actors influence corporate behavior in ways that are not easily described as either pure regulation or pure adjudication. Sections 3 and 4 below put each on its own footing.

Section 3The fundamental question

Some scholars argue that "alpha activist" plaintiffs' firms function as quasi-internal corporate governance actors because they identify cases that mainstream investors ignore, finance the litigation, and discipline boards that other shareholders cannot effectively reach.⁵ On this view, contingency-fee firms supply a private enforcement function that the classical model formally assigns to shareholders themselves and that index-fund-dominated capital markets are structurally unwilling to perform.

The contrasting view — the position this primer adopts — is that the legal-economic identity of contingency-fee firms is irreducibly external to the corporation. Their economic interest is in fee awards, not in shareholder wealth.⁶ The most prominent recent example: in In re Dell Technologies Inc. Class V Stockholders Litigation, the Court of Chancery awarded class counsel $266.7 million in attorneys' fees — 26.67% of the $1 billion settlement and roughly 66× counsel's documented $4 million lodestar.⁷ The Delaware Supreme Court affirmed en banc on August 14, 2024. The fee award alone is larger than the total market capitalization of many public companies tracked by this Initiative's Reincorporation Index.

The Texas legislature has addressed the resulting incentive structure directly. Texas Senate Bill 29 (89th Leg., R.S. 2025), which became effective May 14, 2025, codified an ownership threshold for derivative-suit standing: a shareholder bringing a derivative proceeding must hold at least 3% of outstanding voting shares unless the company has opted out by bylaw or charter provision.⁸ The threshold appears to have been first enforced in federal court on March 17, 2026 in Gusinsky v. Reynolds, in which Judge Kinkeade is reported to have dismissed the derivative complaint against Southwest Airlines because the named shareholder held 100 shares — far below the 3% threshold — and the bylaw was held to apply at the time the proceeding was instituted, not at the time of the pre-suit demand letter. The court's specific dismissal order is not yet available in the free public databases at editorial cutoff; this primer relies on the docket and on a contemporaneous practitioner summary.⁹

Five Texas-connected public companies have adopted the § 21.552 threshold so far. Three are Tier-1 EDGAR-verified Texas-incumbent companies that adopted standalone bylaw amendments shortly after SB 29 took effect; two are bundled adopters (Tesla via its Delaware → Texas reincorporation and Southwest via the contested-bylaw amendment that produced the Gusinsky case). Click any card for the verbatim bylaw language and the EDGAR primary source.

This Initiative's working position is that the contingency-fee plaintiffs' bar is external. It supplies an enforcement service to the corporate-governance ecosystem, but its claim to be part of the principal-agent chain depends on a counter-factual: but for contingency-fee firms, would shareholders be able to hold boards accountable through derivative action? On the current data — index-fund managers do not litigate; activist hedge funds occasionally bring cases but at modest scale — the answer is empirically yes, the enforcement function would diminish. The policy question is whether that diminution is acceptable in exchange for narrower agency costs in the fee channel itself. The Texas legislative answer is the 3% threshold of SB 29; the Delaware answer is closer attention to fee proportions under Sugarland.¹⁰

Section 4Two questions for the field

Question 1: Should the contingency-fee plaintiffs' firms be regarded as part of internal governance?

If the answer is yes — that they supply an enforcement function the classical model would not otherwise produce — then the policy task is to constrain their fee-share-of-recovery economics so that the enforcement work is performed on terms shareholders would themselves choose ex ante. The Texas legislative answer (the 3% threshold of SB 29, codified at TBOC § 21.552(a)(3), plus codified business-judgment rule with particularity pleading at TBOC § 21.419, plus the 45-day demand-review-panel procedure at TBOC § 21.554) is one such answer. Delaware's continued close attention to fee proportions under Sugarland — visible in the Court of Chancery's Dell Class V opinion and the Delaware Supreme Court's en banc affirmance — is another. Both responses preserve the enforcement channel while attempting to reduce its rent-seeking dimension.

If the answer is no — that plaintiffs' firms are external actors whose interests are not coextensive with shareholder interests — then their incentives should be evaluated like those of any other external agent (auditors, lenders, insurers, exchanges, proxy advisors), and the framework for evaluating them should be agency-cost analysis applied to their contracted role, not internal-governance theory.¹¹

Question 2: What is the appropriate governance role of the adjudicating courts?

Even if plaintiffs' firms are external, the courts that hear their cases are not. Courts decide demand-futility, approve settlements, allocate fees, set fiduciary standards, and issue prospective conduct rules in the form of judicial opinions that bind future boards. In contested corporate cases — from Delaware to Texas to federal district court — the choice of forum and the standard of review are doing substantial governance work.

This Initiative's position is that courts that hear derivative and representative actions are not neutral umpires of external dispute. They are gating actors with substantive governance authority. That authority is highest in jurisdictions where fiduciary doctrine is judge-made (Delaware) and is being consciously rebuilt in jurisdictions where the legislature has begun moving doctrine into statute (Texas). The post-Tornetta wave below — anchored at one end by the rescission and ultimate reversal of Elon Musk's Tesla compensation package¹² and bracketed by the Delaware Supreme Court's clear-day business-judgment-rule treatment of TripAdvisor's Delaware → Nevada conversion in Maffei v. Palkon¹³ — shows the institutional traffic this question is generating.

The framework matters because the empirical work this Initiative produces is calibrated to it. Cohort firms in the Reincorporation Index are evaluated against the classical model's expectations about how each external force should reach the corporation — and where they don't, against the substitute mechanisms the alternative incorporation state provides. The Index's Day-0 announcement results are the empirical anchor for whether the substitutions are wealth-affecting at the moment of corporate action.