Texas codifies the business judgment rule and lets companies limit small-holder derivative suits
Texas Governor Greg Abbott signed Senate Bill 29 on 14 May 2025, effective immediately. It codifies the business judgment rule for Texas corporations and lets listed or larger corporations require shareholders to hold up to 3% of shares before bringing a derivative suit. It also adds a process for testing directors' independence and routes disputes to the new Texas Business Court, part of Texas's push to attract incorporations from Delaware.
Senate Bill 29 amends the Texas Business Organizations Code on the formation, governance and internal management of Texas entities. It was signed on 14 May 2025 and took effect immediately.
What changed
- Business judgment rule: the rule is put into statute, protecting directors' decisions from shareholder challenge unless specific conditions such as fraud or knowing violation of law are shown.
- Ownership threshold for derivative suits: corporations with listed shares, or that opt in and have 500 or more shareholders, can adopt a bylaw or charter provision requiring a shareholder to own up to 3% of the shares to bring a derivative claim.
- Independence determinations: a corporation can ask a court to decide whether the directors considering a shareholder demand are independent and disinterested.
- Disputes are routed to the Texas Business Court, and there are parallel provisions for LLCs and limited partnerships.
Who is affected
Texas corporations, companies thinking about reincorporating in Texas, and their boards and company secretaries.
What to do
Texas corporations can review whether to adopt a derivative-suit threshold in their bylaws.
Later developments
In 2026 a federal court in Texas upheld a 3% threshold bylaw at Southwest Airlines, the first ruling on the new provision.