Last month, Texas Governor Greg Abbott signed into law Senate Bill 29 (SB 29), introducing significant amendments to the Texas Business Organizations Code (TBOC). Chief among these are the codification of the “business judgment rule” and new limitations on shareholder derivative actions. [1] The changes reflect efforts to make Texas a more business-friendly jurisdiction by providing greater legal certainty for directors and officers of Texas entities, especially public companies.
Key TBOC Changes:
- Codification of the Business Judgment Rule
While Texas courts have long recognized the business judgment rule, SB 29 codifies the rule by establishing a presumption that directors and officers act (1) in good faith, (2) on an informed basis, (3) in furtherance of the interests of the corporation, and (4) in a manner consistent with the law and the corporation’s governing documents. This presumption applies to publicly traded corporations[2] and any other corporation with a statement in its governing documents affirmatively electing to be governed by Section 21.419. The burden now shifts to the claimant to rebut this presumption in any fiduciary claim against an officer or director and prove both a breach of duty to the company and that such breach involved fraud, intentional misconduct, an ultra vires act, or a knowing violation of the law. This imposes a heavy burden on any would-be claimant and offers significant protection to officers and directors.
- Limitations on Derivative Actions
SB 29 also includes new provisions addressing shareholder litigation. Corporations are now permitted to set minimum ownership requirements to bring a derivative proceeding. The minimum ownership threshold must be specified in the corporation’s governing documents and may not exceed 3% of the corporation’s outstanding shares. This new provision applies to publicly traded corporations and any corporation that affirmatively elects to be governed by Section 21.419. By setting a minimum ownership requirement, individuals with minimal stakes are prevented from pursuing claims that may not align with the broader interests of the company.
- Predetermination of Director Independence
To further bolster director and officer protections, SB 29 allows a corporation to receive an advance judicial determination that a special committee is independent (prior to the special committee undertaking a review of a proposed, conflicted transaction). After forming a special committee, a corporation may petition the Texas Business Court to preapprove the independence of its members. Notice of the petition must be provided to all existing stockholders, either directly or through a filing with the SEC, giving them an opportunity to appear and rebut the claims of the corporation. After an evidentiary hearing, the court will rule preemptively on the committee’s independence. The court’s determination is dispositive and will be provided within 75 days of the corporation’s petition. This process can also be used for demand or special litigation committees formed to evaluate or pursue derivative claims on behalf of the corporation.
While the ability to obtain a court-approved determination of committee independence could expedite the resolution of certain transactions or litigation, the public nature of these proceedings and the opportunity for shareholders to contest the committee’s independence may make corporations cautious about utilizing this process in practice.
- Waiver of Jury Trial and Forum Selection
In response to the ability of Delaware corporations to waive jury trials, SB 29 authorizes Texas corporations to include a waiver of jury trial in their governing documents. The waiver applies to any internal entity claim, giving corporations the power to waive jury trials for almost all internal issues.[3] Additionally, a person asserting an internal entity claim is considered to have knowingly waived the right to a jury trial if the person either (1) voted for or ratified the waiver language, or (2) acquired or held stock at the time when the waiver was included in the governing documents.
SB 29 also allows corporations to include venue selection provisions in their governing documents. This allows corporations to designate a Texas court, such as the Texas Business Court, as the exclusive venue for these claims.
- Narrowing of Access to Books and Records
SB 29 provides new limitations on books and records requests by shareholders, in an attempt to limit the use of records requests as a litigation or discovery tactic. While restrictions already existed (e.g., shareholders must hold shares for 6 months or hold at least 5% of all outstanding shares to make a demand), the new statute precludes shareholders from submitting requests for emails, text messages, and similar electronic communications unless the shareholder can prove, prior to reviewing the requested materials, that the particular communication effectuates a corporate act. Additionally, in the context of shareholder derivative suits, a written demand for these types of materials is not deemed to be for a proper purpose and cannot be validly requested.
- No Recovery of Attorney Fees in Disclosure Settlements
SB 29 prohibits the recovery of attorneys’ fees for “disclosure only” settlements. Under the new law, additional or amended disclosures made to shareholders, limited partners, or members do not constitute a substantial benefit to the entity for purposes of awarding attorney’s fees. Thus, if the sole outcome of a derivative proceeding is to require a corporation to produce additional disclosures, attorneys representing the plaintiff are not entitled to fee awards.
This change is intended to curb so-called “strike suits”—litigation brought primarily to extract attorneys’ fees in exchange for minor or technical supplemental disclosures that provide little real value to shareholders or the corporation. By removing the incentive for such suits, the amendment seeks to limit frivolous or opportunistic litigation and ensure that attorneys’ fee awards in derivative actions are reserved for cases resulting in a material benefit to the company and its stakeholders.
- Application of SB 29 to Other Entity Types
Other Texas entity types may take advantage of these new protections either by being registered on a public exchange or by adopting the relevant provisions in its governing documents; however, a pre-determination of the independence of a special committee is only available for corporations.
Conclusion
The latest changes to the TBOC highlight Texas’ continued efforts to foster a pro-business environment and may make Texas an increasingly attractive jurisdiction for incorporation. Texas entities – and those considering redomestication in Texas – should review their governing documents and corporate practices to ensure compliance and maximize the benefits of these new provisions. Winstead’s Corporate lawyers are available to assist you with any questions you may have regarding these developments.
[1] SB 29 became effective on May 14, 2025.
[2] Publicly Traded Corporations include any entity that is registered on a stock exchange, including any stock exchange with its registered address in Texas.
[3] An internal entity claim means a claim of any nature, such as a derivative claim, that is based on, arises from, or relates to the (i) rights, powers, and duties of its governing authority, governing persons, officers, owners, and members; and (ii) matters relating to its membership or ownership interests.
