Texas Takes Bold Steps to Transform Corporate Governance

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Texas Corporate Governance Reform

News Summary

Texas Governor Greg Abbott has signed Senate Bill 29 into law, aiming to reshape corporate governance in the state. This legislation limits minority shareholders’ ability to file derivative lawsuits and codifies the business judgment rule, providing greater protection for directors. The bill substantially impacts various corporate entities, improving transparency while reducing legal risks. It also allows public companies to establish committees of independent directors, enhancing the governance framework. With these reforms, Texas is positioning itself as a competitive alternative for business incorporations, fostering a favorable environment for growth and innovation.

Texas has taken a major step towards transforming its business governance landscape with the signing of Senate Bill 29 (SB 29) by Governor Greg Abbott on May 14, 2025. This legislation introduces significant changes, particularly aimed at public companies, by curtailing minority equity holders’ ability to initiate derivative lawsuits against corporations and integrating the business judgment rule into Texas law.

SB 29 establishes a new legal framework where the burden of proof in breach of fiduciary duty claims now falls on the plaintiffs. It requires that any claims brought forward must meet heightened pleading standards, specifically demanding detailed particulars from the plaintiffs. This shift is expected to reduce frivolous lawsuits, thereby streamlining corporate governance and enhancing legal clarity for corporate directors.

Under the new law, shareholders owning less than 3% of corporate stock are prohibited from filing derivative lawsuits against public companies or those with 500 or more shareholders. Additionally, SB 29 limits the recovery of attorney’s fees in cases where the legal action merely results in additional or amended disclosures to shareholders, further discouraging baseless claims.

The legislation also provides public companies with the opportunity to form committees of independent directors tasked with reviewing transactions involving insiders, which serves to strengthen protections against potential claims. Moreover, it imposes restrictions on shareholder requests for books and records, clarifying what constitutes corporate documents under Texas law.

SB 29 allows corporations to designate exclusive venues for internal entity claims in Texas courts and grants the option to waive jury trials through specific bylaw provisions. These reforms aim to establish Texas as a competitive alternative to Delaware for companies seeking favorable corporate governance conditions, thereby attracting more businesses looking to minimize litigation risks and enhance dispute resolution efficiency.

Governor Abbott noted that these reforms are designed to bolster Texas’s status as a premier state for business incorporation, support innovation, and foster economic growth. The legislation aims to provide corporate leaders with enhanced legal certainty, allowing for capital deployment without the looming threat of personal liability.

With the future of corporate governance shifting, the Texas Business Court is anticipated to take on many lawsuits arising under the newly codified business judgment rule. Plans are in place for additional legislation that will expand the jurisdiction and capabilities of this specialized court, solidifying Texas’s commitment to modern and effective business practices.

The corporate community has responded positively to these changes, with various organizations, including Nasdaq, praising the reforms for enhancing corporate governance standards within the state. The combination of the business judgment rule and the new limitations on derivative lawsuits is seen as a means to encourage growth and attract businesses to Texas.

Overall, SB 29 represents a critical advancement in Texas’s corporate law, aiming to create a more business-friendly environment that minimizes legal disputes and maximizes economic opportunities. As Texas positions itself as a leading choice for business incorporation, the implications of this bill may have lasting effects on the corporate landscape in the years to come.

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