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Texas Takes Bold Steps to Transform Corporate Governance

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 Governor Signs Bill Transforming Corporate Governance

On May 14, 2025, Texas Governor Greg Abbott signed Senate Bill 29 (SB 29) into law, signifying a substantial overhaul of corporate governance in Texas, particularly for public companies. This legislation aims to enhance the operating environment for businesses by modifying the landscape of litigation and governance practices.

SB 29 introduces several key changes, notably limiting the capacity of minority equity holders to initiate derivative lawsuits against corporations. The new law establishes that shareholders owning less than 3% of a company’s stock cannot file such lawsuits against public entities or those with over 500 shareholders. Additionally, it imposes rigorous requirements on plaintiffs, who will now bear the burden of proof in breach of fiduciary duty claims under the amended law.

This transformative bill codifies the business judgment rule, which provides directors safe harbor from personal liability when making decisions that are in good faith and aligned with the interests of the company. By codifying this rule, the legislation is designed to foster an environment where corporate leaders can make bold decisions without fear of personal repercussions, thereby promoting capital deployment and economic growth in the state.

Key Provisions of SB 29

In addition to limiting derivative lawsuits, SB 29 introduces other significant reforms:

The law restricts the ability to recover attorney’s fees in derivative actions if the outcome only leads to additional or amended disclosures to shareholders.
It allows public companies to establish committees composed of independent directors specifically to review transactions involving insiders, thereby offering enhanced protection against claims.
Shareholders face heightened scrutiny regarding books and records requests, as the law specifies what constitutes corporate records.
Corporations are granted the ability to designate exclusive venues for internal claims within Texas courts and may opt to waive jury trials through company bylaws.

Impact on Texas Business Landscape

With the implementation of SB 29, Texas is strategically positioning itself as a competitor to Delaware, a long-established leader in corporate entity charters. The hope is that the reforms will attract companies looking for reduced litigation risks and more efficient dispute resolution mechanisms. This initiative is part of a larger effort to enhance Texas’s reputation as a prime location for business incorporation and governance.

The establishment of the Texas Business Court will further facilitate the handling of lawsuits relating to the codified business judgment rule, signifying a dedicated effort to streamline corporate legal matters. Plans are underway for additional legislation to expand the jurisdiction and scope of this court, potentially making Texas a hub for corporate litigation.

Reactions and Future Prospects

Various organizations, including Nasdaq, have responded positively to the reforms brought by SB 29, viewing them as beneficial for the overall governance landscape in Texas. Governor Abbott has indicated that the legislation will fortify Texas’s position as a leading state for business operations, thereby promoting innovation and fostering economic progress.

As the legal landscape continues to evolve in Texas, the implementation of SB 29 marks a significant shift towards a more business-friendly environment, setting a precedent for corporate governance reforms that could redefine the industry standard across the nation.