Governor Greg Abbott signed Senate Bill 29 (SB 29) into law, marking a significant milestone in Texas corporate law. The new legislation introduces a series of reforms to the Texas Business Organizations Code (TBOC) designed to strengthen Texas’s position as a leading jurisdiction for corporate formation and governance. These reforms are expected to make the state more attractive to companies looking for a favorable legal environment, potentially challenging Delaware’s dominance in corporate law.
SB 29 introduces key changes that directly impact business governance, litigation, and dispute resolution. Among the most significant provisions are the codification of the business judgment rule, restrictions on derivative lawsuits by minority shareholders, and enhanced clarity in corporate governance disputes. Legal experts and corporate practitioners predict that these reforms will drive more businesses to incorporate in Texas, further bolstering the state’s reputation as a top destination for both new and established companies.
The Business Judgment Rule: A Key Reformation
One of the central provisions of SB 29 is the codification of the business judgment rule, which protects corporate directors from personal liability for decisions made in good faith, with the belief that they are acting in the best interests of the company. While the business judgment rule has been a foundational element of Delaware corporate law for many years, Texas has now formally adopted it into its legal framework, offering companies greater certainty about their corporate governance practices.
Under the new law, directors of Texas-incorporated companies are granted protection against liability for decisions that result in negative financial outcomes, provided that the decisions were made with proper due diligence and a reasonable belief that they were acting in the best interests of the company. This reform is aimed at encouraging corporate leaders to make bold, forward-thinking decisions without fear of legal repercussions if those decisions do not ultimately lead to positive outcomes.
“This reform sends a clear message that Texas is a business-friendly state where corporate governance is respected and directors can perform their roles without undue concern about personal liability,” said Jonathan K. Moore, a corporate law expert at Vinson & Elkins.
The move to codify the business judgment rule is seen as an effort to make Texas more competitive with Delaware, which has long been the preferred state for incorporation due to its well-developed body of corporate law and judicial precedent. By providing clearer protections for directors, Texas hopes to become a more attractive option for companies, especially those in the technology and innovation sectors.
Limiting Derivative Lawsuits by Minority Shareholders
Another major provision of SB 29 is the limitation of derivative lawsuits by minority shareholders. Under previous Texas law, minority shareholders could file derivative suits on behalf of the corporation, alleging wrongdoing by the board of directors or management. These lawsuits often led to costly and lengthy litigation, sometimes resulting in settlements that did not necessarily benefit the company or its shareholders.
SB 29 introduces new standards that make it more difficult for minority shareholders to bring derivative lawsuits. Specifically, the law requires shareholders to first demonstrate that they have made a reasonable attempt to resolve the issue internally before seeking court intervention. In addition, the law imposes stricter criteria for standing, meaning that only shareholders who hold a significant stake in the company will be able to bring such suits.
Proponents of the reform argue that it will help reduce frivolous lawsuits and prevent corporate resources from being spent on legal battles that are unlikely to benefit the company or its shareholders. By making it more difficult for minority shareholders to bring lawsuits, SB 29 is intended to foster a more stable and predictable corporate environment in Texas.
“Minority shareholder derivative actions have often been used as a tool to extract settlements rather than to address legitimate concerns,” said Sarah Lopez, a corporate litigation attorney at Bracewell LLP. “This reform helps to streamline the legal process and protect companies from costly, baseless litigation.”
However, critics of the reform argue that it could limit the ability of shareholders to hold corporate directors accountable for misconduct. They worry that the law could disproportionately benefit larger shareholders and insiders, leaving minority investors without an effective means of redress if they are harmed by corporate wrongdoing.
Clearer Guidelines for Corporate Governance Disputes
SB 29 also aims to provide greater clarity in the resolution of corporate governance disputes. The law introduces specific guidelines for how disputes between shareholders, directors, and other corporate stakeholders should be resolved. This includes provisions on the interpretation of shareholder agreements, board authority, and the responsibilities of directors and officers. By outlining these areas more explicitly, SB 29 seeks to reduce ambiguity in corporate governance and provide a clearer path for resolving conflicts without resorting to litigation.
The law also enhances the ability of companies to adopt bylaws and governance structures that are tailored to their specific needs. By providing greater flexibility in how companies govern themselves, Texas hopes to attract a broader range of businesses, particularly startups and emerging industries, that may seek more customized governance arrangements than those typically available under Delaware law.
“Texas’s new law offers flexibility that will appeal to businesses looking for more control over their corporate governance,” said George Anderson, a partner at Foley & Lardner LLP. “For companies that want to establish clear guidelines and avoid lengthy litigation, these changes are a welcome step forward.”
The clearer framework for resolving governance disputes will likely be particularly attractive to companies in the technology, biotech, and financial sectors, which often deal with complex corporate governance issues as they scale. These industries will likely appreciate the certainty provided by SB 29, which offers a more predictable legal environment for handling internal disputes.
The Impact on Corporate Formation and Competition with Delaware
Texas has long been known for its favorable regulatory environment, but with the passage of SB 29, the state is positioning itself as a serious competitor to Delaware, which has traditionally been the preferred state for incorporation due to its well-established corporate law framework. By codifying the business judgment rule, limiting shareholder derivative suits, and providing clearer governance dispute resolution mechanisms, Texas is making itself an increasingly attractive option for businesses seeking to incorporate in a jurisdiction that offers legal certainty, flexibility, and a strong commitment to business interests.
While Delaware remains a popular choice for large public companies and those seeking a highly developed body of corporate law, Texas is likely to appeal to smaller businesses, startups, and even some mid-sized companies that are looking for a less complex and potentially more cost-effective option. Additionally, the absence of a state income tax in Texas, combined with these new legal reforms, could make the state an even more attractive destination for companies that prioritize a favorable business climate.
“SB 29 is a game-changer for Texas,” said Rick Johnson, a corporate lawyer based in Dallas. “By strengthening corporate governance protections and providing a clearer, more flexible framework, Texas is sending a clear message to the business world that it’s a place where companies can thrive.”
Looking Ahead: The Future of Texas Corporate Law
With the enactment of SB 29, Texas is positioning itself as an increasingly attractive jurisdiction for corporate formation and governance. Legal experts predict that the reforms will drive further investment and economic growth in the state, especially as businesses seek a legal environment that offers both stability and flexibility. However, it remains to be seen whether Texas can challenge Delaware’s dominance in the long run, particularly given Delaware’s deep legal precedent and established reputation as the corporate law capital of the U.S.
As Texas continues to refine its legal framework for business, SB 29 is a significant step in making the state a more competitive player in the realm of corporate law. The full impact of the law will likely unfold in the coming years, as more companies take advantage of Texas’s reforms and as legal challenges or further adjustments to the law arise.
