Derivative Action
A lawsuit filed by a shareholder, member, or other equity holder on behalf of the entity itself, asserting a claim that belongs to the entity but that management has refused or failed to pursue. The principal procedural vehicle for challenging breaches of fiduciary duty.
A derivative action is a lawsuit filed by a shareholder, member, or other equity holder on behalf of the entity itself, asserting a claim that belongs to the entity but that management has refused or failed to pursue. The plaintiff seeks recovery for the entity, not personally, except in narrow circumstances. Derivative actions are the principal procedural vehicle for challenging breaches of fiduciary duty by directors, officers, managers, or other governing persons.
Standard procedure
Standing. The shareholder must have been a shareholder at the time of the act or omission, or have become one by operation of law from a person who was, and must fairly and adequately represent the corporation's interests. § 21.552(a)(1), (2).
Demand requirement (§ 21.553). Before filing, a shareholder must serve written demand on the corporation stating the matter with particularity. The shareholder may not file until 91 days after demand, except where (a) the demand has been rejected, (b) the corporation is suffering irreparable injury, or (c) waiting would cause irreparable injury.
Stay and committee dismissal (§§ 21.554–21.555, 21.558). While independent and disinterested directors, a committee of them, or a court-appointed panel reviews the allegations in good faith, the court must stay the proceeding for up to 60 days, with 60-day extensions available. The court must dismiss on the corporation's motion if that body determines in good faith, after a reasonable inquiry, that continuing the proceeding is not in the corporation's best interests.
Closely held corporation exception
The most consequential Texas derivative-action provision. For claims against present or former directors, officers or shareholders of a corporation with fewer than 35 shareholders and no shares listed on a national exchange or regularly quoted over the counter, § 21.563 provides that: (1) the demand requirement does not apply (Sneed v. Webre, 465 S.W.3d at 184-85, applying former Tex. Bus. Corp. Act art. 5.14(L)); (2) the committee-dismissal mechanism does not apply; and (3) if justice requires, the court may treat the suit as a direct action and order recovery paid directly to the plaintiff (§ 21.563(c)). Fee shifting under § 21.561(b)(1), which lets the court order the corporation to pay the plaintiff's expenses when the suit produces a substantial benefit, applies to all derivative proceedings and is not part of the exception.
SB 29 changes (effective May 14, 2025)
Ownership threshold for publicly-traded and opt-in corporations (§ 21.552(a)(3)). For Texas corporations listed on a national securities exchange and corporations with 500+ shareholders that have opted into § 21.419, the certificate or bylaws may require a minimum ownership threshold (capped at 3% of outstanding shares) to bring a derivative action.
Attorney's fees limitation (§ 21.561(c)). For any Texas corporation, additional or amended disclosures to shareholders, regardless of materiality, do not count as a substantial benefit that supports ordering the corporation to pay the plaintiff's expenses, including attorney's fees.
Heightened pleading. Under § 21.419(f), claims against directors and officers of listed and opt-in corporations must plead facts "with particularity" demonstrating fraud, intentional misconduct, ultra vires, or knowing violation of law.
Double-derivative actions
Sneed v. Webre held that, for closely held corporations, a shareholder of a parent corporation may sue derivatively on behalf of a wholly owned subsidiary against the subsidiary's officers and directors.
LLC parallel
TBOC Subchapter L of Chapter 101 (§§ 101.451–101.463) provides parallel derivative-action provisions for Texas LLCs. The closely held LLC exception under § 101.463 substantially mirrors § 21.563.
Derivative actions are the primary courtroom vehicle for challenging fiduciary misconduct by Texas directors, officers, managers, and controlling owners. After Ritchie v. Rupe, derivative claims for breach of fiduciary duty became the principal route for minority shareholders. The closely-held-corporation exception under § 21.563 (and § 101.463 for LLCs) removes the standing, demand and dismissal hurdles for claims against insiders of small Texas businesses. Since SB 29, plaintiffs suing listed and opt-in corporations face substantially heightened burdens.
Companion article: Business Divorces in Texas