SB 29: what Texas boards need in their governance documents.

Senate Bill 29 became law on May 14, 2025, the day Governor Abbott signed it. The effective date was immediate. In one document, the Texas legislature codified the business judgment rule, authorized publicly traded corporations and qualifying private entities to require minimum ownership thresholds for shareholder derivative actions, permitted prospective jury trial waivers for internal entity claims, narrowed the scope of shareholder books-and-records inspections, and gave LLCs and limited partnerships substantially more flexibility to define, or eliminate, fiduciary duties.

For Texas-domiciled corporations, the practical question is no longer whether SB 29 is significant. The first federal court decision applying it, Gusinsky v. Reynolds, decided in the Northern District of Texas on March 17, 2026, dismissed a derivative action against Southwest Airlines on the basis of a three-percent ownership-threshold bylaw the company had adopted just sixteen days after SB 29 took effect. The threshold worked. The case was dismissed with prejudice.

The question now is which of SB 29's provisions apply automatically, which require an affirmative election in the governing documents, and which require both an election and a specific bylaw amendment. The answer matters. A board that does nothing leaves most of the new protections on the table.

The codified business judgment rule

SB 29 adds Section 21.419(c) to the Texas Business Organizations Code. The provision presumes that directors and officers of a covered corporation act:

• in good faith
• on an informed basis
• in furtherance of the corporation's interests
• in obedience to the law and the corporation's governing documents

A claimant seeking to challenge a director or officer decision must do three things: rebut one or more of the presumptions, prove that the act or omission breached a fiduciary duty, and prove that the breach involved fraud, intentional misconduct, an ultra vires act, or a knowing violation of law.

This is a meaningfully stronger formulation than the common-law business judgment rule it succeeds. The burden of proof shift is the change that matters. Under the common-law version, the presumption that directors acted appropriately could be rebutted on a relatively modest showing. Under the codified version, even a successful rebuttal does not get the plaintiff to liability, the plaintiff still has to prove the breach and prove that the breach involved one of four named categories of misconduct.

Who it applies to

Publicly traded corporations, specifically, those with a class or series of voting shares listed on a national securities exchange, are governed by the codified rule by default. Private corporations are not. They must affirmatively elect the rule by including a statement to that effect in their governing documents.

The drafting decision

For a private Texas corporation considering whether to elect the codified rule, the board should weigh two things. First, the codified rule is more protective of directors and officers than the common law. Second, the election triggers eligibility for the three-percent derivative threshold provision discussed below, but only if the corporation has 500 or more shareholders. Most private corporations will benefit from electing the rule even if they cannot also adopt the three-percent threshold.

The election language can be simple. A representative formulation: "The corporation elects to be governed by Section 21.419(c) of the Texas Business Organizations Code." The election should appear in the certificate of formation, or, if the certificate cannot easily be amended, in the bylaws. The choice has implications for amendment procedure, since certificate amendments typically require shareholder approval while bylaw amendments often do not.

The three-percent derivative threshold

The most consequential procedural change in SB 29 is the new Section 21.552(a)(3), which authorizes certain corporations to require a minimum ownership threshold for shareholders to bring derivative proceedings. The threshold cannot exceed three percent of the corporation's outstanding shares.

Who can adopt the threshold

Two categories of corporations qualify. First: publicly traded corporations with national-exchange listings. Second: private corporations with 500 or more shareholders that have elected to be governed by the codified business judgment rule.

A privately held corporation with fewer than 500 shareholders cannot adopt the three-percent threshold even with a business judgment rule election. This is a significant carve-out. The threshold is designed for entities that face a real risk of strike suits by minimal-position activist plaintiffs, not for closely held corporations.

Drafting the bylaw

The Southwest bylaw upheld in Gusinsky set the threshold at the statutory maximum of three percent. Some advisors are recommending the maximum, on the theory that future statutory amendments may raise the ceiling and a board would want to capture the increase automatically. Others are recommending a more conservative figure such as one percent, on the theory that a three-percent threshold may face additional constitutional challenge in state court even after Gusinsky, and a lower threshold is less likely to invite litigation. Both positions are defensible. Most public-company boards are landing on the maximum.

Gusinsky was a federal court decision applying Texas law. Texas state courts have not yet weighed in on the constitutional challenges the Gusinsky plaintiff raised, the open-courts and retroactivity arguments, though the federal court's reasoning is persuasive and the legislature's intent on this point is well-documented.

The jury waiver, Section 2.115

SB 29 also adds Section 2.115 to the TBOC, allowing Texas entities to prospectively waive jury trials for "internal entity claims," which the statute defines broadly to include derivative claims and allegations of breaches of fiduciary duty.

Internal corporate disputes, particularly cases involving complex transactional fact patterns or technical fiduciary questions, are often better suited to bench trials before specialized judges. The Texas Business Courts are the natural forum for these disputes. Pairing a Section 2.115 jury waiver with a forum selection clause designating the Texas Business Courts as the exclusive forum creates a procedurally aligned framework: specialized judge, no jury, written opinions feeding into the developing Texas business law jurisprudence.

Like the business judgment rule election, the jury waiver is opt-in for non-public corporations. The waiver should appear in the certificate of formation or bylaws, and is enforceable even against shareholders who did not individually sign it, a meaningful departure from how jury waivers are typically analyzed under standard contract principles.

A representative formulation: "The corporation elects to apply Section 2.115 of the Texas Business Organizations Code. All internal entity claims, including without limitation derivative claims and claims for breach of fiduciary duty, shall be tried to the court without a jury."

Books and records, what shareholders can no longer demand

SB 29 narrows the scope of shareholder books-and-records demands in two ways.

First, emails, text messages, social media content, and similar electronic communications are excluded from the definition of corporate records, unless the specific communication directly effectuated a corporate action.

Second, corporations subject to the codified business judgment rule may deny inspection demands made in connection with an active or pending derivative proceeding, or with active or pending civil litigation to which the corporation and the requesting shareholder are or are expected to be adversarial parties.

The second limitation does not impair a shareholder's discovery rights in actual litigation, formal discovery still applies. What it does is foreclose the use of the books-and-records inspection demand as a pre-litigation discovery tool.

Boards engaged in sensitive deliberations no longer have to assume that every text message between independent directors will be discoverable through an inspection demand. Communications that do not constitute formal corporate action are now meaningfully outside the demand's scope. The implication is not that director communications can be careless, but that the practical envelope for board-level deliberation is somewhat wider than it was a year ago.

LLCs and limited partnerships, duty elimination

SB 29 extends additional flexibility to Texas LLCs and limited partnerships. The governing documents of these entities may now eliminate, not merely restrict, fiduciary duties owed to the entity by members, managers, and officers.

This is a more aggressive change than the parallel provisions for corporations, and it should be approached with care. Eliminating fiduciary duties entirely is rarely the right answer for a Texas LLC, particularly one with outside investors or minority members. The more useful drafting move in most cases is to define the duties with specificity, what the duty of loyalty covers in this entity, what disclosure obligations attach, what the consequences of breach are, rather than to eliminate them outright.

The new flexibility is most useful in the context of fund vehicles, joint ventures, and other structures where the parties are sophisticated, the economic terms are heavily negotiated, and the parties prefer to specify the rules themselves rather than rely on default fiduciary doctrines.

What boards should do before year-end

For a Texas-domiciled corporation that has not yet acted on SB 29, the practical sequence is short.

Step 1: Determine whether SB 29 applies automatically. If the corporation is publicly traded with national-exchange listing, the codified business judgment rule applies by default. The board should still review and update its governing documents to take advantage of the optional provisions.

Step 2: For private corporations, evaluate the election. A private Texas corporation should consider whether to affirmatively elect the codified business judgment rule. For most companies with outside investors or any prospect of litigation exposure, the election is straightforward.

Step 3: Determine eligibility for the three-percent threshold. If the corporation has 500 or more shareholders and has elected the codified rule, the threshold is available. Adopt it. If the corporation does not meet the 500-shareholder threshold, the protection is unavailable, but the business judgment rule election still has value on its own.

Step 4: Pair the jury waiver with a forum selection clause. If the corporation is amending its certificate of formation or bylaws anyway, add Section 2.115 jury waiver language and a forum selection clause designating the Texas Business Courts as the exclusive forum for internal entity claims.

Step 5: Update inspection-rights provisions. Specify in the bylaws, or via board resolution, the corporation's position on the new books-and-records limitations.

None of this is complicated drafting. What it requires is board attention before the next derivative demand arrives. Once a demand is on the table, the timing window for amending bylaws narrows quickly. The Gusinsky timing rule is forgiving, but boards should not rely on it indefinitely.