In 2025, Texas enacted statutory reforms that codify the Business Judgment Rule for Texas-incorporated public companies, establishing a strong presumption in favor of directors and officers and raising the pleading and proof standards for claims against them. The same reforms also authorize these companies to set, in their governing documents, a minimum shareholder ownership threshold (up to 3% of outstanding shares) for standing to bring derivative suits.
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The codification of the Business Judgment Rule in Section 21.419 represents a significant shift in Texas corporate law. Previously, the Business Judgment Rule was a common law doctrine, providing directors and officers with a rebuttable presumption that their business decisions were made in good faith, with due care, and in the best interests of the corporation. The 2025 statutory language now makes this presumption explicit and more difficult to overcome.
For Texas public companies (and qualifying private companies that opt in), the law presumes that directors and officers act properly unless the claimant can both rebut the presumption and prove, with particularity, that the conduct at issue involved fraud, intentional misconduct, ultra vires acts, or knowing violations of law. Tex. Bus. Org. Code § 21.419. This is a higher bar than the prior common law standard, which could be overcome by showing gross negligence or lack of due care. The new law thus provides directors and officers with greater protection from personal liability and from the burdens of litigation, unless the claimant can meet these stringent requirements.
The statute also requires that allegations of fraud, intentional misconduct, ultra vires acts, or knowing violations of law be pleaded with particularity, further raising the threshold for claimants. This heightened pleading standard is designed to deter frivolous or speculative claims and to ensure that only well-founded allegations proceed. Tex. Bus. Org. Code § 21.419.
The same legislative package amended the TBOC to introduce new standing requirements for shareholder derivative actions. For Texas corporations with shares listed on a national securities exchange, or for private corporations that have opted into Section 21.419 and have at least 500 shareholders, the law now permits the corporation to specify in its certificate of formation or bylaws a minimum beneficial ownership threshold for shareholders to bring a derivative suit. This threshold cannot exceed 3% of the corporation’s outstanding shares. Tex. Bus. Org. Code § 21.552.
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