8 Changes Companies Need to Know About Texas SB 25
Texas Has Embraced Pro-business Corporate Law Changes But Texas Corporations Have to Adopt or “Opt-In” to Some of the Changes
In the most recent Texas legislative session, the Texas Legislature, through SB 25, adopted a number of changes to the Texas Business Organizations Code that are very favorable to corporations formed under Texas law. Among other things, the changes include the following:
1. Codification of Business Judgment Rule
New Section 21.419 codifies the “business judgment rule” presumption for Texas public corporations and for those Texas private corporations that affirmatively elect to “opt in.”
2. Exculpation of Directors and Officers:
New Section 21.419 also exculpates directors and officers of a Texas public corporation—and those private Texas corporations that affirmatively elect to “opt in”—from all claims by the corporation or its shareholders related to their actions as directors or officers, unless either: (a) the claimant rebuts the presumption that the director or officer acted in good faith, on an informed basis, in furtherance of the interests of the corporation, or in obedience to the law and the corporation's governing documents; or (b) the claimant proves that the director’s or officer’s act or omission constituted (i) a breach of one or more of the person’s duties as a director or officer; and (ii) the breach involved fraud, intentional misconduct, an ultra vires act, or a knowing violation of law.
3. Waiver of Jury Trial:
New Section 2.116 allows a Texas corporation to include in its governing documents a provision waiving the right to a jury trial for any internal entity claim, which would include any derivative claim.
4. Exclusive Forum Selection:
Section 2.115(b) has been amended to allow Texas corporations to require in their governing documents that all internal entity claims, such as derivative actions, be brought in Texas courts.
5. Minimum Ownership Threshold for Derivative Actions:
Section 21.552(b) has been amended to add subsection (a)(3), which allows public Texas corporations—and any private Texas corporation that has “opted in” to this section and has 500 or more shareholders—to set, in its articles of incorporation or bylaws, the amount of shares a shareholder must own before they can bring a derivative action on behalf of the corporation. This amount shall not exceed three percent of the outstanding number of shares.
6. Limitation on Books and Records Requests:
Section 21.218 has been amended to (a) exclude certain electronic communications from disclosure (such as emails and text messages); and (b) for public corporations, and those private Texas corporations that affirmatively “opt in,” to allow the corporation to reject books and documents requests unless the demand is in connection with an active or pending derivative proceeding or an active or pending civil lawsuit where the shareholder and the corporation are or are expected to be adversarial.
7. Limiting Recovery of Attorney’s Fees in “Disclosure Only” Settlements:
Section 21.561 has been amended to disallow the recovery of attorney’s fees in a derivative action when the proceeding has only resulted in amended disclosures made to shareholders, regardless of the materiality of the changes to the disclosures.
8. Advance Independence Determination:
A new Section 21.416(g) has been added to allow the corporate board of a public Texas corporation—or a private Texas corporation that has “opted in” to the business judgment provision of Section 21.419—to form a committee of independent and disinterested directors to review transactions involving or relating to a controlling shareholder, director, or officer. A new Section 21.4161 allows the board to seek an advance opinion from a court on whether a special committee of the board is composed of independent and disinterested directors. Such an opinion is dispositive on the question of whether the committee is composed of independent or disinterested directors, absent a showing to the contrary.
It is important that all Texas corporations immediately review their organizational documents and decide whether to adopt or “opt in” to any of the protections accorded by SB 25.
Klemchuk stands ready to assist its clients in determining whether to adopt or “opt in” to any of these provisions and to amend their organizational documents accordingly.
Klemchuk PLLC is a leading IP law firm based in Dallas, Texas, focusing on litigation, anti-counterfeiting, trademarks, patents, and business law. Our experienced attorneys assist clients in safeguarding innovation and expanding market share through strategic investments in intellectual property.
This article is provided for informational purposes only and does not constitute legal advice. For guidance on specific legal matters under federal, state, or local laws, please consult with our IP Lawyers.
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