Lone Star Governance: Recent Amendments to the Texas Corporate Statute

I. INTRODUCTION

Texas, a state known for its independence and innovation, has recently taken steps to make the state an even more attractive home for American corporations. One of the most impactful steps was adoption of a set of sweeping changes to the Texas Business Organizations Code (“TBOC”) during the 89th Texas Legislature, whose session ran from January 14 to June 2, 2025. This article examines the four bills passed by the Legislature that resulted in the most significant amendments to the TBOC from a corporate governance perspective – SB 29, SB 1057, SB 2411 and, potentially, SB 2337. The amendments to Texas’ corporate statute resulting from these bills were designed to place limitations on litigation risk for, and liabilities of, officers and directors, to manage relations with shareholders and proxy advisory firms, and to provide additional certainty in corporate formalities.

II. Senate Bill 29

SB 29 includes consequential changes affecting corporate governance, governing authority liability, shareholder rights and the internal management of Texas corporations organized under the TBOC. SB 29 was signed into law on May 14, 2025, and the amendments to the TBOC became effective immediately.

A. Codification of the Business Judgment Rule and Protection for Conflicts of Interest

A central feature of the amendments effected by SB 29 is the codification of the Business Judgment Rule (“BJR Statute”). Specifically, the amendments to TBOC Section 21.419 codify the presumption that directors, officers and other managerial officials of corporations acted in compliance with their duties. To take advantage of this presumption, the Texas corporation must be publicly traded or must opt in to TBOC Section 21.419 in its certificate of formation.

For corporations that take advantage of the BJR Statute, the actions of directors and officers are presumed to be taken in good faith, on an informed basis, in the best interests of the corporation, and in obedience to the law and the corporation’s governing documents. To prevail in a cause of action claiming a breach of duty, the claimant must (a) rebut one or more of these presumptions and (b) prove (i) the act or omission was a breach of the person’s duties as a director or officer and (ii) the breach involved fraud, intentional misconduct, ultra vires acts, or knowing violations of law. The claimant must “state with particularity the circumstances constituting” one of these four elements of the breach. These protections are in addition to any existing statutory or common law defenses.

Additionally, SB 29 amends the TBOC to provide additional protections for certain activities involving conflicts of interest. Under amended TBOC Section 21.418(e), directors and officers of corporations that are publicly traded or opt in to the BJR Statute are shielded from any cause of action brought by shareholders for a breach of duty with respect to the making, authorizing or performing of a contract or transaction because the director or officer had an interest in the transaction unless the cause of action is permitted by the BJR Statute; meaning the act or omission was a breach of the person’s duties and the breach involved fraud, intentional misconduct, ultra vires acts or knowing violations of law.

B. Judicial Determination of Independence of Committees Reviewing Related Party Transactions

Under the amendments to TBOC Sections 21.416 and 21.4161, boards of Texas corporations that are either publicly traded or that opt in to the BJR Statute may petition the Texas Business Court (or any other district court with proper jurisdiction, if the corporation’s principal place of business is not located in an operating division of the Texas Business Court) to make a determination on the independence of the committee of directors formed to review and approve transactions involving directors, officers or controlling shareholders. After expedited proceedings to determine appropriate legal counsel to represent the corporation and its shareholders (other than any relevant controlling shareholder), the court will hold an evidentiary hearing and render a binding determination regarding the independence of the directors on the committee. The finding of the court regarding the committee members’ independence is “dispositive” absent facts not presented to the court. Companies that utilize this option must give notice to their shareholders that a petition has been filed, and public companies can comply by filing a Form 8-K with the SEC.

C. Share Ownership Requirements for Derivative Actions

Texas corporations that are (a) publicly traded or (b) (i) have 500 or more shareholders and (ii) have made an affirmative election to opt in to the BJR Statute, may institute a minimum ownership threshold for shareholders to bring derivative actions. The amendments to TBOC Section 21.552 allow such corporations to set a minimum ownership threshold of up to 3% of the outstanding shares of the corporation to initiate such proceedings. This requirement for a minimum ownership threshold must be stated in either the certificate of formation or the bylaws.

D. Excluding Attorney Fee Awards for Enhanced Disclosure

Under the TBOC, upon termination of a derivative proceeding, the court may order that a Texas corporation pay the plaintiff’s attorney’s fees if the derivative action resulted in a “substantial benefit to the corporation.” The amendments to TBOC Section 21.561 expressly provide that a substantial benefit to a corporation does not include additional or amended disclosures made to shareholders (e.g., supplements to a proxy statement for a merger).

E. Waiver of Jury Trial and Exclusive Forum Selection

The amendments to TBOC Sections 2.115 and 2.116 expressly permit Texas corporations to include, in their bylaws or certificate of formation, a waiver of the right to a jury trial for any internal entity claims. Under Texas law, internal entity claims include claims of any nature that are based on (i) rights, powers, and duties of its governing authority, governing persons, officers, owners and members, and (ii) matters relating to its membership or ownership interests. This includes, for example, derivative claims that directors of a corporation breached their fiduciary duties. Such waivers of jury trial are enforceable even if not individually signed by owners, officers or governing persons. A person is considered to have knowingly waived the right to a jury trial if the person voted for or ratified the document containing the waiver, or, after the waiver was included in the governing documents, either purchased or continued to hold stock in the corporation. Also, in the governing documents, corporations may choose an exclusive Texas forum and venue for all internal entity claims.

Questions might arise regarding the constitutionality of the waiver of trial by jury. The Texas Constitution currently states that the right to a jury trial “shall remain inviolate,” but case law provides that jury trial waivers are generally permitted in Texas if they are entered into knowingly, voluntarily and intelligently with no fraud or deceit.

F. Limitations on Shareholder Inspection Rights

The amendments to TBOC Section 21.218 clarify and, in some respects, limits, the ability of shareholders to inspect corporate records. Emails, text messages and social media communications are excluded from corporate records to which shareholders can access under the statute’s provisions, unless those records effectuate an action by the corporation. Furthermore, Texas corporations that are either publicly traded or that opt in to the BJR Statute may deny inspection demands from shareholders with ongoing or expected litigation involving the corporation or derivative proceedings. These changes do not impair the shareholders’ right to obtain discovery of records from the corporation in an active or pending lawsuit.

III. Senate Bill 1057

SB 1057 permits certain corporations to implement significantly higher thresholds for shareholder proposals. SB 1057 was signed into law on May 19, 2025, and the amendments to the TBOC will be effective on September 1, 2025.

A. Eligible Corporations and Required Notice to Shareholders

The corporations that can elect to take advantage of these provisions include any Texas corporation that is a “nationally listed corporation,” which is defined as a corporation that (a) has equity securities registered under Section 12(b) of the Securities Exchange Act of 1934, (b) is admitted to listing on a national securities exchange, and (c) either (i) has its “principal office” located in Texas or (ii) is admitted to listing on a stock exchange that has its principal office in Texas and has received certain approvals from the Securities Commissioner of Texas. Under Texas case law, the principal office of the corporation is the location where the corporation’s officers direct, control and coordinate the corporation’s activities.

Corporations must affirmatively elect to impose these requirements through an amendment to the governing documents (certificate of formation and bylaws). The corporation must provide notice to its shareholders of the proposed amendment to the governing documents in any proxy statement provided to shareholders in advance of adopting the amendment. Additionally, once these requirements are implemented, any proxy statement provided to shareholders must contain specific information regarding how shareholders may submit a proposal, including information about how shareholders may contact one another for the purpose of satisfying the ownership requirements.

B. The Effect of the Higher Requirements

If a corporation adopts the new requirements in TBOC 21.373(d), then, in order to submit a proposal, a shareholder or a group of shareholders must hold a number of shares equal to at least $1 million in market value or 3% of the corporation’s outstanding voting shares. “Voting shares” are defined as shares that entitle the holders of the shares to vote on the proposal. Ownership of the shares is determined as of the date the proposal is submitted. The shareholders must hold such voting shares (i) for at least 6 months prior to the shareholder meeting and (ii) throughout the duration of the shareholder meeting. In addition, the shareholders must solicit holders of shares representing at least 67% of the voting power of shares entitled to vote on the proposal. Notably, the requirements to submit a proposal that are specified in the statute are still “subject to the corporation’s governing documents.”

These provisions apply to proposals on any matter to be submitted to shareholders for approval at a meeting of shareholders, other than director nominations and procedural resolutions that are “ancillary to the conduct of the meeting.”

C. Legal Uncertainty

Because of the broad scope of SB 1057, the provisions apply not only to shareholder proposals under Rule 14a-8 under the Securities Exchange Act of 1934 (“Rule 14a-8”), but also to floor proposals submitted pursuant to a corporation’s advance notice provisions unless the proposal’s topic is “ancillary to the conduct of the meeting.” While the more stringent shareholder proposal requirements of SB 1057 conflict with Rule 14a-8, Rule 14a-8 allows a company to reject a shareholder provision that is contrary to the laws of the state of incorporation. In a statement issued in 2023, SEC Commissioner Mark Uyeda indicated that states could pass share ownership threshold requirements and use Rule 14a-8’s contrary law provision to reject proposals failing to meet the threshold requirements, potentially providing a basis for corporations to adopt the more stringent shareholder proposal requirements under SB 1057 without running into SEC preemption issues.

IV. Senate Bill 2411

SB 2411 introduces several important amendments addressing officer liability, merger approvals, and transactional administration. SB 2411 was signed into law on May 27, 2025, and the amendments to the TBOC will be effective on September 1, 2025.

A. Expanded Exculpation to Include Officers

By amending TBOC Section 7.001, SB 2411 simply provides exculpation to officers of the corporation to the same extent already permitted for directors. Texas corporations will be able to limit or eliminate the liability of officers for monetary damages for an act or omission taken by the officer in his or her capacity as an officer of the entity. However, that exculpation cannot be provided for breaches of loyalty, intentional misconduct, transactions in which the officer received an improper benefit, or statutory violations. To adopt such exculpation provisions, the corporation must make an affirmative election in its certificate of formation. However, these protections only shield officers from liability for money damages, and the officers could still be liable under suits in equity seeking injunctions or specific performance.

B. Procedural Certainty in Approval of Major Transactions and Related Actions

Amended TBOC Sections 3.106, 10.002, 10.004 and 10.104 expressly state that the governing authority of a Texas entity is not required to approve the final version of corporate documents with all schedules and appendices included in order for such approval to be valid. The amendments provide that the board of directors of a corporation may approve corporate documents such as plans, agreements and instruments (e.g., merger agreement and related plan of merger) in final or “substantially final form.” The amendments also provide that disclosure letters, schedules and other such similar documents to be delivered in connection with a plan of merger are not considered a part of the plan of merger unless expressly stated.

Under the amendments, a plan of merger may include provisions for appointing representatives to act on behalf of owners, with the exclusive authority to enforce or settle post-transaction rights. The appointment of such a representative may be made irrevocable and binding on the parties to such a plan of merger upon approval of the plan. In addition, the amendments provide that a plan of conversion can authorize any additional actions taken by the converted entity in connection with the plan of conversion. Additional approvals by the governing authority or owners of the converted entity are not required other than approval of the plan of conversion itself.

V. Senate Bill 2337

SB 2337 is the only bill that has not yet been signed into law as of June 15, 2025. The bill was passed by the Legislature and sent to the Governor’s desk on June 2, 2025. Under Texas law, since the bill was sent to the Governor within 10 days of the end of the legislative session, the Governor has 20 days to act (i.e., sign or veto) before the bill becomes law automatically. If SB 2337 becomes law, the amendments to the TBOC will be effective on September 1, 2025. The changes in law apply only to proxy advisory services provided on or after the effective date.

SB 2337 amends the TBOC to add new Chapter 6A titled “Proxy Advisory Services.” This new law would mandate significant public disclosures by proxy advisory firms under certain circumstances when advising on proposals related to corporations with Texas connections. The law applies to any “proxy advisor,” which is defined as a person who, for compensation, provides a proxy advisory service to shareholders of a company or to other persons with authority to vote on behalf of shareholders of a company. For this purpose, a “company” includes any publicly traded corporation that (i) is incorporated in Texas, (ii) has its principal place of business in Texas, or (iii) is incorporated in another state and has made a proposal to redomesticate to Texas. “Proxy advisory services” are broadly defined and include, among other things, advice or recommendations on how to vote on proposals, proxy statement research or analysis, ratings or research regarding corporate governance, and development of voting recommendations or policies. The scope of proposals covered by the law includes all proposals that are included in the company’s proxy statement, whether made by the company or by shareholders, including director elections and executive compensation.

A. When Disclosures Are Required

Under the new law, a proxy advisor is required to immediately disclose when its recommendations are “not provided solely in the financial interest of the shareholders of a company.” The statute expressly provides that a recommendation is not provided solely in the financial interests of shareholders:

• When it is wholly or partly based on, or otherwise takes into account, one or more non-financial factors, including a commitment, initiative, policy, or value-based standard based on: an environmental, social or governance (ESG) goal, factor or investment principle; diversity, equity or inclusion (DEI); a social credit or sustainability factor or score; or membership in or commitment to an organization that bases any of its evaluation of the company’s value on nonfinancial factors;
• When it involves a voting recommendation with respect to any shareholder-sponsored proposal that is inconsistent with the recommendation of the board of directors or a committee of a majority of independent directors and fails to include a written economic analysis of the financial impact of the proposal on the shareholders (1);
• When it is not based solely on financial factors and subordinates shareholders’ financial interests to other objectives; or
• When it recommends a vote against a company proposal to elect a governing person, unless the firm affirmatively states that the firm’s recommendation is made solely based on the financial interests of shareholders.

(1) Written economic analysis must include the short and long-term benefits and costs of implementing any shareholder-sponsored proposal, an analysis of whether the recommendation is consistent with the investment objectives and policies of the client, the projected quantifiable impact of adopting the proposal on the investment returns of the client, and an explanation of the methods and processes used to prepare the economic analysis.

The new law would also mandate that proxy advisors provide certain disclosures when the advisor provides advice on how to vote on a proposal that is “materially different” (“Materially Different Advice”) to clients who have not expressly requested services for a nonfinancial purpose. The statute provides that a proxy advisor gives Materially Different Advice when it simultaneously advises (i) one or more clients to vote for, and one or more clients to vote against, the same proposal, (ii) one or more clients to vote for, and one or more clients to vote against (or abstain), the same director nominee, or (iii) that one or more clients vote for or against a proposal in opposition to the recommendation of the company’s management.

B. What Must Be Disclosed

If the proxy advisor’s recommendation is not exclusively based on the financial interests of the shareholders, as specified in the statute, then the proxy advisor must disclose to each shareholder or entity receiving their service that the recommendation is not solely based on, and subordinates, the financial interests of the company’s shareholders and explain, with particularity, the basis of the advice concerning each recommendation. The advisor must also provide a copy of the disclosure to the company that is the subject of the proposal. In addition, the proxy advisor must clearly disclose on its publicly accessible website that its services include advice that is not based solely on the financial interests of shareholders, including “sacrificing investment returns or undertaking additional investment risk to promote one or more nonfinancial factors.”

If the proxy advisor provides Materially Different Advice, the proxy advisor must, in addition to complying with the applicable disclosure requirement in the paragraph above, disclose which of the advice is provided based solely on the financial interests of shareholders and which is supported by any specific financial analysis. The proxy advisor is also required to disclose the conflicting advice to each shareholder receiving the advice, any entity receiving the advice on behalf of a shareholder, the company that is the subject of the proposal, and the Attorney General of Texas.

C. Enforcement of Chapter 6A

TBOC Section 6A.201 provides that a violation of the chapter is a deceptive trade practice under the Deceptive Trade Practices-Consumer Protection Act, which allows for broad-sweeping private and public rights of action. The statute also provides that the recipient of the proxy advisory services, the company subject to the proxy proposal, and any shareholder of the subject company can bring actions seeking injunctive relief or a declaratory judgment against the proxy advisor. The plaintiff is then required to give notice to the Attorney General, who may intervene in the action.

VI. CONCLUSION

There are open questions with respect to certain aspects of the new laws’ interpretation, implementation and application that should be monitored as case law and accepted practices develop.

Taken as a whole, the suite of amendments to the TBOC introduced by SB 29, SB 1057, SB 2411, and potentially SB 2337, represent a significant milestone in the broader effort to make Texas an attractive home for corporations by providing reduced risk of litigation and additional certainty in governance, as well as enhanced protection for officers and directors. These developments in corporate law build on Texas’ reputation as a business-friendly jurisdiction.