Federal court upholds law allowing Texas companies to set minimum ownership requirement for derivative lawsuits: Key takeaways

A court in the Northern District of Texas has issued a significant ruling for Texas-incorporated public companies facing shareholder derivative litigation.

On March 17, 2026, in Gusinsky v. Reynolds, the United States District Court for the Northern District of Texas dismissed with prejudice a derivative action brought by a minority Southwest Airlines shareholder, holding that Texas Senate Bill 29 (SB 29) and Southwest’s amended bylaws barred the plaintiff’s claims as a matter of law.

The decision represents one of the first judicial applications of SB 29’s new ownership threshold requirement for shareholder derivative actions and offers key guidance for corporate boards and counsel navigating the new Texas corporate litigation landscape.

Background

The Southwest Airlines dispute

The underlying dispute arose from a campaign by an activist investor group, which acquired an approximately 11-percent stake in Southwest Airlines. That group called on Southwest’s Board to adopt changes it considered industry standard – including assigned seating, basic economy fares, and checked bag fees – as well as changes to the members of the Board.

The new Board subsequently eliminated Southwest’s renowned “Bags Fly Free” policy, which Southwest executives had previously noted would generate an “[a]nnual EBIT loss” of approximately $300 million if eliminated. Thereafter, the plaintiff, owning just 100 shares, served a written demand to the Board in April 2025, alleging that the directors breached their fiduciary duties by eliminating the policy. The Board rejected the demand, and the plaintiff filed a derivative lawsuit in federal court on July 10, 2025.

SB 29 and the amended bylaws

In the interim, two pivotal events occurred. On May 14, 2025, Texas Governor Greg Abbott signed SB 29 into law with immediate effect. Among other provisions, SB 29 amended Texas Business Organizations Code Section 21.552(a) to allow Texas-incorporated companies to restrict derivative proceedings to shareholders who beneficially own up to 3 percent of outstanding shares.

Two days later, on May 16, 2025, Southwest’s Board adopted amended bylaws implementing exactly that threshold – requiring a shareholder to own at least 3 percent of Southwest’s outstanding shares to institute or maintain a derivative proceeding. Because the plaintiff owned only 100 shares (far below 3 percent of Southwest’s common stock), his derivative suit was squarely blocked.

The Court’s analysis

Written demand did not “institute” a derivative proceeding

The plaintiff’s central timing argument was that his April 2025 written demand letter, served before SB 29’s enactment, should preserve his ability to sue. The Court rejected this argument on textual grounds. The Texas Business Organizations Code defines a “derivative proceeding” as a “civil suit in the right of a domestic corporation,” which unambiguously refers to a lawsuit filed in court, not a pre-suit demand letter.

Moreover, the Code expressly distinguishes between a written demand and the subsequent institution of a derivative proceeding, providing that a shareholder “may not institute a derivative proceeding until the 91st day after the date a written demand is filed with the corporation.” The Court concluded that SB 29 applies to all derivative proceedings “instituted on or after” its effective date of May 14, 2025, and that the plaintiff’s July 10, 2025 complaint was filed within that window.

Fiduciary duty challenge failed

The plaintiff sought to use his breach-of-fiduciary-duty allegation as a vehicle to invalidate the amended bylaws, arguing that defendants acted disloyally in adopting them. The Court found this argument to be circular. Because a director’s fiduciary duties run to the corporation (and not to individual shareholders), a breach-of-fiduciary-duty claim can only be advanced in a derivative suit. But the plaintiff’s derivative claims were already barred by SB 29 and the amended bylaws. A breach-of-fiduciary-duty allegation, the Court held, does not allow a plaintiff to circumvent SB 29’s statutory bar.

Retroactivity challenge failed

The plaintiff also mounted an as-applied constitutional challenge, arguing that SB 29 violates the Texas Constitution’s prohibition against retroactive laws. The Court applied the three-factor Robinson test: 1) the nature and strength of the public interest served by the statute, 2) the nature of any prior right impaired, and 3) the extent of the impairment. The Court found all three factors weighed in favor of upholding the law.

First, the Court found SB 29 serves a compelling public interest: The statute is designed to make Texas the “corporate law capital of America” by modernizing its corporate code, attracting sophisticated business disputes, and positioning Texas to compete with Delaware and Nevada.

Second, the Court found that any “prior right” at stake belonged to Southwest, rather than to the plaintiff individually, because the right of recovery belongs to the corporation in a derivative action.

Third, the Court found that the plaintiff’s impairment was negligible because, even if he prevailed, he would not personally receive any monetary damages, and any recovery would flow to Southwest.

Key takeaways

1. Texas public companies can now meaningfully limit derivative litigation exposure. SB 29 gives Texas-incorporated public companies a powerful tool to deter low-ownership, opportunistic derivative suits by authorizing bylaw provisions requiring shareholders to at least 3 percent of outstanding shares before bringing a derivative action. For most public companies, this will block all but the largest shareholders from pursuing derivative claims. The Gusinsky decision signals that courts are likely to enforce these provisions.

2. SB 29 provides a key incentive for companies to incorporate in Texas. By upholding SB 29, Gusinsky v. Reynolds solidifies a key benefit that Texas-incorporated companies have over Delaware-incorporated companies, which routinely face derivative claims brought by small retail investors.

3. A pre-SB 29 demand letter does not grandfather a plaintiff’s rights. The Court made clear that only a filed lawsuit, not a pre-suit demand, “institutes” a derivative proceeding for purposes of SB 29. Shareholders who sent demand letters before SB 29’s enactment but have not yet filed suit remain subject to the new ownership threshold.

4. Boards are encouraged to promptly review and consider adopting ownership threshold bylaws. The window that SB 29 opened remains available. Boards of public companies in Texas may consider consulting with counsel about adopting derivative standing bylaws consistent with the 3-percent threshold SB 29 permits.

5. Fiduciary duty challenges cannot circumvent the statutory bar. Plaintiffs cannot use a fiduciary duty allegation against the directors who adopted the threshold bylaw as a workaround because such claims are themselves derivative in nature and therefore equally barred.

6. SB 29 signals Texas’s broader ambitions as a corporate governance hub. The Court cited the Texas legislature’s stated intent to position Texas as the “corporate law capital of America” and to develop corporate law rivaling Delaware and Nevada. The Gusinsky decision may serve as an early, favorable data point for companies considering Texas as their state of incorporation or reincorporation.

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