Federal Court Upholds Texas’s Stock Ownership Threshold for Shareholder Derivative Claims
The decision confirms that Texas corporations can limit shareholder derivative claims to those holding more than 3% of their stock.
On March 17, 2026, the U.S. District Court for the Northern District of Texas dismissed with prejudice a shareholder derivative action filed against Southwest Airlines Corporation's board of directors. The decision represents a significant validation of Texas Senate Bill 29 ("SB 29"), which allows Texas corporations to impose a minimum stock ownership threshold of up to 3% for bringing shareholder derivative proceedings.
In April 2025, a holder of 100 shares of Southwest Airlines served the company's board with a pre-suit demand complaining of its decision to eliminate Southwest's "Bags Fly Free" policy. Soon thereafter, SB 29 became effective, and Southwest's board promptly amended the company's bylaws to impose a 3% stock ownership threshold for bringing derivative claims. The board later refused the plaintiff's demand, and he filed suit in July 2025.
Describing SB 29 as "a bold step toward making Texas the corporate law capital of America," the court dismissed the plaintiff's complaint because he lacked the requisite shareholdings when he filed suit. The plaintiff argued that SB 29 and the amended bylaws were inapplicable because his pre-suit demand preceded them, but the court concluded that a demand letter is not a derivative proceeding. Accordingly, because the plaintiff did not file his derivative lawsuit until after SB 29 and the amended bylaws were effective, his lack of required shareholdings was fatal.
The court also rejected the plaintiff's argument that the board's adoption of amended bylaws was itself a breach of fiduciary duty, holding that this, too, was a derivative claim subject to the minimum shareholding threshold. The court then concluded that SB 29 did not violate the Texas Constitution's open courts provision or its prohibition on retroactive laws, and furthermore that the bylaw amendment did not breach the company's contractual relationship with shareholders, who knew that the board could amend the bylaws at any time and without shareholder approval.
With SB 29 surviving its first significant challenge, Texas corporations—and those that reincorporate in Texas—can adopt share ownership requirements with added confidence, ensuring that derivative claims are brought only by shareholders with meaningful skin in the game. And together with other significant developments—such as ExxonMobil Corporation's recently announced intent to reincorporate in Texas—this decision is yet another reason that certain companies are considering Texas as an attractive corporate domicile.
