The SEC’s Enforcement Division is not the only game in town when it comes to public company litigation risks – there are also private plaintiffs to worry about. A Texas statute – part of the “SB 29” overhaul to the Texas Business Organizations Code that was signed into law last year – tries to mitigate one dimension of that risk by allowing companies to impose ownership thresholds in their articles or bylaws that prevent shareholders with small ownership percentages from instituting derivative suits.

This Gibson Dunn memo flags a recent district court case that upheld the new statute in the wake of a shareholder challenge – holding that a company could impose a threshold even if the bylaws were amended to add it after the shareholder sent a demand letter. The memo shares these key takeaways:

– Public companies incorporated in Texas now have a clear and judicially validated pathway to significantly limit exposure to shareholder derivative litigation by adopting ownership thresholds in their bylaws or certificate of formation.

– By dismissing the complaint with prejudice, the decision signals that courts will enforce those thresholds strictly and scrutinize plaintiffs’ attempts to plead around them.

– After this decision, future constitutional challenges to SB 29 – particularly retroactivity and “open courts” arguments—will face an even steeper uphill battle.

– The court’s decision underscored that directors’ fiduciary duties run to — and derivative claims belong to — corporation, not individual shareholders. This enduring principle limits shareholders’ ability to assert “vested” rights or individualized injury from bylaw amendments.

The memo says that the decision reinforces the commitment of the Lone Star State to cultivate a pro-business environment that attracts incorporations.

– Liz Dunshee