After the close of the 89th Texas legislative session, Chuck and Brian work through four bills that reshape Texas corporate governance, anchored by SB 29, effective immediately. The statutory business judgment rule. Heightened pleading standards. Statutory jury waivers. Forum selection. Derivative suit ownership thresholds. And the curious public-private bifurcation: some provisions auto-apply to public companies but require an opt-in for private ones, creating opt-in decisions that themselves trigger fiduciary duties.
Senate Bill 29 is an omnibus amendment to the Texas Business Organizations Code passed in the 89th Texas legislative session. Because it received a two-thirds supermajority, it took effect immediately upon signing. Among its provisions: a statutory business judgment rule, statutory jury waivers, Texas-exclusive forum selection authority, and a 3% ownership threshold for derivative suits against publicly traded Texas corporations.
It codifies in statute what was previously common-law doctrine, raising the pleading standard for breach-of-fiduciary-duty claims and creating a presumption that directors and officers acted in good faith. The presumption applies automatically to public Texas corporations and is available to private corporations that opt in via their governing documents.
A board's decision to opt into the heightened BJR shields directors and officers from claims that might otherwise be actionable, including potentially negligent or grossly negligent acts that don't rise to fraud or intentional misconduct. Because that decision affects shareholder rights, the board must make it consistent with its own duty of care and loyalty, and document the deliberation accordingly.
Bylaw amendments can be approved by the board alone; certificate amendments require shareholder approval. Bylaw amendments are also easier to reverse if shareholders push back. The choice signals to investors whether the board put the question to shareholders or acted unilaterally.
Talk to carriers before opting in. The relationship between heightened pleading standards and D&O premiums is not straightforward, premiums may not drop and could increase if carriers price in broader board discretion as elevated risk.
For nationally-listed Texas corporations that opt in, SB 1057 sets minimum thresholds for shareholder proposals: holding at least $1M in market value or 3% of voting securities, a six-month minimum holding period, and a solicitation of at least two-thirds of voting power. Effective September 1, 2025.
Permits boards to limit officer liability similarly to directors. Allows certain governing-document amendments without shareholder vote. Clarifies that merger-agreement disclosure schedules are not part of the agreement for filing purposes. Effective September 1, 2025.
Public Texas corporations get the statutory BJR presumption automatically. Private corporations and any corporation seeking the jury waiver or Texas-exclusive forum designation must amend governing documents to elect those provisions.
Lightly edited from auto-transcription, ad reads removed, paragraphs grouped, speakers attributed via heuristic. For exact attribution, listen on Apple Podcasts, Spotify, or via the embedded player above.
Brian Elliott: It's time for SB29 to be on the agenda of every board. Hello and welcome to Y'all Street Podcast. I'm Brian Elliott. With me today is my partner, Chuck Krause.
Chuck Kraus: Brian, good to be speaking with you. Summer's upon us. The Texas legislature just ended their 89th session. We've all had a couple of weeks to breathe a little bit, and we're now revisiting a number of the amendments that were passed to the Texas Business Corporations Act and the implications of that for companies and boards of directors.
Brian Elliott: Yeah, it's good to have a minute to reflect at the close of the session to understand not just the text of the legislation that was passed, but to do some thinking about how it affects our clients and what we should expect for changes coming up. So why don't you lead us into that? Chuck, what are some of the things that came out of this legislative session that we should highlight for our clients? Yeah, I think it's important to start just with the backdrop of, you know, there were a lot of big corporate cases that were in the news and being litigated.
Chuck Kraus: You also had the launch of the Texas Stock Exchange and musings around, you know, making Texas a place that was going to be business friendly and attracting capital and all of those things. You had the Tornetta-Musk decision and appeal and decision on appeal, and then you had all the activity in Delaware around SB 21, not only the substantive changes, which were big, but, you know, the manner in which they came about sort of sidestepping the typical rulemaking process and the legislature kind of taking this issue directly and dealing with board approval of a contract. Inflicted controller transaction, as it was described. So I think all of that was in the background as the Texas legislature was meeting, considering these bills.
Brian Elliott: And there's a number of really important things that executives and boards need to consider. Most of them come out of the first bill, which is SB 29. We're going to talk about probably four different bills today. SB 29 will be the main one.
Chuck Kraus: It is effective immediately because it was passed by more than two thirds in the Texas legislature. The other three bills, 24-11, 23-37, and 10-57, have also been approved by the governor, but they did not have that supermajority, so they become effective September 1st. Very good. So taking a look at all these, we're going to focus on them one at a time.
Brian Elliott: But before we dive into the substance here, give me the high-level, big picture. This is major sea change in Texas. This is modernizing the code. What's your overall take on direction of where we're going with corporate law?
Chuck Kraus: Yeah, I think overall it's modernizing the code. I don't think any of it is sea change necessarily, but I think they're very important changes that boards need to really think about thoughtfully. I don't think for any of them we're going to say, across the board, slam dunk, this is something you must act on now. And I think one of the really interesting things, Brian, about the amendments is they introduce this bifurcation, because some of these provisions, particularly in SB 29, they apply automatically to public companies, but voluntarily to the same entity.
Brian Elliott: But if it's not public, they have to opt into it. And I think that's an interesting juxtaposition to say you're the same corporate structure. One of you has reporting obligations to the SEC and your shares trade publicly, and you're subject to a set of rules automatically. But if you're not a public company, this doesn't apply to you automatically, and you need to decide to opt in.
Chuck Kraus: Because from a governance perspective, that decision to opt in has to be something that's made with a duty of care and a duty of loyalty. And just making the decision on some of these things that we'll talk about, like limiting director and officer liability for breach of fiduciary duty and a heightened pleading standard, it's one thing for the rule to apply automatically. Exactly. It's another for the board to seize the issue and implement that in its own governing documents, because that decision itself needs to satisfy some standard.
Brian Elliott: So I think that's where a bit of the peril might be too strong a word, but that's where you need to be thoughtful about these things. And it's an interesting bifurcation for the legislature to say some of these things apply automatically if you're public, but some you have to opt into if you're not public. Yeah, and I would say, you know, in addition to that, even if you don't opt in and the regulations don't directly apply, they create a standard or a guideline, right? Then aspirational it may be, but companies need to live up to it.
Chuck Kraus: And then it starts to define the fabric of what we call corporate governance and where companies should be headed as they prepare to become public. I think that's exactly right. And so let's dig into it a little bit. I think your point, Brian, on this first issue that the statutory business judgment rule hits this issue head on.
Brian Elliott: So what SB 29 does on this topic is it codifies the business judgment rule. So the business judgment rule already is in Texas law as a common law notion. What SB 29 does is it codifies it and increases the pleading standard associated with a claim for breach of fiduciary duty in a pretty significant way. And so you're going to have this situation where, again, this automatically applies to a public company.
Chuck Kraus: But if you're not a public company, you have to make the decision to opt in. And I think that's not a slam dunk decision. And it's a bit of a perilous decision because what you're effectively doing is shielding you, the board, shielding yourself and shielding officers from things that might very well be negligent, not in the company's best interest. But don't rise to the level of the pleading standard that's now part of SB 29.
Brian Elliott: And when the lawsuit comes or the challenge comes, you're going to have to defend why it was a good idea to voluntarily, why it was in the company's and the shareholder's interest to opt into that additional protection where a public company doesn't have to explain because it automatically applies. Yeah, that's an interesting dynamic. And we'll see how that plays out. What are some of the considerations?
Chuck Kraus: If you're in that situation and your board is thinking about it, why might you or might you not want to opt in? Yeah, I think, so let's start with the negative. You know, again, you have to, as a board, make the determination that voluntarily opting into this provision is in the best interest of the corporation. And this includes, you know, insulating officers and directors from actions that might be negligent.
Brian Elliott: It could be grossly negligent. They could be dishonest or even unethical, but they don't rise to the level of fraud, intentional misconduct, conduct, you know, enact beyond authority. or a knowing violation of law. So I think the initial emotional response is maybe, oh, of course, we're going to opt into this.
Chuck Kraus: But then when you get down to the sort of brass tacks of telling your shareholders why you've done this, it's not necessarily, you know, a clear cut case. There's, you know, there's also regulated industries, you know, the banking industry, for example, where, you know, you have to follow safe and sound banking practices, for example, and you can sense potentially some tension if you voluntarily opt into this, but it's sort of inconsistent with the manner in which you hold yourself out as a company or as a regulated industry, you know, as a fiduciary, for example, it might be perceived to be inconsistent. I think the other thing that's really interesting about this is it creates different levels of standards that, you know, I think a creative plaintiff's lawyer might infer, you know, a negative inference. If you're a private company and you haven't opted into this higher standard, I think potentially the argument is, there's a different business judgment that applies to you.
Brian Elliott: And, and you, you know, the fact that you didn't opt into this means you're more liable, perhaps, than you would have otherwise been. So I think this, this bifurcation may, may be problematic, or at least will be used by plaintiffs to challenge it. Yeah. Yeah.
Chuck Kraus: Yeah. It's going to be interesting to see how it, how it plays out. Um, I think the, you know, it's, it's obviously we want to protect boards and, and executives for making, you know, the kinds of day-to-day business decisions and having, having the freedom to, you know, execute their business plan without the, um, you know, the burden of, of passing everything through a, uh, a granular test to, that is going to please everybody. We've seen recent, you know, shareholder, uh, actions that have, you know, called into question, you raised, you know, the Tornetta Musk decision and things like that.
Brian Elliott: And you, you know, you're, you're having boards have to double think a plan, right. Uh, and there are good reasons to do it, but at the same time, we want to, in, in Texas and other places encourage, you know, quick moving decision-making innovation. And we don't want to hamper that with, um, with too much, um, unnecessary regulation in a closely held company. When you've got a handful of, of shareholders and they all know each other, perhaps it's, it's not that big of an issue, but I see that there is like a spectrum or a sliding scale where, you know, you bring on more, you know, third-party, uh, investors and shareholders and, and that, that, that...
Chuck Kraus: you know, that base grows, different considerations will have to come into play. Yeah, I think that's exactly right. You know, other considerations you need to think about beyond just is this in the company's best interest is the manner in which you implement it. So the legislation says that if you're going to opt in, you need to do so in your governing documents, and that there's two governing documents you can use.
Brian Elliott: You can either amend your certificate of formation, or you can amend your bylaws. Obviously, an amendment to the certificate of formation is a higher bar because it requires shareholder approval. An amendment to the bylaws, the board can do. However, if it's only in your bylaws, it's also easier to undo because you don't have to go back to shareholders and ask.
Chuck Kraus: So you can imagine situations where you put this in your bylaw, and, you know, you could get shareholders leaning hard, you know, pressuring to undo that amendment in the bylaw. So I think you need to be thoughtful not only about do we want to pursue this, but if we do, how do we want to pursue it? Do we want to do it just as a board through a bylaw amendment, or do we want to do it through a certificate of formation amendment that we take to shareholders and have shareholders vote on it? Yeah, good considerations.
Brian Elliott: Besides business judgment rule, what else is in SB 29 that we should be aware of? Yeah, there's a bunch of other things. Let me just real quickly kind of run through. I think there's a few other considerations that the board needs to think about.
Chuck Kraus: One of them, you know, and these conversations are just starting is how the D&O markets are going to view this potential change. And I think, you know, I'm counseling boards, before you run off to implement this, have a conversation with your D&O insurers about how they would view, you know, expanding the discretion that directors and officers have to approve things and the heightened pleading standard. It's not necessarily the case that your D&O premiums are going to go down because of this. On the one hand, sure, you might be more insulated from litigation, but you can also see a whole range of decisions that may be less subject to challenge, which may not be the best thing in hindsight, right?
Brian Elliott: Yeah. Other things that are in SB 29 that are really interesting, Brian. So there's, for public Texas corporations, they can adopt a minimum share ownership percentage for shareholders that want to institute or maintain a derivative proceeding. So again, this applies only to public companies.
Chuck Kraus: They have to opt into it. the threshold can't exceed 3% of the company's outstanding shares, but it's a way for public companies in Texas to raise the bar on shareholders bringing derivative claims. So I think that's a helpful one. And there's been lots of activity on this front, not only in Texas, but in other jurisdictions, including Delaware.
Brian Elliott: The other two under SB 29 are an ability for any Texas corporation, public or private, to amend its governing documents to include a waiver of the right to a jury trial regarding internal entity claims. So that's important. Obviously, in the Texas constitution, you have a constitutional right to a trial by jury. Companies were already including these waivers in LLC agreements, in limited partner agreements, and the view was that that's allowed contractually.
Chuck Kraus: There was a bit more of a question as to whether that was allowed in a corporation. So in one sense, what they're trying to do is level the playing field and say, this waiver of jury trial, it applies to all entity types. I do expect we'll see some sort of challenge to this under the Texas constitution that this doesn't apply because of course, it's different in a partnership agreement or an LLC agreement where we sign onto a contract and agree to be banned by the terms of that contract that include a jury waiver. But in the corporate context, this purports to apply if you continue to hold the shares after the company implements the change.
Brian Elliott: So it's not the same as entering into the typical contract where you waive your rights. This is by virtue of continuing to hold these shares after the company implements it, I'm waiving my rights. Yeah. Well, it's interesting, right?
Chuck Kraus: Because we've talked previously about the difference between Texas and Delaware and the changes with the business court here in Texas. And one of the big contrasts is that the Delaware Chancery Courts don't do jury trials, but here in the Texas business courts, we would. But this seems to be pulling that back a little bit and saying, but you can opt out and you can include a jury trial waiver in your governing documents. That's exactly right.
Brian Elliott: I think you know, the Delaware bar looks at this and says, well, there's nothing new here. You know, we haven't had jury trials in chancery court ever. So playing catch up in that regard. And I think that's a fair criticism.
Chuck Kraus: The other thing that SB 29 does is, again, permits both public and private corporation. to designate in their governing documents that a Texas court with jurisdiction over the matter is the exclusive forum and venue for resolving an internal entity claim. So I think this is sort of codifying what we practitioners thought would eventually be a court ruling on this, that you can designate an exclusive forum. And you see this in other jurisdictions, including Delaware, already.
Brian Elliott: I think the additional lens here is that we now have the business courts as a fledgling forum to resolve those disputes with knowledgeable judges, you know, together with a potential waiver of a jury trial, you know, a forum where a knowledgeable judge and commercial matters could decide, you know, an internal entity claim exclusively. Great. Chuck, thanks for walking us through SB 29. Let's take a look at some of the other new changes that are affecting Texas corporate law this year.
Chuck Kraus: Sure. So, Brian, there were two other bills that I think we want to talk about. Again, as we said at the outset, SB 29 was effective immediately. This other legislation, SB 1057, regarding shareholder proposals and SB 2411, those become effective September 1st rather than immediately.
Brian Elliott: So there's a bit more time to prepare for those. SB 1057 applies to nationally listed corporations that opt in via a governing document amendment, provide for a minimum ownership threshold of $1 million in market value or 3% voting shares for shareholder proposals, also require a six-month holding period. So you have to have owned the stock for at least six months leading up to the shareholder meeting. And you need to solicit at least two-thirds of the voting power.
Chuck Kraus: So you can't just go out and solicit, you know, 10 of your buddies. You need to engage in a broad solicitation. So this is designed to put a limit on shareholder proposals in public companies. And I think generally is consistent with trends you were seeing in other jurisdictions and is a good move by Texas and it's supportive of the Texas stock exchange expansion.
Brian Elliott: Would this be similar to SB 29 where you would need to opt into these changes and put it in your governing documents or is this codified and applied generally? No, you would need to opt into this. Yeah. Okay.
Chuck Kraus: Yeah. But again, I think, you know, there's lots of data. Exxon put out a letter, maybe 2024 annual meeting. And it was talking about the costs.
Brian Elliott: Yeah. distractions that its board has to endure with all the shareholder proposals that it receives. And it was tens of millions of dollars and lots of board time dealing with these proposals that were coming from parties that aren't necessarily invested in the long-term success of the business. It seems like a reasonable threshold to put on.
Chuck Kraus: Has there been any reaction? You say this is sort of in lockstep with where other states are already? Yeah, I think this one's going to get less pushback than the statutory business judgment rule we were talking about earlier. The other suite of bills, SB 2411, really had a number of modernizations of the Texas Business Organizations Code.
Brian Elliott: So it did a couple of things. It permissively allows boards to limit the liability of officers similar to the protections already in the statute for directors. I think that's a good potential thing and sort of consistent with freedom of contract. I do think it raises some of the perils we were talking about already with codifying the business judgment rule and whether that's necessarily in all cases a good thing to sort of lower the standards of duty for directors and officers.
Chuck Kraus: It allows some streamlining of amendments made to governing documents. So now boards can approve certain forms of amendments without a shareholder vote. Restated certificates can omit legacy information without triggering a shareholder approval requirement. They also made some amendments that we previously talked about relating to the business courts and their sort of concurrent jurisdiction.
Brian Elliott: The other thing that they did that's interesting in connection with mergers is they clarified that disclosure schedules, so those letters that are delivered in connection with a merger agreement, but not technically part of the merger agreement, that those are excluded for purposes of being an actual part of the merger agreement or potentially having to be filed or disclosed publicly. And as you know, from working on these, you know, there's often sensitive detail in there, detail about claims. There's often, you know, needing redactions to be made or competitively sensitive information that's in those disclosure schedules. And I think this does a good job of really bifurcating, look, what's disclosed between two counterparties isn't necessarily for consumption by the entire world.
Chuck Kraus: So I think that's a, that's a proper, proper amendment. So I think these rule changes seem to me that they're much more geared to practitioners and how we interact with our clients and not really action items for a board to be taking away. What's your thought? Yeah, I agree with that, Brian.
Brian Elliott: I think the much more interesting ones from a consideration perspective are those in SB 29 around the fiduciary duties and the waiver of jury trials and the forum selection. This is great. This is a great overview of new rules. These last two, SB 2411 and 1057, you say will be effective automatically in the fall, in September?
Chuck Kraus: Yeah, so they've been passed. They've been signed. They just didn't have the two-thirds majority, so they become effective September 1st. But SB 29 is effective today.
Brian Elliott: As we talked about, there's some conversations that need to happen at the boardroom about whether to opt into this or not. And I would say, even if you decide not to opt into it, I think that decision needs to be documented, it needs to be debated, and it needs to be a thoughtful decision. So it's time for SB 29 to be on the agenda of every board, or at least every private board, because a lot of this applies automatically to public boards. But for private boards, you need to be considering this, talking to your shareholder base, talking to your D&O insurers, and thinking about the business industry you're in and whether opting into these things is in the best interest of the company.
Chuck Kraus: Great. Well, look, Chuck, why don't we take a quick break? When we come back, we'll talk about the capital flow impact, the business impact, maybe offer some advice and tips to our clients and listeners on what they should be taking away. Sounds great.
Brian Elliott: OK, we're back. Chuck, thanks for breaking down the new changes. That's been very helpful. Let's switch now to, you know, decision factors.
Chuck Kraus: and how it's going to impact clients. Can you give us some thoughts on, you know, where boards should be thinking right now? What kind of decision matrix should they be, you know, trying to go through? What are your initial feedback?
Chuck Kraus: Yeah, Brian, I think it's exactly the right question. You know, the first thing we did when these laws were passed is we, you know, we let clients know that it had happened, and there were going to be things that needed to be discussed. I think what we're doing now is we're getting, you know, getting together with clients, we're getting together with boards, we're talking through the specifics of these changes, who they apply to, who they don't, the whole public-private dichotomy that we discussed, and then also taking a step back and doing refreshers for boards on, you know, what is the business judgment rule? What are the fiduciary duties that apply in Delaware, that apply in Texas?
Brian Elliott: What are the trends? What are the recent cases? I think you think about that together with what industry am I in, and, you know, what kind of pressures are shareholders in those particular industries placing on companies? And then just being thoughtful about what we really think is in the company's interest, not only today with the current business, but based on where the company wants to go and grow, whether we think these things will facilitate that objective or potentially hold us back.
Chuck Kraus: Yeah, I mean, it's interesting, right? Because the company operates within this environment, this legal landscape, and when that landscape changes, it's incumbent on the company to take into consideration those changes and make appropriate adjustments, right? And where you can get more advantage, we should do it. What about, you know, how you see this playing out over the Texas landscape, the Texas economy?
Brian Elliott: Are these, you know, positive changes that will attract new capital and, you know, build the Texas economy? Do you think there's a sense of uncertainty? Wait and see how maybe the constitutionality of some of these rules play out over the next year or two? What are some thoughts then?
Chuck Kraus: Yeah, I think there was already a, you know, a trend towards re-domiciling that will continue, I think, as we get deeper into 2025 and early 2026, and you start to see some of the listings occur, both on the Texas Stock Exchange, but also NYSE Texas, that I think just last week announced their, you know, their first, one of their first listings. I think all of that is still attracting capital into Texas. One of the friends of our firm, I think, said on CNBC a couple of weeks ago that capital goes where it's treated best, and I think that will continue to be the case. And I think any company looking at you to set up, you know, just given the size of the Texas economy, you know, you need to be considering whether this is a place to incorporate.
Brian Elliott: I think a lot of the changes that you saw from the Texas legislature, they are designed and do, in fact, make it a very attractive place to incorporate and do business. That's for sure. You know, I don't think they've eliminated the debate entirely, but they've certainly added more benefit to Texas as a jurisdiction to consider. Well, it certainly adds layers to the consideration of, you know, not just where to incorporate, but, you know, where to expand business implications of fundraising, how you do the fundraising, you know, whether or not you should list on a public exchange.
Chuck Kraus: You know, the landscape has changed, the considerations are changing. You know, it would be nice to have, you know, a simple checklist to say, if you meet these criteria, then, you know, obviously you should do one or another. But I think it's a little bit more complicated than that. It's much more complicated than that.
Brian Elliott: You can't just ask, you know, your favorite AI program to make the decision. You know, it's going to be nuanced and you're going to need to talk with experienced counsel who can look around some of these corners with you. And ultimately, you know, you don't have to be clairvoyant in your decision, but the process by which you come to your decision needs to be a real and robust one. And I think that's the main takeaway from my perspective, is you need to thoughtfully consider these things and make the decision grounded in a firm understanding of the facts of your particular situation.
Chuck Kraus: Well, I know that we are going to have a more in-depth conversation about AI and how AI may or may not impact decision-making in corporations coming up soon. But I think I agree. I think the takeaway for me, you know, listening to the descriptions of these new changes is, you know, reach out to your corporate lawyer and get them on the team. You know, you need to audit your approach to capital and fundraising.
Brian Elliott: You need to audit your approach to shareholder activity and how you manage corporate governance in the changing environment. I think it's a new landscape. It keeps evolving. And you want to make sure that the future of the business is secure.
Chuck Kraus: You understand fully what, you know, the contours of the business judgment rule are so that you can, you know, make the right decisions in Texas of whether or not to implement such things, impact of jury waivers. How does that play out? There's so, so many issues and it takes a team approach to really think through it. Yeah, that's exactly right.
Brian Elliott: And I think the, you know, first step, as you say, is understanding what our current documents say. And then, and then with that moving to, okay, what, what items have changed automatically, either because I'm a public company, or this thing automatically applies to me, and what things are in my discretion. And then, you know, those that are in my discretion, how do I think about them? Those things that have happened automatically, you know, you have an obligation to tell your shareholders about that.
Chuck Kraus: So, you know, if you're a reporting company, and the sort of rules of the game have shifted a bit, you know, you need to explain to your shareholders what has changed. So definitely, the theme of it is, things have changed, you need to get some advice about the implications. And hopefully, they know where to call, and they can talk to one of the great people on the scale corporate team. We're here, we're happy to help.
Brian Elliott: We're working on getting an email address set up for the podcast. I believe it's going to be yallstreet at scalefirm.com, because I'm pretty sure no one else has that email address at the firm. But it's not live yet. But we will endeavor to get it set up.
Chuck Kraus: And we'd love to hear feedback from you. If you have topics that you want us to speak about, or guests you think we should interview, please send those along to us. In the meantime, you can reach either myself or Brian, our emails are on the scale website, you can look us up there, and we'd love to hear from you. Thanks, everybody for joining us.
Brian Elliott: And we'll be back soon. Thanks for tuning in to the scale LLP yallstreet law podcast. We hope you enjoyed today's episode and found it valuable. .