Texas Takes a Page from Delaware: SB 29 Narrows Shareholder Inspection Rights

Texas is making a bold play to become the nation’s premier destination for corporate headquarters. A key part of this strategy is modernizing the Texas Business Organizations Code (BOC) to be more attractive—and predictable—for corporate management. The recently passed Senate Bill 29 (SB 29), effective September 1, 2023, makes sweeping changes to Texas corporate law. While we’ll cover its other provisions in future posts, today we’re focusing on one of the most significant shifts: the narrowing of a shareholder’s right to inspect company books and records.

This change is a clear signal that Texas is listening to the concerns of corporate boards about fishing expeditions and litigation-driven records requests. But what does it mean for shareholder transparency and oversight? Let’s break it down.

Previously, Texas law provided shareholders with relatively broad inspection rights. Under both common law and the BOC, a shareholder could inspect a company’s books and records if they had a “proper purpose.”

A proper purpose is one that is reasonably related to the person’s interest as a shareholder. Examples included valuing shares, investigating potential corporate mismanagement, or communicating with fellow shareholders. To exercise this right, a shareholder generally needed to:

• Have held shares for at least six months or own at least 5% of the outstanding shares.
• Make a written demand stating a proper purpose.

While the “proper purpose” standard existed, Texas courts were often shareholder-friendly in their interpretation. This led to concerns from corporations that the process was being abused by plaintiffs’ attorneys to find grounds for a lawsuit, creating costly distractions for management.

SB 29 significantly tightens the reins on these inspection rights by amending Section 21.352 and other related provisions of the BOC. The goal is to weed out improper or overly burdensome requests early in the process. Here are the key changes:

• Sworn Affidavit Required: The written demand must now be a sworn affidavit, meaning it’s made under penalty of perjury. This raises the stakes for any shareholder making a request and is intended to deter frivolous demands.
• More Detailed Demand: The affidavit must state a proper purpose with “reasonable particularity.” This is a higher standard than before, requiring the shareholder to be more specific about why they need the records.
• Specific Records Only: The shareholder must describe the specific records they want to inspect with “reasonable particularity” and show how those records are “essential” to their stated purpose. This prevents vague, catch-all requests like “all documents related to the merger.”
• New Exclusions: Most critically, SB 29 creates new categories of documents that are expressly shielded from shareholder inspection. These include:
  • Communications with legal counsel (attorney-client privilege).
  • Information related to a pending or potential merger or acquisition before a definitive agreement has been signed.
  • Confidential information whose disclosure would violate law or a contractual obligation.
  • Minutes of board committee meetings that the full board is not entitled to review.

These changes are designed to protect sensitive corporate strategy and privileged communications, aligning Texas law more closely with the realities of modern corporate governance.

Texas’s legislative reforms don’t exist in a vacuum. They are a direct response to the corporate law frameworks in states like Delaware and Nevada, which have long dominated the market for corporate charters.

• Delaware: The gold standard for corporate law, Delaware has a robust body of case law interpreting its inspection statute, Section 220 of the Delaware General Corporation Law. Like the new Texas law, Delaware requires a shareholder to state a “proper purpose” and identify the specific records sought. Delaware courts are adept at balancing shareholder rights with corporate interests, often granting limited inspection targeted at the stated purpose. The exclusions added by SB 29—especially regarding M&A discussions and privileged documents—bring Texas law much closer to the practical application of Delaware’s well-developed jurisprudence.
• Nevada: Known for being exceptionally management-friendly, Nevada law also requires a “proper purpose.” However, its statutes provide corporations with broad discretion to deny requests they deem not in the company’s best interest. While Texas has not gone as far as Nevada, the changes in SB 29 clearly move it in a more management-friendly direction, prioritizing corporate efficiency and confidentiality.

By adopting these changes, Texas is signaling to corporations that it offers a sophisticated and predictable legal environment similar to Delaware’s but with the added benefits of Texas’s business-friendly economic climate. The narrowing of inspection rights is a calculated move to reduce the risk of shareholder litigation and make Texas a more attractive home for public and private companies alike. While this may be welcome news for corporate boards, it places a higher burden on shareholders to justify their requests for information, potentially making it harder to hold management accountable.