Texas Throws Down the Gauntlet: A Comprehensive Analysis of SB 29 and the New “Business Judgment Rule on Steroids”

The Texas Legislature has just fired the most significant salvo to date in its calculated campaign to unseat Delaware as the preeminent jurisdiction for American corporations. The recent passage of Senate Bill 29 (SB 29), signed into law and effective immediately, is far more than a routine legislative update; it is a declaration of intent. Amidst a growing trend of corporate “Dexit” from Delaware, fueled by perceptions of judicial overreach and instability, Texas has responded not with a minor adjustment, but with a fundamental re-engineering of its corporate law landscape.

The cornerstone of this ambitious strategy, championed under the “Incorporate Texas” banner, is the creation of a new Section 21.419 of the Texas Business Organizations Code (TBOC). This provision codifies and radically expands the business judgment rule, creating what can only be described as a legal fortress for corporate directors and officers. The new law is the centerpiece of a multi-pronged state strategy designed to create an unparalleled ecosystem of certainty and predictability—one that is intentionally and aggressively pro-management.

This analysis will provide a comprehensive deep dive into this transformative new law. We will begin by establishing the historical context of the business judgment rule as it existed under Texas common law. We will then deconstruct the powerful new statutory framework of TBOC § 21.419, exploring its practical impact on corporate lawyers, large public companies, and small businesses alike. Finally, we will situate this development within the grand strategic rivalry between Texas and Delaware, examining how SB 29, in concert with the new Texas Business Courts, positions the Lone Star State to challenge for the crown of corporate law.

While SB 29 is a comprehensive piece of legislation with numerous impactful provisions—from shareholder proposal thresholds to books and records requests—this article will focus exclusively on its most transformative element: the new statutory business judgment rule under TBOC § 21.419. These other critical updates will be analyzed in subsequent articles in this series.

To grasp the magnitude of the change SB 29 represents, one must first understand the legal ground it replaced. Prior to this legislation, the business judgment rule in Texas was not found in any statute. It was a common law doctrine, crafted and refined by judges over decades of court decisions. The core purpose of this judicial principle was straightforward: to prevent courts, armed with the perfect clarity of hindsight, from second-guessing good-faith business decisions that simply turned out poorly. As the Texas Supreme Court long ago established, courts should not interfere in corporate affairs based on allegations of “mere mismanagement, neglect, or abuse of discretion”. The rule empowered business leaders to manage their enterprises without the paralyzing fear that every risk-laden decision could result in personal liability.

The business judgment rule operated as a shield in the context of the fiduciary duties that directors and officers owe to the corporation they serve. Under Texas common law, these duties form a triad of core obligations:

• Duty of Care: This is the duty to act on an informed basis and with the level of care that an ordinarily prudent person would exercise in a similar position. The common law business judgment rule was primarily a defense against claims alleging a breach of this duty. While it clearly protected directors from liability for simple negligence, Texas case law was less clear on the standard of gross negligence, with some courts suggesting the rule’s protection would not extend that far.
• Duty of Loyalty: This is the paramount duty to act in the best interests of the corporation, free from personal conflicts of interest. It demands that a director’s decisions be for the sole benefit of the corporation. Critically, the common law business judgment rule generally did not protect directors from claims involving self-dealing, fraud, or other conflicted transactions where the duty of loyalty was implicated.
• Duty of Obedience: This is the duty to act in accordance with applicable laws and the corporation’s own governing documents (its certificate of formation and bylaws). The business judgment rule offered no protection for illegal acts or conduct that violated the company’s charter.

Under this common law framework, the business judgment rule was considered a substantive rule of law. This meant that a plaintiff bringing a derivative lawsuit had the burden to plead and prove that a director’s challenged conduct fell outside the rule’s protective scope.

While functional, this judge-made doctrine presented a key competitive vulnerability for Texas in its rivalry with Delaware. Delaware’s primary appeal to the national corporate community is its vast and deeply developed body of case law, which provides a high degree of predictability for complex transactions. In contrast, the Texas common law business judgment rule was comparatively undeveloped, with limited case law clarifying its precise boundaries, particularly concerning the gross negligence standard and its application to duty of loyalty claims. This created a “predictability gap” that sophisticated corporate actors and their counsel found undesirable. The codification of the rule in SB 29 was, therefore, more than just a strengthening of director protections; it was a strategic legislative maneuver to close this gap. By replacing a somewhat amorphous, evolving judicial standard with rigid, unambiguous statutory text, the Texas legislature took a shortcut to creating the black-letter-law certainty that its judiciary had not yet had a century to build.

The new TBOC § 21.419 does not merely codify the old common law rule; it rebuilds it from the ground up, creating a statutory fortress around corporate decision-makers. A granular analysis of its components reveals a meticulously crafted liability shield.

Applicability: Who is Protected?

The new law establishes a two-tiered system for its powerful protections to apply:

• Automatic Coverage: The protections are automatically granted to all for-profit Texas corporations that have a class or series of voting shares listed on a “national securities exchange.” In a forward-looking strategic move, the law also expands the definition of a “national securities exchange” to include not only those registered under federal law but also any future Texas-based stock exchange approved by the state securities commissioner. This provision is designed to support the entire Texas financial ecosystem, including the new Texas Stock Exchange (TXSE).
• Elective Coverage (The “Opt-In”): All other Texas for-profit corporations, limited liability companies (LLCs), and limited partnerships can receive the exact same protections by affirmatively electing to be governed by Section 21.419 in their governing documents—be it the certificate of formation, bylaws, company agreement, or partnership agreement.

The Four Pillars of Presumption

For any covered entity, the statute grants its directors and officers four powerful legal presumptions. Any action or omission is now presumed to have been made:

• In good faith;
• On an informed basis;
• In furtherance of the interests of the corporation; and
• In obedience to the law and the corporation’s governing documents.

These presumptions are the default starting point for any legal challenge, shifting a heavy burden onto the plaintiff from the very outset of a case.

The Plaintiff’s New Mount Everest

The statute then erects an extraordinarily high two-part threshold that a claimant must overcome to sustain a cause of action against a director or officer:

• Rebut a Presumption: First, the plaintiff must successfully introduce evidence to rebut one or more of the four presumptions listed above.
• Prove Egregious Conduct: Second, and this is the most critical part, even if a plaintiff manages to rebut a presumption, they must also prove that the director’s or officer’s breach of duty involved fraud, intentional misconduct, an ultra vires act (an act beyond the corporation’s legal power), or a knowing violation of law.

This standard is a monumental shift. It effectively immunizes directors and officers from liability for any level of negligence, including gross negligence, as well as any breach of duty that does not rise to the level of intentional wrongdoing.

The Procedural Dagger: “Pleading with Particularity”

To make the climb even steeper, SB 29 adds a powerful procedural weapon for defendants. The law mandates that a claimant must “plead with particularity the circumstances constituting the fraud, intentional misconduct, ultra vires act, or knowing violation of law”. This language deliberately mirrors the heightened pleading standard of Federal Rule of Civil Procedure 9(b). In practice, this means a plaintiff cannot simply make vague allegations. They must state in their initial complaint the “who, what, when, where, and how” of the alleged wrongdoing. This requirement is designed to give defendants a powerful basis to file motions to dismiss lawsuits at the earliest possible stage, before the company is subjected to the immense cost and burden of discovery.

The Monumental Expansion to the Duty of Loyalty

Perhaps the most radical and consequential feature of the new law is its application of this single, high liability standard to all fiduciary duty claims. This quietly but dramatically expands the protective scope of the business judgment rule to cover claims for breach of the duty of loyalty—claims that were largely outside the protection of the common law rule.

This represents a conscious and direct rejection of the nuanced, tiered standards of review that are the hallmark of Delaware corporate law. In Delaware, a conflicted-interest transaction is typically reviewed under the exacting “entire fairness” standard, where the directors must prove the transaction was fair in both price and process. A sale-of-the-company transaction may be subject to “enhanced scrutiny.” Texas has now replaced this entire complex judicial framework with a single, blunt, and formidable statutory shield. Unless a plaintiff can plead with particularity and ultimately prove fraud or intentional misconduct, the inquiry ends.

The table below provides a clear, at-a-glance summary of this legal transformation.

This statutory architecture is not merely defensive; it is preemptive. The combination of the heightened substantive liability standard (requiring proof of fraud or intentional misconduct) and the “plead with particularity” procedural requirement creates a powerful feedback loop. This system is engineered not just to help companies win lawsuits, but to deter those lawsuits from ever being filed. Derivative litigation is often driven by plaintiffs’ attorneys whose business model relies on their ability to survive an initial motion to dismiss and proceed to the discovery phase, where the escalating costs and risks for the defendant company create significant settlement leverage. The new Texas law attacks this economic model at its foundation. By making it prohibitively difficult for a plaintiff to file a complaint that can survive an early dismissal—a difficulty compounded by other SB 29 provisions that restrict pre-suit access to corporate records—the law aims to make Texas an unprofitable market for the plaintiffs’ derivative bar, thereby drastically reducing the volume of such litigation.

The practical implications of this new legal regime are immediate and far-reaching, requiring a strategic reassessment by every Texas business and its legal advisors.

For Texas Corporate Lawyers

The passage of SB 29 has fundamentally altered the advisory and litigation landscape for business attorneys in Texas.

• The New Advisory Role: For transactional and corporate governance lawyers, the primary new duty is to proactively counsel every private entity client on the critical “opt-in” decision for the BJR protections. This is not a simple box-checking exercise; it requires a nuanced discussion of the company’s ownership structure, its future capital needs, its relationship with minority investors, and its overall governance philosophy.
• Revising Governing Documents: There is an immediate and urgent need for lawyers to work with their clients to review and amend corporate bylaws, LLC company agreements, and partnership agreements. These documents should be updated to incorporate not only a potential BJR opt-in but also other powerful tools authorized by SB 29, such as exclusive forum provisions designating Texas courts and enforceable jury trial waivers.
• A Paradigm Shift in Litigation Strategy: For corporate litigators, the playbook for defending derivative lawsuits has been completely rewritten. The focus will now shift dramatically toward aggressive, front-end dispositive motions based on the plaintiff’s failure to plead with the required particularity. The entire lifecycle of these cases will be compressed, with the most critical battle often being fought before any discovery takes place.

For Large, Publicly Traded Businesses

For large public companies incorporated in Texas, the benefits of the new law are automatic and substantial.

• Immediate De-Risking: These companies are now automatically shielded by the new statutory BJR, significantly reducing their litigation risk profile and insulating them from the threat of costly and distracting “strike suits” often filed after a stock drop or a merger announcement.
• Impact on D&O Insurance: This quantifiable reduction in litigation risk is expected to have a direct and positive impact on the cost of Directors & Officers (D&O) liability insurance. Lower premiums represent a tangible financial benefit that will appeal directly to chief financial officers and boards of directors.
• Empowering Bolder Decision-Making: With the threat of judicial second-guessing greatly diminished, boards may feel empowered to undertake more ambitious or riskier strategic initiatives—major acquisitions, significant capital projects, or innovative research and development—with greater confidence and legal certainty.

For Small and Medium-Sized Businesses (SMBs)

While many provisions of SB 29 seem tailored for public companies, its impact on private SMBs is equally profound, centered on a critical strategic choice.

• The Critical “Opt-In” Decision: The most important consideration for any private Texas corporation, LLC, or partnership is whether to amend its governing documents to opt into the protections of Section 21.419. The decision involves significant trade-offs. For a closely-held or family-owned business, opting in provides founders and managers with a powerful liability shield against potential disputes from minority owners or future generations.
• The Investor Relations Angle: Conversely, for a startup or growth-stage company seeking outside capital, the decision is more complex. Sophisticated investors, such as venture capital and private equity firms, often view traditional fiduciary duties as a crucial accountability mechanism. An attempt to opt into a heightened liability shield may be viewed negatively and could become a significant point of negotiation during fundraising rounds, as investors may demand the company retain traditional governance standards as a condition of their investment.
• Leveraging Other Protections: Even if an SMB decides against opting into the BJR, it can still reap substantial benefits from other parts of SB 29. By amending its governing documents to include exclusive Texas forum provisions and jury trial waivers, an SMB can gain significant predictability and control over potential internal disputes, reducing future litigation costs regardless of the liability standard.

The “opt-in” provision for the business judgment rule will likely create a new, de facto classification system for private companies in Texas: those with “fortified governance” that have opted in, and those with “traditional governance” that have not. This status will inevitably become a key diligence item for investors, acquirers, and lenders. A company’s choice will signal its underlying governance philosophy. For a private equity firm considering an acquisition, a target company that has already opted in might be more attractive, as it protects the firm’s appointed directors post-closing. For an early-stage venture investor, the opposite may be true. This binary choice will therefore materially alter the risk profile of a company, influencing negotiations over valuation and the cost of capital.

SB 29 cannot be viewed in isolation. It is the legal centerpiece of a larger, coordinated economic development strategy to make Texas the nation’s most attractive corporate domicile. This campaign is being waged with the vocal support of state leaders, including Governor Greg Abbott, under the explicit branding of “Texas: Open for Business”.

The Texas Business Court vs. The Delaware Court of Chancery

A key component of this strategy was the 2023 creation of the Texas Business Court, a specialized court system designed to handle complex commercial cases and serve as a direct competitor to Delaware’s famed Court of Chancery. A comparison highlights the strengths and strategies of each:

• Delaware’s Strengths: The Court of Chancery’s dominance is built on a foundation over a century deep. Its key assets are its vast body of precedential case law, a bench of highly respected, specialized judges (Chancellors) who are appointed for 12-year terms, and its efficient, non-jury format, which provides speed and predictability.
• Texas’s New Contender: The Texas Business Court is designed to replicate some of these features. It has jurisdiction over major corporate and commercial disputes and is staffed by appointed judges required to have significant experience in business law. However, a potential weakness is that these judges serve shorter two-year terms, which could make them more susceptible to political pressures compared to their Delaware counterparts.

Solving the “Jury Problem”

The most significant structural difference between the two court systems has been the right to a jury trial. This right is enshrined in the Texas Constitution, making it a potential disadvantage for the Texas Business Court. Juries, which are not used in the Court of Chancery, can introduce a high degree of unpredictability, cost, and delay into complex business litigation. The infamous multi-billion dollar verdict in the Texas-based Pennzoil v. Texaco case serves as a powerful cautionary tale for corporate litigants about the volatility of jury trials.

SB 29 provides a brilliant strategic solution to this problem. The newly created TBOC § 2.116 explicitly authorizes Texas entities to include enforceable jury trial waivers for internal entity claims directly in their governing documents. This provision is a masterstroke. It allows Texas corporations to contractually create the efficient, predictable, judge-centric dispute resolution environment that Delaware’s constitution provides structurally. It effectively neutralizes one of Delaware’s key competitive advantages.

A Fundamental Divergence in Philosophy

Ultimately, Texas is not trying to become a mirror image of Delaware. It is offering the market a fundamentally different value proposition. Delaware offers predictability through a sophisticated, flexible, and judge-driven common law system. Its Chancellors are empowered to interpret and shape the law to fit evolving business realities. Texas, with SB 29, is now offering predictability through rigid, management-friendly, black-letter statutory law. It is a strategic choice presented to the corporate world: predictability through judicial deference versus predictability through legislative immunity.

This strategy can be viewed as a form of legal arbitrage. Texas is exploiting perceived weaknesses and recent controversies in Delaware’s system—such as the high-profile decision voiding Elon Musk’s Tesla compensation package, which Governor Abbott explicitly cited as a reason for companies to leave Delaware—to offer a product that Delaware is structurally and philosophically unable or unwilling to provide: extreme, legislatively guaranteed certainty for management. While Delaware’s system relies on the evolving discretion of its expert judges, the new Texas BJR statute effectively removes much of that judicial discretion in favor of a clear, almost insurmountable statutory shield. Texas is making a direct appeal to a corporate leadership class that may be growing weary of the perceived risks of judicial activism in Delaware, telling them: “If you are frustrated by the evolving standards of Delaware’s judges, come to Texas, where the legislature has already decided these issues in your favor.”

Senate Bill 29, and specifically the new business judgment rule codified in TBOC § 21.419, is not an incremental change. It is a fundamental re-engineering of corporate governance law in Texas, creating what is arguably the most management-friendly director and officer liability shield in the nation. The law is a clear signal that Texas is no longer content to be a regional player in corporate law; it is making a direct and credible bid for national dominance.

By combining this fortified statutory protection with a new, dedicated Business Court and innovative procedural tools like the contractual jury trial waiver, Texas has firmly established itself as a top-tier alternative to Delaware. It offers a distinct model of corporate governance, one founded not on the wisdom of judges but on the certainty of statute.

The ground has shifted beneath the feet of every Texas business. The new protections are immense, but they are not all automatic. For private companies, critical strategic decisions must be made. Now is the time for every Texas business leader, board member, and investor to engage with experienced Texas legal counsel to review their governing documents, understand the new landscape, and make the strategic decisions necessary to navigate and capitalize on this new era of corporate law in Texas.