Texas Corporate Litigation Reforms Take Hold: Federal Court Enforces Texas’s 3% Ownership Requirement for Derivative Claims
Last summer, the Texas legislature enacted sweeping amendments to the Texas Business Organizations Code (TBOC) with the stated purpose of “modernizing” the code and “clarifying and strengthening” the state’s corporate law framework. See our previous post for an overview of Texas Senate Bill 29 (S.B. 29).
Among its most significant reforms, S.B. 29, TBOC § 21.552(a)(3), allows Texas corporations to impose an ownership threshold for shareholders seeking to institute derivative proceedings. Publicly traded corporations and other opt-in corporations with more than 500 shareholders may set an ownership threshold of up to 3% of common stock, requiring a shareholder-plaintiff (or multiple shareholder-plaintiffs acting together) to have a meaningful economic interest in the corporation to bring derivative claims.
In Gusinsky v. Reynolds, S.B. 29’s ownership threshold survived its first challenge. On March 17, 2026, the U.S. District Court for the Northern District of Texas dismissed a shareholder derivative action against Southwest Airlines’ board of directors for failure to satisfy Southwest’s 3% ownership threshold.
Plaintiff Vladimir Gusinsky, a Southwest shareholder owning only 100 shares of Southwest stock, alleged that members of the company’s board breached their fiduciary duties in connection with the decision to eliminate Southwest’s “Bags Fly Free” policy. Defendants, members of Southwest’s board, moved to dismiss Gusinsky’s claims for failure to satisfy Southwest’s 3% ownership threshold to bring a derivative suit, as set out in Southwest’s amended bylaws and authorized by S.B. 29. The district court held that S.B. 29 permits corporations to require a minimum ownership threshold for shareholders seeking to bring derivative claims, and such requirement barred the plaintiff’s suit.
It was not disputed that Gusinsky’s ownership of 100 shares failed to satisfy the ownership threshold (which would require ownership of about 17 million shares). Instead, Gusinsky lodged an as-applied challenge to the validity of the ownership threshold itself. Gusinsky argued that the defendants adopted the amended bylaw to entrench themselves, and doing so was a breach of defendants’ fiduciary duties, violated the Texas Constitution, and violated principles of Texas contract law. The court rejected each of Gusinsky’s arguments and dismissed the claims with prejudice. The court also rejected Gusinsky’s request to replead his claims as direct claims, reasoning that under Texas law, a breach of fiduciary duty claim against a director belongs to the corporation and cannot be brought by a stockholder directly.
The Court Enforces S.B. 29’s Ownership Threshold. At the outset, the court held that the statutory framework enacted by S.B. 29 permits corporations to adopt ownership thresholds for shareholders to institute derivative proceedings. Southwest amended its bylaws pursuant to this statutory authorization two days after S.B. 29 became effective and before Gusinsky filed the derivative suit. The result: S.B. 29 barred Gusinsky’s derivative suit as a matter of law for failure to satisfy the 3% ownership threshold set out in Southwest’s amended bylaws.
The rest of the court’s decision rejected Gusinsky’s various attempts to avoid the ownership threshold.
Timing of the Lawsuit Matters. S.B. 29 applies only to a “derivative proceeding” instituted on or after the effective date of S.B. 29. Gusinsky served a written shareholder demand before S.B. 29 was enacted and Southwest amended its bylaws, but filed the derivative lawsuit afterward. The court held that a written shareholder demand does not constitute a “derivative proceeding” as defined in S.B. 29, which refers to a shareholder lawsuit filed in court on behalf of a corporation. The timing of Gusinsky’s written shareholder demand had no bearing on whether his derivative suit was barred—the timing of the derivative suit is what matters.
Nature of the Claim Controls. In addition to his underlying derivative claim, Gusinsky sought a declaratory judgment that defendants breached their fiduciary duties by adopting the ownership threshold in Southwest’s amended bylaws. In doing so, Gusinsky argued that Southwest’s board sought to avoid liability by adopting the amended bylaws after his written demand, and the ownership threshold should not bar this claim. The court disagreed, holding that Gusinsky could not use a breach of fiduciary duty claim to get around the ownership threshold. It reasoned that a director’s fiduciary duties run to the corporation, not an individual shareholder, and cited the Fifth Circuit’s opinion in Gearhart Industries, Inc. v. Smith International, Inc., 741 F.2d 707 (5th Cir. 1984), for the proposition that a breach of fiduciary duty claim against a director may be advanced only in a shareholder’s derivative suit.
S.B. 29 Survives Constitutional Challenge. The court also rejected Gusinsky’s as-applied constitutional challenge to S.B. 29. Gusinsky argued that S.B. 29 violates the Texas Constitution’s prohibition on retroactive laws by extinguishing an accrued and pending breach of fiduciary duty claim. The court applied the three-factor Robinson test in assessing retroactivity, considering the public interest, the right impaired by the statute, and the extent of the impairment. The court held that all three factors weighed against Gusinsky.
The court held S.B. 29 serves a “significant public interest” in attempting to attract businesses, modernize the TBOC, and make Texas “the corporate law capital of America.” Further, the statute did not impair a prior right of Gusinsky because a claim for breach of directors’ fiduciary duties belongs to the corporation; it cannot be brought by a stockholder in his own right. If any prior right is impaired, it is a right belonging to Southwest. The extent of any impairment to Gusinsky was negligible because any recovery belonged to the corporation, not the shareholder-plaintiff.
The court also noted that Gusinsky’s claims were not “pending” at the time of S.B. 29’s enactment because he had not filed suit before S.B. 29’s effective date. A written demand was not sufficient.
Contract Law Principles Do Not Invalidate Ownership Threshold. Lastly, Gusinsky argued that Southwest’s ownership threshold violates principles of Texas contract law because it was unreasonable, the product of fraud or overreach, and adopted for an improper purpose: to suppress shareholder oversight three weeks after he filed a written demand. The court held Gusinsky’s contract law theory is not a valid avenue to circumvent the ownership threshold. While Gusinsky argued that the ownership threshold was adopted in response to his written demand, the court noted that Southwest adopted its amended bylaws just two days after S.B. 29 was enacted. The court held it was “just as likely” the amended bylaws were adopted in response to S.B. 29’s statutory authorization, as opposed to Gusinsky’s demand letter.
Remaining Claims Abandoned, Request for Leave to Amend Denied. The court held that Gusinsky abandoned his additional theories that S.B. 29 is irreconcilable with federal law and violates the Texas Constitution’s open courts provision because he presented no argument in his response. The court also denied Gusinsky’s alternative request to replead his claims as direct claims in the event his derivative claims were barred, finding that “[i]t is well-established that a breach of fiduciary duty claim against a corporation’s directors belongs to the corporation, not the plaintiff-shareholder.” The court did not expand on this conclusion or address the circumstances under which Texas courts have held that a shareholder may assert fiduciary duty claims directly (e.g., based on a special relationship).
Gusinsky v. Reynolds is just the first decision on this issue, but it signals that courts may be willing to hold shareholder-plaintiffs to the S.B. 29 ownership threshold at the pleading stage. As Texas continues its effort to rival Delaware’s prominence in corporate law, we expect to see additional challenges testing the scope and application of these reforms. For now, Gusinsky offers a first glance at how courts may approach them.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
