Texas court upholds first SB 29 shareholding threshold bylaw

As part of its effort to attract corporations to Texas, the Texas legislature passed Texas Senate Bill 29 (“SB 29”) in May 2025, which amended Section 21.552(a) of the Texas Business Organizations Code to allow Texas corporations to adopt a provision in their certificate of incorporation or bylaws that bars derivative actions brought by shareholders holding less than 3% of all outstanding shares. In a first-of-its-kind decision, a federal court dismissed a derivative action on the basis of such a bylaw, rejecting the shareholder plaintiff’s arguments that the bylaw was not enforceable. See Gusinsky v. Southwest Airlines Co., 2026 WL 747179 (N.D. Tex. Mar. 17, 2026).

Background

The case involved Southwest Airlines’ decision to eliminate its longstanding “Bags Fly Free” policy. In 2024, an activist fund acquired an 11% ownership stake in Southwest and, among other things, criticized the Southwest Board and management for failing to implement certain commercial changes consistent with the rest of the industry, including elimination of the Bags Fly Free policy. Following prolonged negotiations, Southwest and the activist fund entered into an agreement by which six new directors were appointed—five of whom were nominees of the activist fund. Southwest subsequently eliminated the free checked bag policy.

A shareholder later served a demand letter on the Board, alleging the directors breached their fiduciary duties. The shareholder claimed that the directors eliminated the Bags Fly Free policy to “entrench [] themselves” in their positions on the Board and did not act in the best interest of the company.

Southwest is a Texas corporation. After the shareholder served the demand letter, SB 29 was adopted. The Southwest Board decided to amend the bylaws to limit derivative standing to shareholders owning at least 3% of the company’s outstanding shares, as permitted by the new provisions of the Texas Business Organizations Code. The Board did not respond to the demand letter, and the shareholder filed a derivative suit against the directors in federal court in the Northern District of Texas. The directors moved to dismiss on the basis that the shareholder did not own the requisite number of shares under the bylaws to bring a derivative action.

The Court’s decision enforcing the bylaw provision

The Court granted the motion and dismissed the case with prejudice, rejecting the shareholder’s argument that the bylaw was not enforceable.

The Court first addressed the shareholder’s timing arguments. It rejected the argument that the bylaw could not be enforced because it was adopted after the shareholder made the demand—under the text of the statute, what mattered was that the bylaw was adopted before the lawsuit was filed.

Next, the Court rejected the shareholder’s argument that SB 29 violated the Texas Constitution’s prohibition on retroactive laws. The Court found that “SB 29 serves a significant public interest” and the statute does not impair rights belonging to the shareholder Plaintiff, particularly because a derivative claim belongs to the corporation itself.

Finally, and perhaps most importantly, the Court found the shareholder’s argument unpersuasive that the bylaw was unenforceable under principles of Texas contract law. The Court recognized that the certificate of incorporation and the bylaws of a corporation “create a contractual relationship” between a shareholder and the corporation and were enforceable as contracts. The Court found that none of the shareholder’s arguments undermined the enforceability of the bylaw as a matter of contract law.

Key takeaways

SB 29 reflects the Texas Legislature's commitment to modernize the Texas Business Organizations Code to attract corporate business to Texas. The Gusinsky decision represents the first decision on the enforceability of a bylaw establishing a shareholdings threshold for derivative standing and bodes well for continued enforcement of such bylaws in the future.