On March 17, 2026, a federal court in Texas dismissed a shareholder derivative action against the Board of Southwest Airlines, marking the first judicial application of Texas Senate Bill 29 (SB 29)—a statute that significantly reshapes Texas corporate governance law.
The decision provides early confirmation that SB 29’s central reform will be enforced as written.
SB 29 in Brief
SB 29, signed into law in May 2025, was enacted as part of Texas’s effort to position itself as a more attractive corporate domicile. Among other changes, the statute authorizes Texas corporations to adopt charter or bylaw provisions requiring shareholders to own up to 3% of a company’s outstanding shares in order to bring a derivative action.
The Southwest Case
The case arose after Southwest Airlines eliminated its long‑standing “Bags Fly Free” policy following an activist campaign by Elliott Investment Management. After a reconstituted Board approved the change, a shareholder owning 100 shares of Southwest stock served a demand letter accusing the directors of breaching their fiduciary duties.
After the demand—but before any lawsuit was filed with the court—Southwest amended its bylaws to require derivative plaintiffs to own at least 3% of the company’s outstanding shares, as permitted by SB 29. When the shareholder later filed suit, the defendants moved to dismiss.
The Court’s Ruling
The court dismissed the action with prejudice, holding that:
- SB 29 applies to any derivative lawsuit filed after its enactment, regardless of when a demand letter was sent.
- A shareholder demand letter does not “institute” a derivative proceeding; only the filing of a complaint does.
- The statute authorizes ownership thresholds of up to 3%, and such thresholds are neither unconstitutional nor unreasonable simply because they limit standing.
The court emphasized the Texas Legislature’s stated policy objective and rejected attempts to avoid the statute through retroactivity or fiduciary‑duty arguments.
Why This Matters
The decision provides clear confirmation that ownership thresholds for derivative standing are enforceable under Texas law. For Texas‑incorporated companies, SB 29 now offers a validated mechanism to substantially limit exposure to derivative litigation brought by shareholders with minimal economic stakes.
More broadly, the ruling will likely factor into ongoing debates about corporate domicile. While Texas has now demonstrated a willingness to adopt—and enforce—management‑friendly governance reforms, Delaware remains unmatched in terms of institutional experience, well‑developed fiduciary‑duty jurisprudence, and predictability. How companies weigh those competing considerations will vary, but SB 29 has now cleared an important early test.