Texas codifies the Business Judgment Rule
Governor Greg Abbott signed Senate Bill 29 into law on May 14, 2025 (effective immediately), codifying the business judgment rule into the Texas Business Organizations Code. The business judgment rule empowers business leaders to manage their entities as they see fit without courts’ second guessing business decisions.
The Texas business judgment rule applies to corporations, limited partnerships and limited liability companies.
S.B. 29 grants directors and officers of corporations a presumption that when they act on business matters that they did so (1) in good faith, (2) on an informed basis, (3) in the interests of the corporation, and (4) in obedience to the law and corporate governing documents.
S.B. 29 also applies to general partners in a limited partnership and the governing persons in a limited liability company. In both cases, S.B. 29 creates a presumption that the general partner, or governing person, acted in (1) good faith, and (2) in accordance with the law and the governing documents of the entity.
If shareholders wish to sustain an action against directors and officers (general partners or governing persons), then they first must rebut these presumptions. For example, they must provide proof of fraud or misconduct to counter the presumptions. They may not sustain actions against directors and officers solely based upon the directors’ and officers’ business judgment. In effect, Texas has disavowed courts from second guessing the business decisions of Texas business leaders.
These presumptions do not automatically apply.
The business judgment rule only applies to entities (1) that have a class or series of voting shares/interests listed on a “national securities exchange,” or (2) if the entity opts into the business judgment rule in its governing documents.
- The bill expands the definition of a “national securities exchange.” A “national securities exchange” is one registered under the national Exchange Act of 1934, or a Texas-approved stock exchange that has its principal place of business in Texas.
- Texas businesses may consider revisiting their governance documents to ensure they’re aligned with the new protections available under S.B. 29.
S.B. 29’s enactment makes Texas one of the few states to codify the business judgment rule. While directors and officers have long relied on courts to defer to their good-faith decisions, the statutory language now provides clarity — and a higher bar for plaintiffs challenging internal corporate actions.
Click here for a complete read of S.B. 29.