Business Judgment Rule
A Texas substantive doctrine protecting corporate officers and directors from liability for decisions made in good faith and within the honest exercise of business judgment. As of May 14, 2025, Texas operates two parallel regimes: a common-law version applicable to all entities by default, and a codified version under TBOC § 21.419 for publicly-traded and opt-in corporations.
The business judgment rule is a Texas substantive doctrine that protects corporate officers and directors from liability for decisions made within the honest exercise of their business judgment and discretion, even decisions that are negligent, unwise, inexpedient, or imprudent, provided the decisions are made in good faith, with reasonable diligence, and without disabling conflicts of interest. As of May 14, 2025, Texas operates two parallel business judgment rule regimes: a common-law version applicable to all Texas entities by default, and a codified statutory version (Tex. Bus. Orgs. Code § 21.419) that applies to publicly-traded Texas for-profit corporations and any Texas for-profit corporation that affirmatively elects to be governed by it.
What the common-law rule does
Where the rule applies, courts will not second-guess board decisions and will not substitute their judgment for the directors' judgment. The Texas Supreme Court in Sneed v. Webre described the rule as generally protecting corporate officers and directors from liability for acts within the honest exercise of their business judgment and discretion.
What § 21.419 does
§ 21.419 creates a rebuttable statutory presumption that directors, officers, and other managerial officials acted (1) in good faith; (2) on an informed basis; (3) in furtherance of the corporation's interests; and (4) in obedience to the law and the corporation's governing documents.
To rebut the presumption and establish liability, a plaintiff must (a) rebut one or more of the statutory presumptions, and (b) prove that the act or omission constituted a breach of duty, and (c) establish that the breach involved fraud, intentional misconduct, an ultra vires act, or a knowing violation of law. The pleading requirements track Federal Rule of Civil Procedure 9(b), claims must be pleaded with particularity.
Limits of the common-law rule
Texas courts have held the common-law rule does not protect a director's: (1) grossly negligent acts; (2) ultra vires acts; (3) fraudulent acts; (4) self-dealing transactions; (5) failure to exercise any judgment at all; or (6) uninformed decisions made without reviewing reasonably available material information. See Gearhart, 741 F.2d at 721.
Pleading burden
Under Texas common law, the rule is a substantive rule, not merely an affirmative defense. Sneed v. Webre, 465 S.W.3d at 178. A plaintiff alleging breach of fiduciary duty by a director generally must plead and prove conduct outside the rule's protections. The Texas Supreme Court has, however, relaxed this pleading burden for shareholders of closely held corporations bringing derivative claims. Sneed v. Webre, 465 S.W.3d at 193.
Coverage of the codified rule
§ 21.419 covers all duties of directors and officers, duty of care, duty of loyalty, and duties relating to interested-party transactions. This expanded scope is a significant departure from the common-law rule, which has historically been most protective in duty-of-care cases. § 21.419 also authorizes the corporation to form committees of independent and disinterested directors to review conflict transactions involving insiders.
Interaction with derivative actions
For corporations governed by § 21.419, related SB 29 amendments to § 21.552(a)(3) permit the certificate or bylaws to require a minimum ownership threshold (capped at 3% of outstanding shares) for shareholders to bring a derivative proceeding. § 21.561(c) precludes recovery of attorney's fees in a derivative proceeding involving a § 21.419 corporation if the only result is amended shareholder disclosures.
The business judgment rule is the single most important defense in Texas director and officer litigation. The 2025 split between the common-law version and the codified § 21.419 version creates a meaningful strategic decision for closely-held Texas corporations, affirmatively opting into § 21.419 substantially increases director-and-officer protection but also subjects the corporation to the heightened pleading requirements and ownership thresholds for derivative claims. After Ritchie v. Rupe, breach of fiduciary duty claims (subject to the business judgment rule) became the principal mechanism for challenging board conduct in closely-held Texas corporations; SB 29 has now produced the most director-and-officer-friendly Texas corporate-litigation environment in modern history.