Closely Held Corporation
A Texas for-profit corporation defined by TBOC § 21.563(a) as having fewer than 35 shareholders and no public market for its shares. Triggers significant procedural advantages for shareholders pursuing derivative claims.
A "closely held corporation" is a Texas for-profit corporation defined by TBOC § 21.563(a) as a corporation that has (i) fewer than 35 shareholders and (ii) no shares listed on a national securities exchange or regularly quoted in an over-the-counter market. The closely held corporation is not a separate corporate form, it is a statutory category that triggers procedural and substantive advantages for shareholders pursuing derivative claims.
Distinguishing "closely held" from "close corporation"
Texas law uses two distinct terms that are easily confused:
Close corporation (Subchapter O of Chapter 21, §§ 21.701–21.763). A specific corporate form that a Texas corporation may elect by statement in the certificate of formation. Election enables management directly by shareholders without a board, through a shareholders' agreement under § 21.713. Opt-in regime requiring formal election.
Closely held corporation (§ 21.563). A statutory category triggered automatically by meeting size and market criteria. No election required.
A Texas corporation may be both, either, or neither. The terms are not interchangeable.
The § 21.563 derivative-action advantages
No demand requirement. The 91-day written-demand procedure of § 21.553 does not apply. Sneed v. Webre, 465 S.W.3d at 178.
No dismissal-by-independent-committee. The committee-dismissal mechanism of § 21.555 does not apply.
Direct recovery available. § 21.563(c) permits the court to order recovery to be paid directly to plaintiff shareholders rather than to the corporation if "justice requires."
Attorney's fees recoverable. § 21.561(b) permits recovery of legal fees from defendants where the suit provided substantial benefit.
The post-Ritchie significance
Ritchie v. Rupe substantially narrowed minority shareholder protections by eliminating the common-law oppression cause of action. The Texas Supreme Court in Sneed v. Webre emphasized that the closely held corporation derivative-action procedure under § 21.563 is the principal mechanism through which minority shareholders may seek meaningful relief. Sneed also held that a shareholder of a closely held parent corporation may bring a "double-derivative" suit on behalf of the parent's wholly owned subsidiary against the subsidiary's officers and directors.
LLC parallel, § 101.463
Texas LLC law contains a substantially parallel provision: an LLC qualifies for derivative-action advantages if it has fewer than 35 members and no public market.
SB 29 implications
The 2025 SB 29 corporate-governance reforms generally do not apply automatically to closely held corporations. The codified business judgment rule under § 21.419, the 3% derivative-action ownership threshold under § 21.552(a)(3), and related amendments apply by default only to publicly-traded corporations. A closely held corporation may opt into these protections, but doing so subjects the corporation to the more director-and-officer-protective regime, generally not in the interest of minority shareholders.
The closely held corporation is the dominant form of small-to-medium Texas business that uses corporate (rather than LLC) form. The procedural advantages of § 21.563 are substantial enough that minority shareholders of Texas closely held corporations have meaningfully better protection than minority shareholders of publicly-traded Texas corporations. This produces a counterintuitive result: shareholders of small Texas corporations have stronger derivative-action protections than shareholders of large Texas corporations, by design.
Companion article: Starting a Business in Texas
Full entry: Closely Held Corporation