Derivative Action
A lawsuit filed by a shareholder, member, or other equity holder on behalf of the entity itself, asserting a claim that belongs to the entity but that management has refused or failed to pursue. The principal procedural vehicle for challenging breaches of fiduciary duty.
A derivative action is a lawsuit filed by a shareholder, member, or other equity holder on behalf of the entity itself, asserting a claim that belongs to the entity but that management has refused or failed to pursue. The plaintiff seeks recovery for the entity, not personally, except in narrow circumstances. Derivative actions are the principal procedural vehicle for challenging breaches of fiduciary duty by directors, officers, managers, or other governing persons.
Standard procedure
Standing. The shareholder must have been a shareholder at the time of the act or omission and must remain a shareholder throughout the proceeding. § 21.552(a)(1).
Demand requirement (§ 21.553). Before filing, a shareholder must serve written demand on the corporation stating the matter with particularity. The shareholder may not file until 91 days after demand, except where (a) the demand has been rejected, (b) the corporation is suffering irreparable injury, or (c) waiting would cause irreparable injury.
Stay and committee dismissal (§§ 21.554–21.555). The corporation may stay the proceeding and move to dismiss based on an independent committee's determination that the proceeding is not in the corporation's best interests.
Closely held corporation exception
The most consequential Texas derivative-action provision. For corporations with fewer than 35 shareholders and no public market under § 21.563: (1) the demand requirement does not apply (Sneed v. Webre, 465 S.W.3d at 178); (2) the committee-dismissal mechanism does not apply; (3) the court may order direct recovery to plaintiff shareholders if "justice requires" (§ 21.563(c)); (4) the plaintiff may recover legal fees if the suit provided substantial benefit (§ 21.561(b)).
SB 29 changes (effective May 14, 2025)
Ownership threshold for publicly-traded and opt-in corporations (§ 21.552(a)(3)). For Texas corporations listed on a national securities exchange and corporations with 500+ shareholders that have opted into § 21.419, the certificate or bylaws may require a minimum ownership threshold (capped at 3% of outstanding shares) to bring a derivative action.
Attorney's fees limitation (§ 21.561(c)). In a derivative proceeding involving a § 21.419 corporation, plaintiff's counsel may not recover fees if the proceeding's only outcome is amended shareholder disclosures.
Heightened pleading. Under § 21.419, claims against directors and officers of opt-in corporations must plead facts "with particularity" demonstrating fraud, intentional misconduct, ultra vires, or knowing violation of law.
Double-derivative actions
Sneed v. Webre held that, for closely held corporations, a shareholder of a parent corporation may sue derivatively on behalf of a wholly owned subsidiary against the subsidiary's officers and directors.
LLC parallel
TBOC Subchapter L of Chapter 101 (§§ 101.451–101.463) provides parallel derivative-action provisions for Texas LLCs. The closely held LLC exception under § 101.463 substantially mirrors § 21.563.
Derivative actions are the primary courtroom vehicle for challenging fiduciary misconduct by Texas directors, officers, managers, and controlling owners. After Ritchie v. Rupe, derivative claims for breach of fiduciary duty became the principal route for minority shareholders. The closely-held-corporation exception under § 21.563 (and § 101.463 for LLCs) gives minority owners of small Texas businesses one of the most plaintiff-friendly derivative regimes in the United States. SB 29 has produced a sharp split, publicly-traded and opt-in corporations now face substantially heightened plaintiff burdens.
Companion article: Business Divorces in Texas