Derivative Standing
Derivative standing is the right to sue on behalf of an entity for a wrong done to it. In Texas the plaintiff must have been an owner at the time of the conduct complained of, must be an owner when the suit is filed, and must remain one. Losing the interest during the case can end the claim outright.
The company owns the claim. A shareholder who thinks the directors wasted company assets has not been injured in a way the law recognizes separately, because the company has. Derivative procedure is the workaround, and standing is its first and most fatal requirement.
The statutory framework
Corporations are governed by Tex. Bus. Orgs. Code §§ 21.551–.563 and limited liability companies by §§ 101.451–.463. The two schemes run in parallel. Each requires the plaintiff to have been an owner at the time of the act or omission complained of and to remain one throughout. Each requires a written demand on the entity, followed by a waiting period during which the entity may investigate through a committee of disinterested persons.
Closely held entities are relieved of most of that machinery. Under § 21.563 for corporations and § 101.463 for limited liability companies, the demand and committee provisions do not apply, the court may treat a derivative proceeding as a direct action, and recovery may be paid to the plaintiff rather than to the entity where justice requires. A closely held limited liability company is one with fewer than 35 members and no membership interests listed on a national securities exchange or regularly quoted over the counter. Sneed v. Webre, 465 S.W.3d 169 (Tex. 2015), reads those provisions broadly.
Ownership at filing
The business court enforced the requirement without sympathy in Crain v. Northern, 2026 Tex. Bus. 11 (8th Div. Mar. 11, 2026). The plaintiff had lost his membership interest through a buy-sell ruling six weeks before he filed. That was enough. Membership at the time of filing is required, and a former member has no standing to pursue the entity's claim no matter how well founded the underlying grievance.
The timing lesson is uncomfortable and clear. Where a buy-sell mechanism is running and a fiduciary claim is forming, the claim has to be filed before the interest is extinguished, or the right to bring it derivatively is gone. Anyone who expects to be bought out should assume the buyout will be argued as a standing bar.
The 2025 threshold provision
S.B. 29, effective May 14, 2025, added Tex. Bus. Orgs. Code § 21.552(a)(3), which lets a corporation adopt an ownership threshold of up to 3% of outstanding shares as a condition of derivative standing. It is an opt-in, and its reach is limited. The election appears to be available to a corporation with shares listed on a national securities exchange, or one that affirmatively elects to be governed by § 21.419. The statute also treats two or more shareholders acting in concert as a shareholder, so holders may aggregate to meet the threshold, and that aggregation right cannot be contracted away.
Anyone advising a closely held Texas company that it can now impose a 3% floor should read the section again. Most private companies cannot.