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 developed in Texas corporate cases, 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 and without disabling conflicts of interest. As of May 14, 2025, Texas operates two parallel business judgment rule regimes: a common-law version developed in Texas corporate cases, 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 a director or officer, in taking or declining to take action, 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. Under § 21.419(f), a party alleging fraud, intentional misconduct, an ultra vires act, or a knowing violation of law must state the circumstances with particularity.
Limits of the common-law rule
Under Gearhart, Texas courts will not impose liability on a noninterested director unless the challenged action is ultra vires or tainted by fraud. 741 F.2d at 721. Transactions involving an interested director are reviewed separately for fairness to the corporation. Id. at 719–20.
Pleading burden
A shareholder suing directors or officers derivatively must plead and prove a breach of duty that the rule does not protect. Allegations of mere mismanagement, neglect, or abuse of discretion are not enough and may be disposed of on special exceptions or summary judgment. Sneed v. Webre, 465 S.W.3d at 187. For closely held corporations, the statute removed the demand requirement, so the shareholder need not plead around the board's business judgment to have standing, but the rule continues to apply to the merits. Id. at 179, 185.
Coverage of the codified rule
Under § 21.419(b), the presumptions concern directors' and officers' duties to the corporation, including the duty of care and the duty of loyalty as those duties pertain to transactions with interested persons. The common-law rule has been described as a defense to duty-of-care claims. Gearhart, 741 F.2d at 721. A separate SB 29 provision, § 21.416(g), lets a listed or opted-in corporation form a committee of independent and disinterested directors to review transactions with a controlling shareholder, director, or officer, and § 21.4161 lets the corporation ask a court to confirm the members' independence.
Interaction with derivative actions
Related SB 29 amendments to § 21.552(a)(3) permit the certificate or bylaws of a corporation with common shares listed on a national securities exchange, or of a corporation that has opted into § 21.419 and has 500 or more shareholders, to set a minimum ownership threshold (not exceeding 3% of outstanding shares) for bringing a derivative proceeding. Under § 21.561(c), additional or amended disclosures to shareholders, regardless of materiality, are not a substantial benefit that supports an award of the plaintiff's expenses, including attorney's fees, in any derivative proceeding.
The 2025 split between the common-law rule and the codified § 21.419 version gives closely held Texas corporations a choice. A corporation that opts in gains the statutory presumptions and the particularity requirement in § 21.419(f). The derivative ownership threshold in § 21.552(a)(3) is available to an opted-in corporation only if it has 500 or more shareholders. After Ritchie v. Rupe declined to recognize a common-law shareholder-oppression claim, derivative claims for breach of fiduciary duty, which are subject to the business judgment rule, became a central route for challenging board conduct in closely held Texas corporations.
Practice guide: Breach of Fiduciary Duty in Texas