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 (Subchapters O and P 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 184-85 (applying former Tex. Bus. Corp. Act art. 5.14(L), the predecessor of § 21.563).
No dismissal-by-independent-committee. The committee-dismissal mechanism of § 21.558 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. In any derivative proceeding, not only one involving a closely held corporation, § 21.561(b)(1) lets the court order the corporation to pay the plaintiff's expenses, including attorney's fees, if the proceeding resulted in a substantial benefit to the corporation. Additional or amended disclosures to shareholders do not count as a substantial benefit. § 21.561(c).
The post-Ritchie significance
Ritchie v. Rupe declined to recognize a common-law cause of action for shareholder oppression, pointing to the derivative action and other existing remedies. In Sneed v. Webre, the court relied on that reasoning and declined to add judge-made barriers to derivative suits on behalf of closely held corporations. 465 S.W.3d at 187-88. 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
Several of the 2025 SB 29 corporate-governance reforms do not apply automatically to closely held corporations. The presumptions in § 21.419 apply only to a corporation with voting shares listed on a national securities exchange or one whose governing documents affirmatively elect that section, so a closely held corporation can opt in. The ownership threshold of up to 3% in § 21.552(a)(3) is not a default even for listed companies. It applies only if the certificate of formation or bylaws set it, and only to a corporation with listed common shares or one that has elected § 21.419 and has 500 or more shareholders. A closely held corporation meets neither condition, and § 21.563(b) makes § 21.552 inapplicable to its derivative claims against present or former directors, officers, and shareholders.
Section 21.563 makes a derivative suit against a present or former director, officer, or shareholder easier to bring in a closely held corporation than in other corporations: no demand, no stay or dismissal on a board or committee determination, and, if justice requires, a court may treat the suit as a direct action. The business judgment rule still applies to the merits of the claims. Sneed v. Webre, 465 S.W.3d at 193.
Companion article: Starting a Business in Texas
Full entry: Closely Held Corporation