On March 17, the United States District Court for the Northern District of Texas dismissed Gusinsky v. Reynolds, applying and upholding the reforms to the Texas Business Organizations Code introduced in 2025 by Senate Bill 29. In doing so, the court provided an early and significant validation of Texas’ “Y’all Street” initiatives to become a hub for business, capital markets and corporate governance. In particular, the decision upheld dismissal of a derivative claim because the plaintiff did not have sufficient economic interest in a corporation, as determined by bylaws adopted by the corporation as authorized by S.B. 29, providing an early validation of the statute.
The opinion confirms that the Texas legal reforms associated with Y’all Street are working and should help corporations and their boards feel confident that these new statutory tools will withstand judicial scrutiny.
Background: Texas’ Corporate Law Transformation
Texas has engaged in a series of reforms designed to build on its economic growth to strengthen its capital markets and its legal framework for corporate governance decisions. The state has positioned itself to compete with jurisdictions like Delaware, long seen as the preferred state of corporate domicile, and Nevada, which has historically been Delaware’s strongest competitor. This effort has been described in national media as the rise of “Y’all Street,” reflecting the state’s determination to draw American enterprise — and the jobs it creates — home to Texas.
One of these reforms is S.B. 29, which the Alliance for Corporate Excellence actively supported and lobbied for during the 89th Texas Legislature, a bill intended to help Texas companies solve real problems faced by public and private companies in the current market by introducing several key reforms to modernize the Texas Business Organizations Code. As the Bill Analysis states, the legislation represents “a bold step toward making Texas the corporate law capital of America.” Among its most significant provisions, SB 29 authorized Texas corporations with shares listed on a national securities exchange to adopt, if they choose, a required ownership threshold for shareholder derivative actions. Under this provision, publicly listed companies may limit the right of their shareholders to institute a derivative proceeding to shareholders who “beneficially own[] a number of the common shares sufficient to meet the required ownership threshold to institute a derivative proceeding in the right of the corporation identified in the corporation’s certificate of formation or bylaws, provided that the required ownership threshold does not exceed three percent of the outstanding shares of the corporation.”
The Legislature designed this provision to address a documented problem in corporate governance: attorney-driven derivative suits that do not align with the genuine interests of the corporation or its shareholders. Going into the 89th Texas Legislature, it was clear that the modern landscape of shareholder derivative litigation was increasingly dominated by lawsuits motivated to achieve paydays for attorneys rather than to protect the genuine interest of the corporation. Historic studies showed that in some years 97.5 percent of transactions over $100 million were challenged in court, each generating an average of seven distinct lawsuits. The shareholder-plaintiffs bringing these claims typically held de minimis stakes in the companies they sued, were repeat litigators and arguably did not fairly and adequately represent the interests of the corporation or their fellow shareholders.
S.B. 29’s establishment of a derivative ownership threshold was intended to provide a real tool to Texas public corporations: by limiting derivative claims, claims which are corporate assets that should only be directed for the benefit of all shareholders, to plaintiffs having actual skin in the game, the statute was intended to help ensure that derivative plaintiffs did in fact “fairly and adequately represent” the interests of the shareholders broadly. To make sure this did not prevent meritorious claims, the bill contained two protective features: shareholders are permitted to aggregate their holdings to overcome a threshold, and the exact threshold, while not exceeding three percent, must be determined by each company. The aggregation feature ensures that small shareholders can coordinate with other small shareholders or larger institutions to meet any ownership threshold. The fact that the threshold is set by each company means that shareholders, through their power to amend corporate bylaws, have the chance to propose a lower, or no, threshold than the one selected by the board. As a result, frivolous or lawyer-driven suits are deterred, while meritorious claims with broad shareholder support remain viable.
Gov. Greg Abbott signed SB 29 into law on May 14, 2025, with immediate effect. The bill passed the Texas Legislature with overwhelming bipartisan support.
The Case: Gusinsky v. Reynolds et al
The facts of the case trace back to 2024, when Elliott Investment Management L.P. purchased Southwest stock worth approximately $1.9 billion, representing an 11 percent ownership stake in Southwest. Elliott advocated for changes to Southwest’s business model, including the elimination of the “Bags Fly Free” policy. Plaintiff Vladimir Gusinsky, a frequent litigant who had filed more than 30 prior shareholder lawsuits and who owned 200 shares — less than 0.00002 percent — of Southwest’s stock, served a demand letter on the defendants April 28, 2025, alleging that the elimination of the Bags Fly Free policy was a breach of the board’s fiduciary duties.
S.B. 29 went into effect May 14, 2025, and two days later, the Southwest board amended the company’s bylaws to include a derivative ownership threshold provision stating that “no shareholder may institute or maintain a derivative proceeding unless that shareholder … beneficially owns at least three (3) percent of the outstanding shares of the corporation.” The plaintiff then filed his derivative suit against the defendants in federal court July 10, 2025.
The Court’s Analysis
In examining the claims, the court analyzed what constituted a “derivative proceeding” under Texas law. S.B. 29 specified that it applied “only to a derivative proceeding instituted on or after the effective date” of S.B. 29; however, the Texas Business Organizations Code defines “derivative proceeding” as a “civil suit in the right of a domestic corporation,” not a pre-suit demand letter. Accordingly, the court reasoned that a written shareholder demand is delivered to a corporation’s board of directors, not a court of law, and the Texas Business Organizations Code expressly distinguishes between a written demand letter and a derivative proceeding.
Because Gusinsky had not filed suit until July 10, 2025, after the adoption of the amended bylaws, the court then considered the plaintiff’s as-applied constitutional challenges to the ability of a Texas corporation to adopt a derivative ownership threshold as against Gusinsky’s claims. The court analyzed this under the three-factor Robinson test. It first found that SB 29 serves a significant public interest in bringing corporate business to Texas. The court then held that the statute does not impair any prior right of Gusinsky, because derivative claims belong to the corporation, not to individual shareholders. Finally, the court found that any impairment on Gusinsky was negligible because even a successful plaintiff in a derivative action would not be entitled to monetary damages — recovery belongs to the corporation.
Accordingly, the court granted the defendants’ motion to dismiss with prejudice, holding that the plaintiff’s derivative claims were barred by S.B. 29 and the amended bylaws as a matter of law.
What Does It Mean?
The Gusinsky case was the first major legal challenge to S.B. 29, and the court’s decision represents an early validation of the law, particularly of the adoption of a derivative ownership threshold as a constitutionally sound mechanism for Texas corporations to manage derivative litigation risk.
In particular, the dismissal of the case under 12(b)(6) shows that such thresholds can work as intended: preventing claims that do not demonstrate adequate shareholder support from proceeding deep into litigation. This efficiency is precisely what Texas lawmakers intended when they designed SB 29 to “provide[] business decision makers the certainty that sound business judgments made in the best interest of shareholders will not be second-guessed by courts.” Texas public corporations now have an additional tool to allow boards to help manage litigation risk and to ensure that derivative litigation represents concerns of the shareholders and not only of the plaintiffs’ bar.
The Gusinsky decision sends a clear signal to the corporate world: Texas is ready for sophisticated business disputes, and its new corporate governance framework will be enforced by the courts. As Sen. Bryan Hughes stated when introducing S.B. 29, “[b]y offering Texas as a refuge from this activist storm, S.B. 29 will draw American enterprise and the jobs it creates home to Texas.” The Northern District of Texas’ decision in Gusinsky v. Reynolds is one more paving stone on the road to Y’all Street.
Christopher Babcock is a partner at Foley & Lardner’s Dallas office, where he serves as co-chair of the firm’s Texas Corporate Governance Team, and the President of the Alliance for Corporate Excellence.