Gusinsky v. Reynolds and What SB 29 Means for Texas Corporate Law
A federal judge in Dallas has dismissed a shareholder derivative suit against Southwest Airlines’ board, providing the first meaningful judicial test of Texas Senate Bill 29 (SB 29) and offering useful guidance for companies navigating Texas’s evolving corporate governance landscape.
Southwest shareholder Vladimir Gusinsky sued the airline’s board after it eliminated the “Bags Fly Free” policy following Elliott Investment Management’s activist campaign. Gusinsky owned 100 shares, fewer than 0.00002% of Southwest’s outstanding common shares, and under Southwest’s amended bylaws—enabled by the enactment of SB 29—a shareholder or group of shareholders must own 3% of theoutstanding shares to bring a derivative suit. Gusinsky argued that the ownership threshold should not apply to his suit because he served his demand on the board before Southwest amended its bylaws. Judge Ed Kinkeade disagreed and dismissed the case with prejudice.
Why it matters beyond Southwest. The ruling does three things. It validates SB 29’s ownership threshold as constitutional. It establishes that a shareholder demand letter does not “institute” a derivative proceeding—only the filed complaint does. And it forecloses the proposed workarounds to an ownership threshold: retroactivity challenges, breach of fiduciary duty accusations, and the argument that such a threshold is “unreasonable” all failed. In responding to Gusinsky’s retroactivity challenge, the Court found that the “public interest served by SB 29 is strong” and favorably quoted SB 29’s Bill Analysis that the statute is “a bold step toward making Texas the corporate law capital of America by modernizing the Texas Business Organizations Code.”
SB 29 was explicitly designed to make Texas the “corporate law capital of America,” and this opinion is its first major courtroom stress test. It passed. For companies weighing Delaware versus Texas incorporation, this result should add to the calculus. Ownership thresholds are now a proven tool worth consideration, particularly for boards seeking to manage derivative litigation exposure without eliminating shareholder accountability entirely. As explained in the Alliance for Corporate Excellence’s Amicus Brief submitted in this case, the statutory ownership threshold “serves as a tool to limit abusive derivative proceedings not broadly supported by the owners of a corporation (its shareholders), was carefully balanced to protect the concerns of large and small shareholders, and is constitutional and consistent with existing law.” Through SB 29, Texas has enabled companies to adopt governance provisions that reflect their needs and risk profiles, reinforcing Texas’s broader effort to enhance its competitiveness as a corporate domicile. See Revitalizing U.S. Capital Markets: The Case for State-Led Reform.
The bottom line: Texas is serious about competing for corporate domicile, and the courts are validating the competitive tools implemented by Texas.
Key Takeaways:
1. SB 29’s Ownership Threshold Survives Its First Challenge. Southwest amended its bylaws to require that any shareholder bringing a derivative suit must have at least 3% ownership. The Court found no basis to override the statutory bar, confirming that the threshold operates as intended.
2. Demand Letters Do Not Institute the Suit for Timing Purposes. Gusinsky argued that the ownership threshold should not apply to his case because he served his demand letter before Southwest amended its bylaws to add the ownership threshold. The Court rejected this argument: a demand letter delivered to a board is categorically distinct from a “derivative proceeding,” which only commences upon filing in court.
3. The Retroactivity Challenge Failed on All Three Factors. Gusinsky invoked the Texas Constitution’s prohibition on retroactive laws and the Robinson three-factor test (“[1] the nature and strength of the public interest served by the statute as evidenced by the Legislature’s factual findings; [2] the nature of the prior right impaired by statute; and [3] the extent of the impairment.”). The Court found against him on each factor—the statute serves a strong public interest, any impaired right belongs to the corporation not the shareholder, and the personal impact on the plaintiff is negligible since derivative plaintiffs never personally recover damages anyway.
4. Fiduciary Duty Claims Can’t Circumvent the Bar. Gusinsky attempted to reframe the ownership threshold challenge as a declaratory judgment request—asking the Court to declare that adopting the ownership threshold is itself a breach of fiduciary duty. The Court was unpersuaded and held that the plaintiff cannot use a breach of fiduciary duty allegation to get around the 3% threshold requirement.
5. The “Unfair Surprise” Contract Argument Failed. Gusinsky argued the bylaws were unconscionable because they were adopted just weeks after his demand letter, suggesting the board was targeting him specifically. The Court noted the more obvious explanation: the board amended its bylaws two days after SB 29 passed, making it equally plausible they were simply acting on newly available statutory authority.
6. Open Courts and “Federal” Arguments. Gusinsky’s complaint raised open courts and federal law challenges to SB 29. Because his response brief offered no supporting argument on either point, the Court deemed both theories abandoned.
7. No Leave to Amend. Gusinsky asked in the alternative to replead his claims as direct rather than derivative. The Court denied this, reaffirming the settled rule that breach of fiduciary duty claims against directors belong to the corporation and cannot be repackaged as direct shareholder claims.
