Texas has enacted significant legislation in the past few months designed to attract more corporations to its state and challenge Delaware’s dominance as the preferred state for incorporation. We are now seeing the first challenges to parts of these new laws.  (See our coverage of the adoption of these new laws here.)

Southwest Airlines Derivative Complaint 

On July 10, 2025, a derivative complaint was filed in the U.S. District Court for the Northern District of Texas against certain members of the board of directors of Southwest Airlines Co., a Texas Corporation, seeking to remedy defendants’ breaches of fiduciary duties. 

The story began with a demand to investigate and remedy a breach of fiduciary duty, and violations of law filed by plaintiff on April 28, 2025, in response to Southwest’s decision to terminate its “bags fly free program,” despite previous statements by the company that the program “generates market share gains in excess of potential lost revenues from bag fees” and “eliminating the ‘bags fly free’ policy would destroy value.” A September 2024 presentation by the company even suggested that ending the program would cost the company at least $300 million. According to the plaintiff, the decision to terminate the successful and critical program was in response to activist pressure and threats to board membership. 

On May 14, 2025, Gov. Greg Abbott signed SB 29 into law, which includes a new §(3) to §21.552(a) of the Texas Business Organizations Code that permits most Texas corporations to include in its organizational documents minimum beneficial ownership requirements (not to exceed 3% of the corporation’s outstanding shares) to institute a derivative proceeding.

Two days later, before responding to plaintiff’s demand, the board of directors of Southwest amended and restated the company’s bylaws to include (i) a provision that a shareholder may not institute or maintain a derivative proceeding unless the shareholder beneficially owns 3% of the company’s issued and outstanding stock (the “3% Derivative Action Bylaw”) and (ii) a waiver of the right to trial by jury.

Then, on June 27, 2025, Southwest responded to plaintiff’s demand, stating that the board of directors would not take any action, and instead demanded plaintiff “cease and desist from pursuing any litigation in violation of the company’s bylaws (specifically, the 3% Derivative Action Bylaw).

This brings us to the July 10, 2025 derivative complaint, in which plaintiff now seeks, among other things, declaratory judgment in its favor, declaring that Southwest’s amended bylaws (1) were adopted in breach of defendants’ fiduciary duties, because their sole purpose was to reduce the risk of being held accountable to the Company or its shareholders for any violations of law and to protect their tenure by entrenching their control of the company, (2) are irreconcilable with Texas law and public policy, because they are designed to, and do effectively, eliminate plaintiff’s statutory and common law right to commence and prosecute derivative litigation, no matter how egregious the wrongs committed by defendants, and (3) are invalid and unenforceable as they relate to plaintiff’s claims, because they apply retroactively to plaintiff’s accrued and/or vested rights.

Glass Lewis Challenge to Texas Proxy Advisory Firm Law

On July 24, 2025, Glass, Lewis & Co. (Glass Lewis) filed a complaint in the U.S. District Court for the Western District of Texas to stop SB 2337, which was recently signed into law in June and will become effective September 1, 2025. SB 2337 regulates proxy advice that pertains to companies that are organized or have their principal place of business in Texas, as well as companies that have sought, but not yet received, shareholder approval to reorganize in Texas. The new law requires proxy advisers (like Glass Lewis and ISS) to provide detailed disclosures when their voting recommendations respecting Texas corporations are based on non-financial factors, such as ESG and DEI considerations. 

In its complaint, Glass Lewis argues that SB 2337 regulates speech and violates the First Amendment’s prohibition on viewpoint discrimination and infringes on its freedom of association, as it appears to require proxy advisers to convey a government-mandated message any time their own speech is based on or takes into account “membership in … an organization or group that wholly or partly bases its evaluation or assessment of a company’s value over any period on nonfinancial factors.” The complaint also alleges that the law is unconstitutionally vague, preempted by the Employee Retirement Income Security Act of 1974 (ERISA), which instructs fiduciaries who invest for employee benefit plans to consider all relevant facts, and in violation of the Dormant Commerce Clause.