Corporate Counsel Daily, Court upholds Texas stock-ownership threshold, (Mar 25, 2026)

By Anne Sherry, J.D.

The owner of only 100 shares of Southwest Airlines stock can’t sue the company’s board for reversing the “Bags Fly Free” policy.

A derivative plaintiff can’t carry on with his lawsuit over Southwest Airlines’ jettisoning its “Bags Fly Free” policy. A federal court in Texas upheld the constitutionality of Texas SB 29, which allows corporate bylaws to restrict shareholder derivative suits by plaintiffs who own less than 3 percent of shares. Despite a heavy presumption against retroactive laws, Texas SB 29 is airworthy because it advances the public interest and does not impair a significant right of derivative plaintiffs (Gusinsky v. Reynolds, No. 3:25-cv-01816-K (N.D. Tex. Mar. 17, 2026)).

Demand and lawsuit. The plaintiff demanded that Southwest sue the directors involved in eliminating the airline’s longstanding policy of allowing free checked bags (“Bags Fly Free”). Later, SB 29 was enacted to allow Texas corporations to institute a stock ownership threshold for shareholder derivative actions. Two days after the bill was signed, Southwest’s bylaws were amended to institute the maximum 3-percent ownership floor for a derivative action.

The board declined to act on the demand, and the plaintiff sued on behalf of the corporation in federal court. The complaint alleged that the defendant directors breached their fiduciary duties by eliminating the Bags Fly Free policy despite knowing this would harm Southwest and by amending the bylaws to shield themselves from accountability. The plaintiff also made an as-applied constitutional challenge to SB 29 by arguing that it violates the state constitutional prohibition against retroactive application of law.

Timing. Although the plaintiff served his demand before SB 29 was enacted, he filed his lawsuit afterward. The court found that SB 29 and the amended bylaws barred the plaintiff’s claims as a matter of law. The shareholder demand was delivered to the board, not a court of law, and did not count as a derivative proceeding under state statute. Accordingly, the 3-percent threshold applied to the action, and the plaintiff’s 100 shares did not meet the threshold.

This timing issue also doomed the plaintiff’s request for a declaratory judgment that the amended bylaws are invalid. This request was predicated on alleged breaches of fiduciary duty, and those duties run to the corporation. Therefore, the request for declaratory judgment was itself a derivative claim.

Retroactive application. Furthermore, SB 29 does not violate the constitution’s prohibition against retroactive law. Applying the three Robinson factors, the court found that SB serves a strong public interest in allowing Texas to compete with incorporation powerhouses like Delaware and Nevada. “Clearly, SB 29 is meant to bring corporate business to Texas and provide statutory incentive to incorporate and conduct business here, and Plaintiff does not dispute that objective,” the court wrote.

As to the second and third Robinson factors, the statute did not impair a prior right of the plaintiff. Because a derivative action is on the corporation’s behalf, if any prior right is impaired, it belongs to Southwest. The plaintiff could not show a “settled expectation” of money damages because any such award would go to Southwest.

Furthermore, because the plaintiff had not already filed suit when SB 29 went into effect, the prohibition against retroactivity did not apply.

Contract argument. The court further rejected the plaintiff’s argument that the amended bylaws violated Texas contract law. Southwest’s charter and bylaws create a contractual relationship between shareholders and the company, and the plaintiff did not dispute that he was on notice that the defendants could amend the bylaws without shareholder approval. The court was not persuaded that the bylaws were amended in response to the plaintiff’s demand and therefore constituted “unfair surprise.” It was equally likely, the court reasoned, “that Defendants adopted the Amended Bylaws, including the percentage ownership requirement, in response to the statute, passed two days prior, giving them the authority to do so.”

The case is No. 3:25-cv-01816-K.

Judge: Kinkeade, E.

Attorneys: Joe Kendall (Kendall Law Group) for Vladimir Gusinsky. Michael A Swartzendruber (Norton Rose Fulbright US LLP) for Christopher P. Reynolds, David Cush, David J. Grissen, David P. Hess, Douglas H. Brooks, Gregg A. Saretsky, Lisa M. Atherton, Patricia A. Watson, Pierre R. Breber, Rakesh Gangwal, Robert E. Jordan, Robert L. Fornardo, Sarah Feinberg, Eduardo F. Conrado and Elaine Mendoza.

Companies: Southwest Airlines Co.

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