Suing on Behalf of the Company: Derivative Claims in Texas

Direct claim or derivative claim?

The first question in any owner dispute is who was hurt. If the wrong was done to you personally, such as a refusal to honor your buyout right or a lie that induced your investment, the claim is direct and you sue in your own name. If the wrong was done to the company, such as an officer paying himself an unauthorized bonus or steering a contract to his own side business, the company's value fell and your loss is a share of its loss. That claim belongs to the company. When the company will not pursue it, because the wrongdoers control it, an owner may bring it for the company. That is a derivative proceeding, defined in Business Organizations Code sections 21.551 (corporations) and 101.451 (LLCs) as a civil suit in the right of the company.

Getting this wrong is costly. A derivative claim pleaded as a direct claim gets dismissed for lack of standing; a direct claim buried in a derivative suit subjects it to procedures that do not apply. Most owner cases plead both, in separate counts, each in the right capacity.

Who may bring a derivative suit

Under sections 21.552 and 101.452, the plaintiff must have been a shareholder or member at the time of the act or omission complained of (or have acquired the interest by operation of law from someone who was), and must fairly and adequately represent the interests of the company in enforcing its right. For LLCs, 'member' includes an assignee of a membership interest and a beneficial owner through a voting trust or nominee (section 101.451(3)). For corporations, two or more shareholders acting in concert count as a shareholder (section 21.551(2)). A buyer who acquires an interest after the misconduct generally cannot sue over it.

The written demand and the 90-day wait

Sections 21.553 and 101.453 bar an owner from filing a derivative suit until the 91st day after filing a written demand with the company that states with particularity the act, omission or other matter complained of and requests that the company take suitable action. The waiting period ends early, or does not apply, if the company notifies the owner that the demand is rejected, if the company is suffering irreparable injury, or if irreparable injury would result from waiting out the 90 days.

The demand is not a formality. It tells the company what the claim is, so that independent decision-makers can investigate, and it tolls limitations: under sections 21.557 and 101.457, filing the demand tolls the statute of limitations on the claim until the 31st day after the waiting period or any court-ordered stay ends. A demand that is vague about the conduct protects nothing, because particularity is the statutory standard.

Example

Suppose a 15 percent member of a Dallas commercial real estate LLC with six members learns that the managing member leased the company's best property to his own family entity at half of market rent. The company was harmed; the claim is derivative. She sends the company a written demand describing the lease, the parties, the dates, the rent differential and the approval that was never obtained, and asks the company to rescind the lease and recover the lost rent. Because the LLC has fewer than 35 members, the demand and waiting period are not statutory requirements for her claim against the managing member (section 101.463), but she sends the demand anyway: it tolls limitations, creates a record, and often produces a settlement before any filing.

How the company responds: independent review

Once a demand or petition arrives, the company decides how to proceed through disinterested decision-makers. Sections 21.554 and 101.454 require the determination to be made by a majority of the independent and disinterested directors or governing persons (even if they are not a majority of the board), a committee of them, or a panel of independent individuals appointed by the court on the company's motion. For corporations, a 2025 amendment lets the company petition the court in advance for a finding that the directors are independent and disinterested, with an evidentiary hearing within 45 days and an order within 75 days; that finding is dispositive absent new evidence (section 21.554(c) to (i)).

While the review is under way in good faith, the court must stay the derivative suit for up to 60 days at a time, renewable in 60-day increments, if the company agrees to report the outcome (sections 21.555, 101.455). During a proposed dismissal, the owner's discovery is limited to the independence of the reviewers, the good faith of the inquiry and the reasonableness of its procedures, not the merits, unless the court finds no good-faith review occurred (sections 21.556, 101.456).

Dismissal, burden and settlement

If the independent decision-makers determine in good faith, after a reasonable inquiry, that continuing the suit is not in the company's best interests, the court must dismiss it on the company's motion (sections 21.558, 101.458). Who bears the burden depends on independence: the plaintiff must prove the determination was defective if the reviewers were independent and disinterested or were a court-appointed panel; otherwise the company carries the burden. A suit filed after a rejected demand must plead with particularity why the rejection did not meet the statutory standards (sections 21.559, 101.459).

A derivative suit cannot be discontinued or settled without court approval, and the court orders notice to other owners if a settlement may substantially affect them (sections 21.560, 101.460). On termination, the court may order the company to pay the plaintiff's reasonable expenses including attorney's fees if the suit produced a substantial benefit to the company; may order the plaintiff to pay the defendants' expenses if the suit was brought without reasonable cause or for an improper purpose; and may shift the cost of any pleading not well grounded in fact or law (sections 21.561, 101.461). Since 2025, added or amended disclosures to owners do not count as a substantial benefit.

The closely held exception: fewer than 35 owners

Sections 21.563 and 101.463 define a closely held corporation or LLC as one with fewer than 35 shareholders or members and no interests listed on a national exchange or quoted over the counter. For a derivative claim by an owner of such a company against a present or former director, officer, governing person, member or shareholder, the standing, demand, stay, discovery, dismissal and settlement provisions (sections 21.552 to 21.560 and 101.452 to 101.460) do not apply. And if justice requires, the court may treat the derivative proceeding as a direct action brought by the owner for the owner's own benefit, and may order the recovery paid directly to the plaintiff rather than to the company, if that is necessary to protect creditors or other owners.

Three cautions. The exception covers claims against insiders, not claims against outside third parties joined in the same suit. The expense-shifting provisions of sections 21.561 and 101.461 still apply. And subsection (d) of each section says the exception does not itself create a direct cause of action: whether the owner has a direct claim is decided under other Texas law. Most Dallas owner disputes involve companies well under 35 owners, so this exception, not the full procedure, is usually the operative law.

Which court

Derivative suits are filed in district court in the county of the company's principal office, or, when the amount in controversy exceeds $5 million, in the Texas Business Court, which has concurrent jurisdiction over derivative proceedings under Government Code section 25A.004(b)(1). A corporation that wants a pre-suit independence finding and has not yet been sued files that petition in the Business Court if its principal office is within an operating division (section 21.554(d)). If the company agreement or bylaws contain an arbitration clause that reaches owner disputes, the derivative claim may belong in arbitration.

How this fits the larger dispute

Derivative claims are the vehicle; the substance is usually a breach of fiduciary duty or of the agreement. What duties exist, and how they differ among partners, LLC managers and corporate directors, is covered in what fiduciary duties partners and LLC managers owe in Texas. Remedies for those breaches, including disgorgement, are in remedies for breach of fiduciary duty. A litigator's role is to decide which claims are direct and which derivative, draft a demand that satisfies the particularity standard and tolls the clock, and position the case to be treated as the owner's own under the closely held exception. Tina Wysk represents owners and companies on both sides of derivative and direct claims in Dallas state and federal courts. See breach of fiduciary duty for the scope of that work.