Delaware Law Alert: The Risks of Designated Directorships—Current Guidance for Directors and Those Who Appoint Them

Significant stockholders of Delaware corporations may negotiate for the right to designate one or more directors of their choosing to the board. While such a designation right may be extremely valuable, several recent Delaware Chancery Court opinions highlight the risks of personal liability for the designated directors and the stockholders who appoint them. This Legal Update provides guidance on how designated directors and stockholders can navigate these risks, particularly in light of the 2025 amendments to Delaware General Corporation Law (DGCL) §144.

Background and Key Principles

Fiduciary Duties of Designated Directors: Directors appointed by a specific stockholder or a class of stockholders are often referred to as “constituency directors,” “designated directors,” or “blockholder directors,” among other terms. The right to appoint such directors might appear in the certificate of incorporation or in a separate governance agreement.¹ A company might grant director designation rights to its venture capital, private equity, or strategic investors, as well as to stockholders as part of a shareholder activist proxy contest settlement. Often, the designated directors are principals, officers, or employees of the appointing stockholder; however, they can also be individuals independent of both the corporation and the appointing stockholder.

Holders of designation rights might hold the mistaken belief that a designated director is intended to serve as their representative, who in addition to providing information and monitoring corporate developments, should vote in their interests. In reality, Delaware courts have long held that a designated director owes fiduciary duties of care and loyalty to the corporation and all the stockholders and not to any subset of stockholders, including the stockholders that appointed the director. Specifically, directors owe fiduciary duties to “the stockholders in the aggregate in their capacity as residual claimants, which means the undifferentiated equity as a collective, without regard to any special rights.”² In other words, a director’s duties run to “the entity and the entire body of stockholders generally rather than to individual stockholders or stockholder subgroups.”³

Moreover, directors who act to benefit the interests of or at the direction of the stockholders that appointed them to the detriment of the corporation and all of its stockholders may be liable for breaches of their fiduciary duties, along with other claims.

DGCL §144: In 2025, Delaware made significant amendments to §144 of the DGCL relating to conflicted transactions involving directors, officers, and controlling stockholders.⁴ For designated directors and the stockholders appointing them, §144 now provides important clarity in several areas, such as when a designated director is deemed to be conflicted, when designation rights cause a stockholder to become a “controlling stockholder,” when transactions involving such directors and stockholders are deemed to be conflicted, and the procedures necessary to obtain “safe harbor” status for conflicted transactions. Although §144 was not at issue in the designated director cases discussed in this update, we consider in more detail below the aspects of §144 relevant to designated directors and their appointing stockholders.

Brief Overview of the Opinions

Three recent decisions of the Delaware Chancery Court (all issued by Vice Chancellor J. Travis Laster) provide practical examples of how designated directors should conduct themselves on a board and the types of situations that they should avoid.

• A Rogue Designee: In one case,⁵ holders of Class A preferred stock had a right under a governance agreement to designate a director. Such stockholders subsequently characterized the director elected by the Class A stockholders as effectively going rogue, alleging that, through a series of successive governance amendments and related transactions, the director voted with the rest of the board to reduce and ultimately eliminate Class A rights and preferences. The Class A stockholders sued, claiming that under the implied terms of the governance agreement, the Class A director was required to (1) act in the best interest of the Class A stockholders and (2) vote against transactions that would harm the Class A stockholders.⁶
  
  The court disagreed, holding that Delaware does not generally recognize “constituency directors” and that no director is entitled to serve the particular interests of any stockholder or any class or series of stockholders, even if the stockholder, class, or series had a right to appoint the director. Instead, each director owes fiduciary duties to promote the value of the corporation for the benefit of all of its stockholders. The court noted that enforcing a contractual obligation to act in the interests of the Class A stockholders would put the director in the impossible position of serving the best interests of the particular stockholder on the one hand and the best interests of the corporation and all of its stockholders on the other hand; a tenuous position given that both sets of interests could readily diverge.

• A Stockholder’s Agent on the Board: In the second case,⁷ an investor held a right under a voting agreement to appoint a director to a three-member board. The investor appointed one of its employees as its designee. At the pleading stage, the company alleged that the director had acted in the interests of the investor by delaying and ultimately preventing certain financing transactions because he refused to act without the investor’s signoff. The company also alleged that the director demanded confidential information from the company, including drafts of agreements with the investor’s competitors and competitors’ internal data, and provided the information to the investor. The company suspected that the investor sought to benefit itself by delaying the launch of the company’s product and, thereby, keeping the product out of the hands of the investor’s competitors. The company further alleged that, due to its inability to obtain financing, it had to shut down.
  
  At the pleadings stage, these allegations were sufficient to sustain several claims against the director and the investor. As to the director, the court held that the company had sufficiently pled that the director’s actions constituted a breach of his duty of loyalty to the company on two grounds. First, the director was a “dual fiduciary,” conflicted between fiduciary duties owed to the investor as an employee and duties owed to the company as a director. As such, the director’s course of action demonstrated he was putting the interests of the investor above those of the company and its stockholders writ large. Second, the court found that the complaint sufficiently alleged that the director’s actions, which were alleged to have caused the demise of the company, demonstrated a failure to act in good faith by pursuing the investor’s objectives at the expense of  company.
  
  As to the investor, the court held that its alleged involvement in the director’s actions were sufficient to sustain claims against the investor for aiding and abetting the director’s breaches, intentionally interfering with the company’s prospective economic advantage, and breaching the implied covenant of good faith and fair dealing.
  
  The investor argued that the claims should be dismissed pursuant to a provision in the voting agreement that exculpated the investor for the actions of the director. The court refused to dismiss the claims at this stage, noting that the exculpation provision could be void as contrary to Delaware law.

• A Director-Stockholder Alliance: The third case is a post-trial decision involving a business with shares held by the CEO, his sisters, and other family members.⁸ The CEO was at odds with his sisters and had taken extreme measures (and appeared prepared to do so again) to maintain control of the corporation, including arranging an employee walkout and a customer boycott. To counter their brother and improve corporate governance and transparency, the sisters had, over a number of years, appointed three outside directors on the five-member board. The outside directors made considerable efforts to work with the CEO to resolve differences, but when it seemed the CEO was prepared to stage another employee walkout and boycott, the directors voted to remove him. In challenging the directors’ actions, the CEO asserted that the directors were beholden to his sisters and had thereby breached their duty of loyalty. Trial evidence showed that some of the directors had consulted with the sisters and took their concerns into account in determining a course of action. Also, the directors had not notified the CEO and his board allies of the engagement of legal counsel and public relations firms in anticipation of removing the CEO.
  
  The court rejected the CEO’s claims, reviewing the directors’ actions under the business judgment rule and holding that the directors did not act in bad faith. The court held that the directors in this case were not mere agents of the sisters. To the contrary, the directors were appointed over the span of several years, did not have a unified agenda, acted with deliberation in seeking to engage constructively with the CEO, and when the CEO failed to respond constructively, were prudent in engaging experts to assist with the CEO’s anticipated transition. Although confronted with difficult decisions, their efforts to act rationally in the interests of the company were protected by the business judgment rule.

What Designated Directors Need to Know

These opinions offer some practical guidance for designated directors on how to avoid conflicts of interest and address them should they arise. Individuals serving as designated directors should keep in mind the following:

• Scope of Fiduciary Duties: Designated directors owe fiduciary duties to the company and all of its stockholders, not just to the stockholder or class of stockholders that appointed them, even if that stockholder or class holds a controlling interest in the company.
• Breach of the Duty of Loyalty: Designated directors risk breaching their duty of loyalty when they are “sufficiently loyal to, beholden to, or otherwise influenced by an interested party to undermine [their] ability to judge the matter on its merits.”⁹ A director who is an employee of the appointing stockholder is at particular risk because the director owes fiduciary duties to both the corporation and, as an employee, to the appointing stockholder. As a “dual fiduciary,” such directors should take care to avoid conflicts and mitigate their risks of breach. Directors should be aware that formal action is not required to breach fiduciary duties and that informal action (including sharing confidential information in a manner detrimental to the corporation) and conscious inaction (including stalling board action) are sufficient.
• Independence of Designated Directors: After noting that designated directors owe fiduciary duties to the corporation and all of its stockholders, Vice Chancellor Laster addressed the other side of the coin: “Delaware decisions consistently reject the related concept of ‘constituency directors’ as well as the notion that a director appointed by a particular minority stockholder or a particular class or series of stock can or should serve the particular interests of the appointing party.”¹⁰ Specifically, designated directors do not have an obligation to act for the benefit of the appointing stockholder or to refrain from harming the interests of the appointing stockholder. Even when a corporation has a controlling stockholder, directors do not have a duty to protect that stockholder. In circumstances where the interests of the appointing stockholder and the corporation conflict, a designated director’s fiduciary duty may require acting to the detriment of the appointing stockholder to serve the best interests of the corporation and all of its stockholders.
• Director Coordination with Appointing Stockholder: Although designated directors should avoid acting as the agent for any stockholder or group of stockholders, they may consult with and align themselves with such stockholders as long as the directors are acting in good faith to benefit the company and all of its stockholders.
• Conflicted Transactions: When the board considers a transaction involving the appointing stockholder, designated directors may be deemed to be conflicted and subject to claims for breach of the duty of loyalty. In such situations, designated directors should consider mitigating their risk in the following ways:
  • Safe Harbors: Conflicted designated directors should seek to ensure the transaction is structured to qualify for a safe harbor under new DGCL §144. A director is deemed to be conflicted under §144 if the board is asked to approve a transaction between the corporation and an entity in which the director has a “financial interest” or is a director, stockholder, partner, manager, member, or officer. In such cases, the approving directors generally may obtain safe harbor protection if the transaction is (1) approved by the affirmative vote of a majority of the disinterested directors of the board or committee of the board, (2) approved by the informed, uncoerced, and affirmative vote of the majority of the disinterested stockholders or (3) fair to the corporation and its stockholders. Subject to certain exceptions, the safe harbor protection under §144 exempts the director from equitable relief and damages relating to the director’s involvement in giving rise to the transaction, the director’s receipt of any benefit, the director’s participation in meetings regarding the transaction and the director’s involvement in the initiation, negotiation, and approval of the transaction.
  • Abstention: While the §144 safe harbor provides broad protection, a conflicted director should also consider abstaining from the decision-making process. Generally, an abstaining director cannot be liable for the wrongful approval of a conflicted transaction, unless the director was involved in negotiating the transaction or promoting its approval.

What Appointing Stockholders Need to Know

These cases also provide important guidance for stockholders in exercising a right to designate directors:

• Control of Designated Directors: An appointing stockholder does not have an enforceable right to cause a designated director to promote the interests of the stockholder or to refrain from harming those interests.
• Potential Stockholder Liability: If an appointing stockholder causes its designated director to breach his or her fiduciary duties or otherwise act in a manner detrimental to the corporation, the stockholder may be liable for a variety of claims, including:
  • Aiding and Abetting Liability: A stockholder that “knowingly participates” in a designated director’s breach may be liable for aiding and abetting the breach, even if the director is exculpated from monetary liability (under DGCL §102(b)(7)). An appointing stockholder knowingly participates in its designated director’s breach if the stockholder instructs the director to take actions or refrain from taking actions that it knows would harm the corporation. Although the stockholder may consult with its designated director, a stockholder may not direct the director to take actions it knows would be detrimental to the corporation. Notably, §144(d)(6) expressly exempts from safe harbor protection claims against stockholders who aid and abet a breach of a director’s fiduciary duty.
  • Intentional Interference with Prospective Economic Advantage: If the stockholder induces the director to breach his or her duty of loyalty by taking actions to benefit the stockholder and harm the corporation, the stockholder may be liable for the tort claim of intentionally interfering with a prospective economic advantage of the corporation. Generally, to prove a claim, the company must show that the stockholder intentionally interfered with a reasonably probable business opportunity of the company. Delaware courts require that the interference be improper (e.g., beyond the stockholder’s “privilege to compete or protect [its] business interests in a fair and lawful manner” or otherwise “without justification”).¹¹ Despite some ambiguity in these elements, a stockholder might be liable if it causes a designated director to breach his fiduciary duty by delaying consideration of and ultimately killing without justification two urgently needed corporate financings. Even if the director appointed by the stockholder had a valid contractual right under a governance agreement to block the proposed financings, it would still be improper interference for the stockholder to cause the director to use that right in a manner that would constitute a breach of the director’s fiduciary duty.¹²
  • Breach of the Implied Covenant of Good Faith and Fair Dealing: The implied covenant applies to contractual relationships, and among other functions, allows a court to determine whether a party exercised a discretionary contractual right reasonably, consistent with the parties’ expectations. The implied covenant assumes a party would not exercise a discretionary right in a manner that would “destroy the contractual relationship maliciously and without any justification rationally related to the shared contractual purpose.”¹³ A stockholder that instructs a designated director to exercise a veto right for the sole purpose of harming the company for the benefit of the stockholder (such as by causing the director to delay and ultimately prevent urgently needed corporate financings, thereby keeping promising technology away from competitors) may be deemed to have acted maliciously and without any justification rationally related to the shared contractual purpose.
• Limits of Contractual Exculpation: A provision in a governance agreement that exculpates a stockholder from liability for the acts and omissions of its designated director may not be valid in certain circumstances. DGCL §122(18) permits a corporation to enter into agreements with stockholders in which the corporation agrees to refrain from taking certain actions in the future. However, §122(18) also provides that no such contractual provision is enforceable to the extent the provision would be contrary to the certificate of incorporation or would be contrary to the laws of Delaware if included in the certificate of incorporation. Because Delaware common law prohibits contractual elimination of liability for intentional and bad faith acts, a contractual exculpation provision may be void.
• Designation Rights as Evidence of Control: A designation right may render a stockholder a “controlling stockholder” under §144. Among the circumstances specified in §144 that can cause a stockholder to be deemed a controlling stockholder is the possession of contractual or other rights to cause the election of director nominees who constitute either (1) a majority of the members of the board or (2) directors entitled to cast a majority in voting power of all directors on the board. If deemed to be a controlling stockholder, conflicted transactions with the appointing stockholder may be subject to entire fairness review, unless the safe harbor and exculpation protections offered under §144 apply.

¹ DGCL §122 was amended in 2024 to provide, among other things, that a corporation has the power to enter into contracts with its stockholders regarding corporate governance matters (so long as they are not contrary to the corporation’s charter or Delaware law), which include rights of stockholders to appoint directors.

² Guilbeau v. Footprint International Holdco, Inc., 358 A.3d 248, C.A. No. 2024-0968-JTL (Del. Ch. April 30, 2026) (Laster, V.C.) (granting motions to dismiss).

³ Id.

⁴ See Mayer Brown Legal Updates, Delaware Law Alert: A Step-by-Step Approach for Boards Evaluating Conflicted Director, Officer, and Controlling Stockholder Transactions Under the Amended Delaware Corporation Law (April 2025) and Delaware Law Alert: Delaware Supreme Court Upholds Safe Harbor Procedures for Conflicted Transactions (March 2026).

⁵ Guilbeau, supra. The decision addresses three contractual and contract-adjacent claims, and a later decision addresses nine fiduciary duty claims. Guilbeau v. Footprint International Holdco, Inc., ___ A.3d ___, C.A. No. 2024-0968-JTL (Del. Ch. May 11, 2026) (Laster, V.C.) (granting and denying motions to dismiss).

⁶ The plaintiffs asserted breaches of the implied covenant of good faith and fair dealing, which requires evidence of a “gap” in the contractual terms for the implied covenant to fill. In this case, the court held that there was no gap to fill given the extensive backdrop of law governing the duties of designated directors.

⁷ Zync, Inc. v. Porsche Investments Management, S.A., ___ A.3d ___, C.A. No. 2025-0284-JTL (Del. Ch. May 29, 2026) (Laster, V.C.) (denying motions to dismiss).

⁸ DSM Holdco, Inc. v. Demoulas, ___ A.3d ___, C.A. No. 2025-1020-JTL (Del. Ch. April 20, 2026) (Laster, V.C.) (post-trial opinion). This legal update focuses only on the issues from this opinion relating to stockholder-director alignment. The opinion is also notable because it provides an in-depth overview of several lines of precedent to clarify when directors do and do not have an equitable obligation to include other directors in deliberations and to give notice of board meetings and the business to be transacted. While those topics may be relevant in some cases to designated directors, they are beyond the scope of this update.

⁹ Zync, supra.

¹⁰ DSM, supra.

¹¹ Zync, supra. Vice Chancellor Laster notes that the elements developed in Delaware case law are not as clear or consistent as they could be, especially in contrast to the articulation in the Restatement (Second) of Torts.

¹² In light of the 2024 amendments to DCGL§122, it is typically more advantageous for a stockholder to directly hold veto or consent rights over specified corporate actions under a governance agreement, instead of having a director hold such contractual rights.  In addition, under the 2025 DCGL§144 amendments, controlling stockholders and members of control groups, in their capacities as such, cannot be held liable for monetary damages for breach of the duty of care.

¹³ Zync, supra.