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. 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.” 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.”
READ MORE »
