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Designated directors have always been in a tough spot. Though their relationship to the appointing stockholder can vary – with some holding key leadership roles at the stockholder while others are independent – they are still serving on the board at the behest of that one stockholder. Yet they owe fiduciary duties to the corporation and all its stockholders “in the aggregate.” As we’ve seen from some recent Chancery Court decisions (like Guilbeau v. Footprint), the interests of one stockholder or class may not align with the interests of the collective, and the directors can be held liable for breaching their fiduciary duties if they act for the benefit of one or a subset of the stockholders to the others’ detriment. Stockholders can also find themselves in the litigation hot seat for aiding and abetting those breaches.

For example, in Zync, Inc. v. Porsche Investments Management (Del. Ch.; 8/26), the Chancery Court denied a motion to dismiss allegations of breaches of fiduciary duties by a designee and aiding and abetting by the appointing stockholder. The company alleged that the director refused to act without the investor’s approval and, in doing so, delayed and actually prevented the company from entering into necessary financing arrangements, causing the company to shut down its business. Vice Chancellor Laster found that the allegations were sufficient to sustain claims that the director pursued the stockholders’ objectives over the company’s and that the stockholder aided and abetted the director’s breaches, intentionally interfered with the company’s prospective economic advantage and breached the implied covenant of good faith and fair dealing. He was also not persuaded that the claims should be dismissed as exculpated because Delaware law does not allow eliminating liability for intentional and bad-faith acts.

In light of this and other recent Delaware rulings, this Mayer Brown alert shares guidance for both designated directors and stockholders on managing liability risks, taking into account amended Section 144 of the DGCL. They’re worth reading in full, but here are the key takeaways related to amended Section 144 for director designees and appointing stockholders:

What Designated Directors Need to Know. 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. 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.

– Meredith Ervine