In Ayers v. Foley, the Delaware Court of Chancery applied for the first time the 2025 amendments to Section 144 of the Delaware General Corporation Law.[1] Among other changes, those amendments protect directors and officers from claims for equitable relief or damages from interested transactions if certain procedural steps are followed, and provide a heightened presumption of disinterestedness for directors of public companies. Applying the new statutory standard in conjunction with existing Delaware law on demand futility, Ayers confirms that plaintiffs must now overcome these “interconnected hurdles” to successfully maintain derivative actions.

Background

A stockholder-plaintiff filed a derivative action asserting claims against the company’s directors for breach of fiduciary duty and unjust enrichment. Plaintiff challenged two compensation decisions made by the board’s compensation committee. The first was a $50 million equity grant to the company’s founder and non-executive chairman, who continued to hold 3.6 percent of its outstanding shares (the “Equity Grant”). The second increased all directors’ compensation in 2022, 2023, and 2024 pursuant to an equity incentive plan (the “Director Compensation”). These types of derivative suits have become more frequent since the Delaware Supreme Court’s 2017 decision in Investors Bancorp, which held that directors’ decisions to set their own compensation would ordinarily be reviewed for entire fairness, the most onerous review under Delaware law.[2] Defendants moved to dismiss under Delaware Chancery Court Rules 23.1 and 12(b)(6), invoking the 2025 “safe harbor” amendments to Section 144. 

The Court’s Decision

The court dismissed the claims challenging the Equity Grant for failure to plead that a presuit demand on the board of directors was excused—the threshold defense in a derivative action––while largely allowing the claims challenging the Director Compensation to proceed. 

To decide whether demand was excused, the court incorporated the new Section 144 into the pre-existing Zuckerberg test.[3] The court first rejected plaintiff’s argument that the Equity Grant and the Director Compensation had to be considered a single transaction. The court explained that the record reflected two discrete decisions and processes. The court further reasoned that treating the two transactions as one would contradict the plain language of Section 144(a)(1) and thwart the General Assembly’s purpose of “provid[ing] a safe harbor for a specific ‘act or transaction.’”

The court then applied the Zuckerberg test as to the Equity Grant. The court held that the first Zuckerberg prong—whether a majority of the company’s 11 directors received a material personal benefit––was not satisfied. The court concluded that only the founder received a material personal benefit from the Equity Grant.

The court then evaluated whether a majority of the board lacked independence from the founder under the third Zuckerberg prong. Section 144(d)(2) now provides for a “heightened” presumption of disinterestedness for directors of listed companies when the board has determined that such directors have satisfied the stock exchange’s independence criteria. At least three directors met that requirement, while plaintiff conceded five other directors’ independence. Plaintiff therefore had to plead “substantial and particularized facts” to rebut the statutorily heightened presumption of independence as to those three directors, a change from the requirement to plead only “particularized” facts under Rule 23.1. The court interpreted “substantial” to mean allegations that are qualitatively, rather than quantitatively, substantial. In other words, “volume alone cannot substitute for materiality.” Applying the statutory standard in conjunction with Rule 23.1, the court concluded that allegations that the three directors served on other boards of directors with the founder, received fees for such board service, invested in professional sports teams along with the founder, and had certain other outside business dealings with him did not constitute the requisite “substantial and particularized facts” needed to overcome Section 144(d)(2)’s heightened presumption of disinterestedness. 

Though plaintiff conceded that it could not establish the second Zuckerberg prong—that a director faced a substantial likelihood of liability from the claims—the court analyzed that prong anyway. The court stated that plaintiff would have to overcome “two interconnected hurdles”: the statutory safe harbor of Section 144(a)(1) and the company’s provision exculpating directors from liability under Section 102(b)(7), which together “narrow the circumstances in which directors can incur personal liability for approving an interested transaction.” The court explained that Section 144(a)(1) would require plaintiff to plead that the decision to approve the Equity Grant was not made in good faith, reflected gross negligence, or that material facts were not disclosed to the approving directors. If that hurdle were overcome, plaintiff would still have to plead particularized facts supporting a reasonable inference of bad faith to overcome the exculpation provision. The court stated that plaintiff could not overcome even Section 144(a)(1)’s safe harbor, citing the involvement of two board committees, expert advice received by both committees, and the lack of any allegations that material facts were not disclosed to directors. 

The court next addressed the Director Compensation claims. Defendants conceded that demand was excused for those claims. Instead, defendants invoked the safe harbor provision of Section 144(a)(3), which protects an interested director transaction that is “fair as to the corporation and the corporation’s stockholders.” The court held—consistent with Section 144’s legislative history—that Section 144(a)(3) tracks the existing entire fairness standard under Delaware law. Applying Investors Bancorp, the court held that the fiduciary duty claims survived against the members of the compensation committee who approved their own compensation, but dismissed the fiduciary duty claims against the other directors who only received the increased compensation because plaintiff did not plead facts suggesting that the directors knew the compensation was wrongful. The court did, however, allow plaintiff’s unjust enrichment claim to proceed as to all directors, including the passive recipients.

Takeaways

1. Section 144 decreases the likelihood that a court will view multiple corporate transactions as one in assessing whether a demand is excused. It is thus more difficult for a plaintiff to plead that demand is excused by alleging that a director was interested as to one transaction because of a material benefit received from another transaction. Stockholder-plaintiffs have often leveraged such allegations to survive motions to dismiss.
2. As intended, Section 144 simplifies the decision of whether a director is presumed disinterested. The statute’s “heightened presumption” of disinterestedness requires little analysis because it applies to any directors meeting exchange independence standards. To rebut that presumption, a plaintiff must plead qualitatively substantial facts, a more stringent requirement than the “particularized” facts already required by Rule 23.1.
3. Section 144(a)(1) provides an additional hurdle for plaintiffs who try to plead that directors are interested because they face a substantial likelihood of liability. A plaintiff must first overcome the Section 144(a)(1) safe harbor—e., plead that the material facts were not disclosed to the approving directors or that the transaction was not approved in good faith or with gross negligence—before proceeding to the traditional demand excused analysis governed by Rule 23.1 and any Section 102(b)(7) exculpatory provision. Future plaintiffs may argue that the court’s analysis was non-binding dicta because plaintiff had conceded the second Zuckerberg prong, but for now Ayers directs that Section 144(a)(1) and a corporation’s exculpation provision are “interconnected hurdles” for plaintiffs.
4. The court confirmed that the fairness safe harbor of Section 144(a)(3) tracks a common law entire fairness analysis under existing precedent. Investors Bancorp thus appears to remain good law, at least in that respect.
5. At the time this suit was filed, the company’s stockholders had already approved its reincorporation to Nevada—indeed, the suit was brought just one day before the reincorporation was to take effect. Under Nevada law, challenges to director compensation are not subject to entire fairness review.[4] Corporations considering redomestication from Delaware should remain mindful that plaintiffs may seek to bring claims before redomestication takes effect, possibly leading to a near-term spike in litigation. With that said, the Court of Chancery recently granted a motion to dismiss derivative claims based on a Texas forum-selection bylaw adopted after the case was filed, so corporations may be able to obtain dismissal of any such litigation.[5]

[1] Ayers v. Foley, --- A.3d ----, 2026 WL 1723538 (Del. Ch. June 15, 2026).

[2] In re Invs. Bancorp, Inc. Stockholder Litig., 177 A.3d 1208, 1211 (Del. 2017); see also Knight v. Miller, 2023 WL 3750376, at *7 (Del. Ch. June 1, 2023) (“Since [Investors Bancorp], the Court of Chancery has had a steady diet of breach of fiduciary duty suits regarding allegedly excessive director compensation. These claims have become fodder for quick settlements and substantial fee requests.”).

[3] See United Food & Com. Workers Union & Participating Food Indus. Emps. Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021).

[4] See Nev. Rev. Stat. §§ 78.138, 78.140.

[5] See In re Tesla, Inc. Derivative Litig., 2026 WL 982336 (Del. Ch. Apr. 13, 2026).