Duties of Directors and Officers under Delaware Law: The Six Core Duties

Oct 25

4 min read

Good faith, disclosure, candour, duties in particular transactional contexts, oversight and the business judgment rule – with the leading decisions

Many U.S. companies, including numerous subsidiaries of German companies, are incorporated in Delaware. Delaware law governs the internal affairs of their governing bodies, and its programme of duties has largely been shaped by the case law of the Delaware courts. The starting point is the fiduciary duties (Treuepflichten) of directors, which divide into the duty of care (Sorgfaltspflicht) and the duty of loyalty (Loyalitätspflicht). According to the case law, the individual duties described below are applications of these two basic duties.

1. Good faith

A director must at all times act with honesty of purpose and in the best interests and welfare of the corporation (In re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 755 (Del. Ch. 2005), aff’d, 906 A.2d 27 (Del. 2006)). Directors may not consciously and intentionally disregard their responsibilities or adopt a “we don’t care about the risks” attitude concerning a material corporate decision (id. at 754–55, citing In re Walt Disney Co. Derivative Litigation, 825 A.2d 275, 289 (Del. Ch. 2003)). The duty of good faith is a subset of the duty of loyalty (Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006)).

2. Disclosure to stockholders

Directors are obliged to disclose all material information when soliciting stockholder action (Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992)). Where directors disseminate information to stockholders when no stockholder action is sought, the fiduciary duties of care, loyalty and good faith apply (Malone v. Brincat, 722 A.2d 5, 12 (Del. 1998)). The duty of disclosure is an application of both the duty of care and the duty of loyalty (Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009)).

3. Candour towards the board

Directors have a duty to disclose to the board material information in their possession that bears upon a board decision, particularly where the directors have a personal interest in the outcome of the decision (Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1283 (Del. 1989)). This duty is an application of the duty of loyalty.

4. Duties in particular transactional contexts

In certain transactional situations the case law gives specific shape to the board’s duties. In a sale of control of the company there is a duty to maximise the price (Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)). When adopting takeover defences, directors must act reasonably in response to the threat (Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)). Both duties have been held to be applications of the duties of care and loyalty (Malpiede v. Townson, 780 A.2d 1075, 1086 (Del. 2001), on Revlon; Gilbert v. El Paso Co., 575 A.2d 1131, 1146 (Del. 1990), on Unocal).

5. Oversight

Directors must assure that a reasonable information and reporting system exists (In re Caremark International Inc. Derivative Litigation, 698 A.2d 959, 971 (Del. Ch. 1996)). The duty of oversight is an application of the duties of care and loyalty (Guttman v. Huang, 823 A.2d 492, 506 (Del. Ch. 2003)).

6. Business judgment rule

Under the business judgment rule, the courts will not second-guess a board’s decision if three conditions are met: the board followed a reasonable process, took into account the key relevant facts and made the decision in good faith.

Officers are also covered

The fiduciary duties apply not only to directors but, according to the case law of the Delaware Supreme Court, also to officers (Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009)). The Court of Chancery has expressly confirmed this for the duty of oversight: it also applies to officers, company-wide in the case of a CEO and, for other officers, in principle to red flags within their area of responsibility (In re McDonald’s Corp. Stockholder Derivative Litigation, C.A. No. 2021-0324-JTL (Del. Ch. 26 January 2023)).

By way of comparison: German law

German stock corporation law knows a comparable idea: under § 93 (1) sentence 2 AktG, there is no breach of duty if a management board member could reasonably assume, when making an entrepreneurial decision, that he or she was acting for the benefit of the company on the basis of adequate information. The Federal Court of Justice (Bundesgerichtshof) had recognised the entrepreneurial margin of discretion even before this statutory provision (BGH, judgment of 21 April 1997 – II ZR 175/95, BGHZ 135, 244 – ARAG/Garmenbeck). The Delaware programme of duties, by contrast, rests largely on judge-made law.

Practical consequences

Take board decisions on the basis of adequate information and document the decision-making process.
Disclose personal interests in a decision to the board.
In communications to stockholders, state material information completely and accurately.
Establish an adequate information and reporting system and monitor its effectiveness.
In a sale or takeover defence, coordinate the approach with U.S. legal advisers at an early stage.

Conclusion

Directors and officers of a Delaware company act on safe legal ground if they decide on an informed, honest and traceable basis. For managers of German companies who are also officers of a U.S. subsidiary, it is worth engaging with this programme of duties at an early stage. Please feel free to contact us if you have any questions.

Status: 23 October 2026

NIETZER Rechtsanwälte · Attorneys at Law (USA) · Heilbronn · www.unternehmensrecht.com

This article is for general information only and does not replace legal advice in an individual case.