Heightened Means Heightened: Chancery’s First Read of SB 21’s New Presumption Shuts Down Demand Futility
In Ayers v. Foley (available here), the Delaware Court of Chancery recently became the first court to interpret Section 144(d)(2) of the Delaware General Corporation Law (DGCL), the provision added by Senate Bill 21 (SB 21) in 2025 that affords a “heightened” presumption of disinterestedness to directors of listed companies whom the board has determined to be independent under stock exchange rules. Vice Chancellor Will held that the heightened presumption is not confined to Section 144’s safe harbors and applies with full force to the demand futility analysis under Court of Chancery Rule 23.1, and that overcoming it requires “substantial and particularized facts” of sufficient qualitative significance.
The decision illustrates the meaningful protections the amended statute now affords disinterested directors at the pleading stage, while confirming that directors who award compensation to themselves remain exposed to entire fairness review.
Background
Fidelity National Financial, Inc. (FNF) is a publicly traded provider of title insurance, mortgage servicing, and related real estate services. Its founder and Non-Executive Chairman, William P. Foley, owns 3.6% of the company’s outstanding shares. The plaintiff did not contend that Foley is a controlling stockholder. In October 2024, after Foley publicly signaled an intention to shift his focus to private ventures, FNF’s Compensation Committee negotiated a one-time $50 million equity grant (the “Foley Equity Grant”), down from Foley’s initial $60 million request, with 25% vesting on the grant date and the remainder vesting over three years subject to his continued service as Chairman. (The negotiating director later abstained from the committee’s vote because of his role in the negotiations.) In light of the award’s significance, the Compensation Committee conditioned its approval on sign-off by FNF’s Related Person Transaction (RPT) Committee, which met separately on October 16, reviewed the compensation consultant’s independence and market research, obtained legal advice, and approved the grant two weeks later. At the same October 2024 meeting, the Compensation Committee also approved increases to the non-employee directors’ (NEDs) own compensation, including a one-time $100,000 special equity grant for each NED.
A stockholder plaintiff filed a derivative suit in June 2025 challenging both the Foley Equity Grant and the directors’ 2022–2024 compensation. Because the suit was filed after SB 21’s adoption, the amended statute governed. And in a notable bit of timing, the plaintiff filed one day before FNF’s re-domestication from Delaware to Nevada took effect.
Section 144(d)(2)’s Heightened Presumption Defeats Demand Futility
The Court first rejected the plaintiff’s effort to treat the NED compensation and the Foley Equity Grant as a single board act. Distinguishing In re Investors Bancorp, where the entire board approved executive and non-employee director awards in a unified process, the Court emphasized that the two decisions here diverged. The NED compensation was definitively approved on October 14, while the Foley Equity Grant proceeded through a separate, conditional process culminating in the RPT Committee’s independent approval two weeks later. Because the NEDs were not parties to the Foley Equity Grant, they could invoke Section 144(d)(2)’s presumption with respect to it.
Applying the three-part demand futility test of United Food & Commercial Workers Union v. Zuckerberg, the Court found that Foley was disabled as the grant’s recipient, but that none of the NEDs received a material personal benefit from the award. The dispositive question was therefore whether a majority of the eleven-member board lacked independence from Foley, an inquiry that now runs through amended Section 144(d)(2). Turning to the statute, the Court reasoned that because other provisions of Section 144 expressly limit their reach, the absence of any limiting language in paragraph (d)(2) was purposeful, and the heightened presumption therefore applies broadly, including under Rule 23.1. The Court then construed the requirement of “substantial and particularized facts” to demand more than Rule 23.1’s existing particularity standard. “Substantial” carries a qualitative meaning, so the pleaded facts must be significant enough to evidence a disabling conflict, and volume alone cannot substitute for materiality.
The plaintiff’s allegations could not meet that exacting standard. Overlapping service on the boards of Foley-affiliated companies, a decade of aggregated director fees pleaded without any showing of personal materiality, and indirect minority co-investments alongside Foley in professional sports franchises, including the Vegas Golden Knights, did not suffice. The Court was unmoved by the argument that co-owning a sports team is an “exceedingly rare and prestigious opportunity,” observing that nothing about a sports franchise legally distinguishes it from other private ventures.
Although the plaintiff disclaimed any argument that the directors faced a substantial likelihood of liability, the Court addressed the theory anyway and explained that it would have to clear two “interconnected hurdles.” Section 144(a)(1) shields a conflicted transaction approved in good faith and without gross negligence by fully informed, disinterested directors, and FNF’s Section 102(b)(7) charter provision exculpates the disinterested directors from personal liability absent bad faith, a showing the Court called a “high hurdle.” The record foreclosed any such inference. Majorities of both approving committees were disinterested, both engaged third-party compensation and legal advisors, and the Compensation Committee negotiated Foley’s request down by $10 million. Demand was not excused, and the claims challenging the Foley Equity Grant were dismissed.
Self-Compensation Remains Subject to Entire Fairness
The directors’ own compensation was a different matter. Because the Compensation Committee members were parties to the awards they approved, the defendants could rely only on Section 144(a)(3), which insulates an interested transaction shown to be “fair as to the corporation and the corporation’s stockholders” and which the Court confirmed tracks the common law entire fairness doctrine. Consistent with precedent treating the unfair dealing component as effectively satisfied at the pleading stage when directors set their own pay, the Court focused on unfair price: the plaintiff’s allegations that director pay ran 21% to 67% above the peer median while FNF lagged its peers in market capitalization, revenue, and net income sufficed, even though the Court acknowledged the defendants’ counterarguments “may well pose a formidable barrier to the plaintiff’s ultimate success.” The fiduciary duty claim survived against the Compensation Committee members who approved the awards, but not the directors who passively received them. The unjust enrichment claim, however, survived against all directors who retained the challenged compensation, including Foley as to his annual compensation, though not as to the Foley Equity Grant.
Key Takeaways
The heightened presumption of disinterestedness now operates at the demand futility stage. When the board of a listed company determines that a director meets the exchange’s independence criteria, Section 144(d)(2)’s presumption follows that director beyond the statute’s safe harbors and into the Rule 23.1 analysis, leaving stockholders hard-pressed to disqualify a majority of the board. To overcome the presumption, a plaintiff must plead specific facts of sufficient qualitative significance to evidence a disabling conflict, a more demanding and more director-protective standard than the one that governed before SB 21. Allegations of overlapping board service, ordinary director fees, and minority co-investments, without more, will not suffice.
A sound approval process and structure provide powerful protection against fiduciary challenges. In Ayers, routing the proposed grant to a separate committee of disinterested directors, which met on its own, engaged its own compensation and legal advisors, and made its own decision, prevented the award from being lumped together with the directors’ own pay and left the plaintiff unable to plead facts taking the approval outside of Section 144(a)(1)’s safe harbor. The Court observed that the referral “reflects sound corporate governance” even though nothing required it. Documentation also matters as much as structure, because proxy disclosures and committee minutes, readily incorporated into complaints through Section 220 productions, may supply the very record on which the motion to dismiss is decided. Paired with a Section 102(b)(7) exculpatory charter provision, the safe harbor leaves bad faith, a “high hurdle,” as the only path to director liability for an approved conflicted transaction.
Director self-compensation remains subject to entire fairness review absent stockholder approval. Directors who set their own pay are inherently interested, and unless the corporation obtains disinterested stockholder approval under Section 144(a)(2), SB 21 offers no pleading-stage shield. Even directors who merely receive the challenged compensation may face unjust enrichment claims for the awards they retain.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
