Reinforcing the shield: Trends in Delaware’s business judgment jurisprudence

This article was originally published on Delaware Business Court Insider, March 2026.

The business judgment rule has long been a protection for directors and officers, offering wide latitude for decisions made in good faith with the belief that those decisions serve the company’s best interests. A decision resulting in a bad outcome or honest mistake is generally shielded from liability where it did not involve a director’s or officer’s personal gain. Courts will not second guess a decision, despite a bad outcome, where there was a genuine belief at the time of the decision that the change was in the best interest of the company.

Conversely, where a decision disproportionately benefits a controlling party over other shareholders or members, offering a “nonratable” benefit to directors or officers, a stricter scrutiny or “entire fairness” analysis may be applied. Under the entire fairness analysis, the burden of proof shifts to the controlling party to show that the decision was both fair in process and price. If there is no significant change to shareholder benefits, the controlling party will be entitled to protections of the business judgment rule.

While definitions provide some avenue for understanding, the lines as to whether a nonratable benefit is material (and therefore sufficient to trigger the application of the entire fairness approach), and the proof necessary to establish remedies (when a material nonratable benefit is proven), remain blurred. Recent Delaware Supreme Court decisions in Maffei v. Palkon, 339 A.3d 705 (Del. 2025) and Tornetta v. Musk (In re Tesla Derivative Litigation), No. 10, 2025, 2025 WL 3689114 (Del. Dec. 19, 2025) add to the ambiguity, but signal a trend towards a more director-friendly application of the business judgment rule.

In Maffei, the Delaware Supreme Court reversed a Delaware Court of Chancery’s decision to apply the entire fairness analysis to a director’s decision to move a company from Delaware to Nevada, benefiting directors and officers with greater legal protections from shareholder suits and limiting minority shareholder rights. The Delaware Supreme Court opined that the decision to relocate the corporation, while advantageous to directors and officers, did not trigger a material nonratable benefit because the advantage was not actual or quantifiable, rather the benefit was determined to be prospective and speculative. The Supreme Court expressly stated that the entire fairness review does not apply to claims that are prospective but may be triggered where litigation is anticipated. In doing so, the court seemingly reinforced the principal that speculative future benefits will not strip a controlling body of the protections afforded by the business judgment rule. Since Maffei, there remains a question of whether the “loss” or diminished benefit to other shareholders must be imminent or whether a more lenient temporal proximity will apply.

In Tornetta, the Delaware Supreme Court recently reversed the Court of Chancery’s decision granting recission of a compensation plan after applying an entire fairness analysis. The claim involved a derivative action brought against Elon Musk, a majority and controlling shareholder, challenging a compensation plan which afforded Musk a potential payout of $55.8 billion, noted to be the largest compensation plan in history. Following a trial, the Court of Chancery found that neither the process of adopting the compensation plan, nor the price, were fair. Factors in coming to this conclusion included Musk’s control over the content and timing of the plan without adversarial response or negotiation; the significant personal and financial relationships between Musk and the compensation committee; the lack of analysis of the plan’s compensation with others in the market and; the absence of transparency in the proxy statements concerning the conflicting relationships. The price was also found to be unfairly high because Musk was compensated through stock options tied to milestones, and therefore the court found the massive compensation unnecessary for Musk’s services, already performed. Notably, a post-trial ratification of the compensation package was also rejected by the Court of Chancery on the premise that a post-trial shareholder vote cannot retroactively validate a conflicted transaction that was already determined to have breached fiduciary duties.

In its recent decision, the Delaware Supreme Court did not address the process of the compensation plan, but instead overturned the remedy, finding recission inappropriate as it left Musk uncompensated. The Supreme Court further opined that it was erroneous to assign the burden of identifying viable alternatives to the compensation plan to the defendants, as the burden to satisfy prerequisites for relief always remains with the plaintiff. Rather than remand the case, the Supreme Court reinstated Musk’s compensation and reduced the award to plaintiffs to nominal damages—bringing this long saga to an end.

These recent decisions indicate that Delaware is positioning itself as a more director-friendly jurisdiction, likely to combat corporate migration to venues like Nevada and Texas for their more favorable treatment of directors and officers. This trend is further supported by the recently adopted Delaware Senate Bill 21, offering greater protections for directors and officers by strengthening the presumption of independence, tightening the definition of a controlling stockholder or group, broadening the availability of business judgment rule protection and limiting the scope of inspection demands, which makes it more difficult to support an investor lawsuit. While there remains some uncertainty as to how this trend will unfold in future litigation, it seems that 2026 is shaping up to be a promising year for companies incorporated in Delaware.