Can a director or CEO of a Delaware corporation do business with the corporation? Can the director lend money to the company, provide paid services, or recommend a relative as an independent contractor?
The short answer is “yes”, but the transaction should be handled as an interested transaction and approved or reviewed under Delaware’s conflict-of-interest framework.
Even in a small corporation with only a few shareholders and directors, or even one shareholder who is also the sole director, the corporation is still a separate legal person. Its funds are not the personal funds of its directors, officers, or shareholders.
What Is an Interested Transaction?
For this discussion, an interested transaction is a transaction between a Delaware corporation and one of its directors, or a transaction in which a director has a material financial interest.
That interest may be direct, such as when the director personally sells services to the corporation or lends it money. It may also be indirect, such as when the corporation contracts with:
- the director’s other company;
- an entity where the director is an owner, officer, director, or otherwise financially interested; or
- a close relative or other person whose financial benefit may be important to the director.
A simple example: a director recommends that the corporation hire the director’s mother as an independent contractor. Even if the director is not paid directly, the relationship may create indirect interest and should be treated accordingly.
Delaware’s Framework: Section 144
Delaware law addresses these situations in 8 Del. C. § 144. In general, a conflicted transaction involving a director or officer is not automatically prohibited. But it should satisfy one of the statutory safe harbors or otherwise be fair to the corporation and its stockholders.
In practical terms, the safer paths are:
a) Disinterested director approval. The material facts of the director’s interest and the transaction are disclosed to the board or committee, and the transaction is approved in good faith by the required disinterested directors’ vote; or
b) Disinterested stockholder approval. The material facts of the transaction are disclosed, and the transaction is approved or ratified by an informed, uncoerced vote of disinterested stockholders; or
c) Fairness. If proper disinterested approval is not available or not obtained, the transaction may still survive if it is fair to the corporation and its stockholders.
From a governance perspective, the first two routes are usually preferable. Relying only on “fairness” can be significantly harder because the interested fiduciary bears the burden of proving that the transaction was fair. If the transaction is unfair or constitutes self-dealing in breach of the duty of loyalty, a Delaware court may grant equitable relief, set aside the transaction, or award monetary damages.
Practical Examples
A director may lend money to a struggling corporation, but the loan should be documented with market or otherwise fair terms, including principal, interest, maturity, repayment priority, and any security.
A director may provide paid consulting services to the corporation, but the company should document the business need, the scope of services, the compensation, and why the terms are commercially reasonable.
A director may suggest a relative as a contractor, but the relationship should be disclosed before approval. The corporation should evaluate the contractor’s qualifications, pricing, and terms as it would with any unrelated third party.
Who Can Challenge the Transaction?
Interested transactions may later be challenged by the corporation itself, when, for example, a new board of directors is elected, or by stockholders. In small corporations, disputes often arise after a change in control, a breakdown among founders, or a disagreement over corporate funds.
That is why papering the transaction correctly at the time of approval is essential. Minutes, written consents, disclosures, comparable pricing, and a clear business rationale can become important evidence if the transaction is later questioned.
Recent Delaware Developments
The above legal structure was finalized in 2025, when Senate Bill 21 became law. The 2025 Amendments to General Corporation Law Section 144 expanded the statutory framework for conflicted director and officer transactions. Those amendments were challenged on constitutional grounds, but in Rutledge v. Clearway Energy Group LLC, №248, 2025 (Del. Feb. 27, 2026), the Delaware Supreme Court rejected the constitutional challenges and upheld the amendments in 2026.
The Amendments protect directors and officers from claims seeking equitable relief and damages if one of the above-described approval paths is satisfied. They also define key concepts such as “disinterested director” and “disinterested stockholder”. In general, these concepts focus on whether the person is a party to the transaction, has a material interest in it, or has a material relationship with someone who has such an interest. The statute also defines “material interest” and “material relationship,” giving Delaware corporations guidance when evaluating conflicts.
Takeaway
A Delaware director or CEO may transact with the corporation, but not casually. The key is disclosure of material aspects of the transaction, clear approval by disinterested decision-makers where available, fair terms, and careful documentation. For Delaware corporations, these steps are the best protection against later claims of self-dealing or breach of fiduciary duty.