Red Flags Everywhere! – Ten Risks for Directors – Week 3

Each week for the next 10 weeks, we will publish an installment of our Red Flags Everywhere! series, highlighting key risk areas that public companies and their board of directors should keep top of mind.

This series will serve as a lead up to MoFo’s upcoming Red Flags Everywhere! Tabletop program, taking place in our Palo Alto office on May 7. Members of our Securities Litigation, Employment and Labor, and Capital Markets Groups will guide attendees through a ripped-from-the-headlines fact pattern designed to spark interactive discussion and practical analysis that will be valuable to every board advisor.

This week, we focus on board refreshment and the increasing attention institutional investors are placing on thoughtful board composition. Proactive, thoughtful evaluation of board structure can strengthen governance and reduce litigation risk.

If you are interested in learning more about MoFo’s Red Flags Everywhere! Tabletop event, please reach out to Deborah Argueta. See all the Red Flags client alerts.

Board Refreshment and Director Risk: Navigating Investor Demands and Delaware Constraints

 Investors, proxy advisors, and activists increasingly expect boards to look beyond their current composition and assess whether the board is positioned to oversee the company’s future strategy and risks. That same assessment takes on added urgency in stockholder litigation, where plaintiffs routinely scrutinize whether a board is sufficiently independent, disinterested, and appropriately constituted to exercise oversight, evaluate conflicts, and make litigation-sensitive decisions. At the same time, Delaware law places procedural limits on how boards may change their composition. Effective refreshment that mitigates liability risk requires navigating both investor demands and corporate law requirements.

Why Lack of Refreshment Becomes a Litigation Flashpoint

For most public companies, exchange listing standards require a majority independent board. But independence must be evaluated based on the facts and circumstances of a particular transaction or issue, and formal independence may not be the same as practical independence. In lawsuits attacking oversight or conflicts, plaintiffs frequently probe director relationships, tenure and social ties, prior employment, venture relationships, and founder/management influence. Longer-tenured boards with concentrated insider influence can provide a narrative hook that the board is not functioning as an effective check. Even long-tenured board members who are demonstrably independent are not immune to attacks as investors and activists increasingly argue legacy disproportionately increases favorable disposition towards management and entrenchment mentality in favor of existing business strategies.

Increasing the risk, litigation often arrives quickly—after a cyber event, restatement, regulatory inquiry, product failure, workplace controversy, or contested transaction. A board that has not refreshed may find itself defending decisions with a governance profile that plaintiffs characterize as stale, insider-heavy, or insufficiently independent at precisely the wrong moment. Moreover, new directors are hesitant to step into board roles when the company is perceived to be in trouble, thereby creating a vicious cycle of lack of board refreshment at a juncture when refreshment is the most helpful to the company.

Delaware Law’s Procedural Limits Make Proactive Refreshment More Important

Delaware law places meaningful procedural limits on how boards may change their composition, which can make “fixing” independence and committee makeup difficult once a dispute is underway. Directors generally cannot remove other directors; that authority rests with stockholders.[1] For classified boards, directors may be removed only for cause unless the charter provides otherwise, and removal for cause requires notice and an opportunity to be heard.[2] Courts have also invalidated arrangements that improperly restrict the board’s statutory authority over composition.[3] The board’s main artillery to remove a recalcitrant director is usually not nominating that director to the board slate at the next annual meeting of stockholders, which generally causes a lag of a year. The result of all these restrictions is that, while Delaware law leaves substantive refreshment decisions largely to board judgment and stockholder voting, it requires boards to follow proper processes—and that can make “rapid” mid-stream reconstitution impractical when litigation risk is already crystallizing.

Tools That Support Refreshment—and Strengthen the Litigation Record

Mechanisms that support orderly succession planning and can help boards demonstrate a deliberative approach to composition over time, include overboarding policies, tenure guidelines, resignation policies tied to changes in primary employment, and annual individual director evaluations. These tools can be particularly valuable when they are framed and implemented as part of a risk and oversight program—not merely a proxy season exercise.

Board evaluations, particularly individual director evaluations, play a central role in this process. Nearly all public companies conduct annual board evaluations, and the use of individual evaluations and independent facilitators continues to increase. In addition, companies are making increasing use of board matrices setting forth each director’s expertise in relation to the company’s evolving business needs. When used effectively, evaluations combined with establishing a well‑defined board matrix can (i) surface skill gaps and engagement issues, (ii) create a structured pathway for succession discussions, and (iii) help boards show that refreshment decisions were made thoughtfully and consistently—facts that can matter when plaintiffs later challenge the board’s independence, diligence, or oversight posture.

Key Takeaways

1. Treat board refreshment as a liability mitigant. In oversight and conflict litigation, plaintiffs routinely attack board composition and independence—especially where refreshment appears stalled.
2. Stress-test independence with a litigation lens. Pay particular attention to insider influence over leadership roles and committee chairs, long-tenure dynamics, and relationships that could be framed as loyalty or dependence.
3. Plan ahead within Delaware’s process constraints. Because director removal and certain composition changes require stockholder action and strict process compliance, boards should not assume they can “fix” composition once a dispute is underway.
4. Be especially deliberate in founder-controlled or dual-class structures. Ensure independent directors occupy meaningful leadership and committee roles, and that refreshment is periodic and credible.
5. Use evaluations, board matrices, and flexible tools—and document the approach. Overboarding policies, tenure guidelines, resignation policies, robust individual evaluations (often with an independent facilitator), and board matrices can support orderly succession and help create a defensible record if decisions are later challenged.

The prior Red Flags alerts are available here:

• Red Flags Everywhere! – Ten Risks for Directors – Week 1 | Morrison Foerster
• Red Flags Everywhere! – Ten Risks for Directors – Week 2 | Morrison Foerster

[1] Hockessin Community Center, Inc. v. Swift, 59 A.3d 437 (Del. Ch. 2012) (“for 89 years, Delaware law has barred directors from removing other directors”) (quoting Kurz v. Holbrook, 989 A.2d 140, 157 (Del.Ch.2010)).

[2] Hockessin, 59 A.3d at 454 (“removal for cause requires notice of the charges and an opportunity to be heard”); Seavitt v. N-Able, Inc., 321 A.3d 516 (Del. Ch. 2024) (reaffirming that classified directors may be removed only for cause absent a charter provision to the contrary).

[3] West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., 311 A.3d 809 (Del. Ch. 2024) (holding that provisions giving stockholders control over board size and committee composition were “facially invalid”).