I. Introduction: Tariffs as a new macro shock
The US government’s “Liberation Day” tariffs, unveiled on April 2, 2025 to force a rebalancing of global trade in favor of the United States, have unleashed significant market volatility and global economic disruption.
The tariffs have triggered retaliatory measures from affected countries – most notably, China’s imposition of 125-percent tariffs on US goods in response to the United States imposing a total of 145-percent duties on Chinese goods.
The 90-day reduction of the United States’ and China’s respective tariffs agreed on May 12, 2025,[i] together with the partial 90-day pause of the reciprocal tariffs on other countries announced on April 9, 2025 and certain other limited exemptions, has provided some relief. Nevertheless, the US government’s trade policy remains unpredictable.
For US public company boards and management teams, the tariffs could pose complex business planning challenges, as well as legal and regulatory risks, which shine a spotlight on the board’s key role in the oversight of risk management.
Below, we explore the bedrock principles under Delaware corporate law governing directors’ fiduciary duties. We further set out considerations for board oversight of tariff-related risks while adhering to the business judgment rule.
II. The disruption caused by tariffs: A changing set of risks
The impact of tariffs is highly variable, affecting companies differently depending on their exposure to international trade, supply chains, consumer demand, and competitive dynamics. In a globally integrated economy, no company with global operations will be immune from the tariffs’ impact, and retaliatory actions by trading partners could amplify disruption.
Tariffs introduce a cascading set of corporate risks, including the following:
- Direct financial impact: Tariffs could erode profitability by increasing input costs, disrupting supply chains, and depressing demand. For companies with significant import or export exposure, the effect on revenue and costs can be immediate and severe. As seen in recent market reactions, uncertainty around tariff policy can halt M&A and capital markets activity.
- Strategic and operational risks: Tariffs may force companies to reconfigure supply chains, relocate production, and renegotiate contracts – often at significant upfront cost and with uncertain long-term benefits. The permanence and uneven application of tariffs make it difficult to forecast normalized financial performance, complicating spending, investment, and planning.
- Secondary and systemic risks: Even companies without direct tariff exposure could face secondhand risks from recessionary pressures, reduced consumer spending, or disruptions in key customer or supplier industries.
- Covenant and liquidity risks: Declines in earnings before interest, taxes, depreciation, and amortization (EBITDA) driven by tariffs can threaten compliance with financial covenants in credit facilities and other debt instruments. This can trigger covenant breaches, lead to liquidity crunches, and force companies to seek waivers or amendments and, in severe cases, undertake a financial restructuring out-of-court or under the protection of bankruptcy law.
III. Delaware law on director fiduciary duties and the business judgment rule
A. The board’s core responsibilities
Under Delaware corporate law, directors, rather than shareholders, manage the business and affairs of the corporation. While management is charged with day-to-day operations, establishing and overseeing the execution of corporate strategy is at the heart of the board’s responsibilities. In their discharge of those responsibilities, directors owe fiduciary duties of care and loyalty to the corporation and its stockholders. They must act on an informed basis, in good faith, and in the honest belief that their actions are in the best interests of the company – striking a balance between actions designed to enhance stockholder value in the short term and actions intended to enhance growth and profitability over the long term.
In the face of economic shocks that could create short-term pressures, the board is responsible for taking actions that are in the company’s best interests. The Delaware Supreme Court stated in 1989 that “directors, generally, are obliged to chart a course for a corporation which is in its best interests without regard to a fixed investment horizon.”[ii]
Duty of care
The duty of care, at its core, demands informed, deliberative decision-making based upon all material reasonably available. This requires a process that is reasonably designed to gather and consider relevant facts. Boards can, in good faith, rely upon information provided by management, as well as by counsel from third-party professionals, in certain cases. In evaluating such information, directors are encouraged to review the information critically before acting.
The duty of care also permits directors to delegate managerial duties to corporate officers. However, directors retain the “obligation to establish or approve the long-term strategic, financial and organizational goals of the corporation; to approve formal or informal plans for the achievement of those goals; to monitor corporate performance; and to act, when in the good faith, informed judgment of the board it is appropriate to act.”[iii]
Absent a breach of the duty of loyalty, the applicable standard of conduct required to breach the duty of care is gross negligence.[iv]
Duty of loyalty
The duty of loyalty “mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director … and not shared by the stockholders generally.”[v] The duty of loyalty further includes a duty to act in good faith[vi] and avoid conflicts of interest. Directors have been held to act in bad faith where they took action (i) “with the intent to harm the corporation;” (ii) in a “state of mind affirmatively operating with furtive design or ill will;” (iii) “with a purpose other than that of advancing the best interests of the corporation;” or (iv) “with intent to violate applicable positive law.”[vii]
Duty of oversight
Directors also owe a duty to exercise oversight and monitor the corporation’s operational viability, legal compliance, and financial performance. The duty to monitor derives from the core fiduciary duties of care and loyalty.
Under the Delaware Court of Chancery’s Caremark decision, the duty of oversight requires directors to make a good-faith effort to put in place reasonable information and reporting systems to provide timely, accurate information about compliance and business performance. Since Caremark, Delaware courts have held directors liable for breach of their oversight duties only where there are sustained or systematic failures to exercise oversight.
There are two prongs to potential Caremark liability. Directors cannot:
- Consciously fail to implement a board-level system to monitor reasonably company compliance with applicable law and related company protocols, or,
- Having implemented such a system, intentionally disregard red flags signaling material company noncompliance with such law and protocols.
There is a high bar to plaintiff success in pursuing Caremark claims, primarily due to the necessity to demonstrate bad faith by the directors under either of the two prongs noted above and the need to establish demand futility to bring a derivative shareholder claim.
In a few Caremark decisions, the Delaware courts have suggested that, at least in egregious cases, directors may be subject to Caremark liability not only for a failure to oversee mission-critical legal and regulatory compliance risks but also for key business risks.[viii] More recently, however, the Delaware Court of Chancery’s decisions have underscored that a board’s business-risk decisions are generally subject to the board’s business judgment and that Caremark duties are not applicable.[ix]
B. Protections under the business judgment rule and exculpatory charter provisions
The business judgment rule, alongside the exculpatory charter provisions, provides directors with strong protection against personal liability for their decision-making as long as decisions are made following an appropriate process – regardless of outcome.
Business judgment rule
In the absence of bad faith and conflicts of interest, the business judgment rule is the default standard of review for board decision-making. The business judgment rule is a powerful presumption that, in making a business decision, directors acted on an informed basis, in good faith, and in the honest belief that their actions were in the company’s best interests.[x] If this presumption is not rebutted by evidence of gross negligence, bad faith, or self-dealing, the business judgment standard of review applies, and “the Court gives great deference to the substance of the directors’ decision and will not invalidate the decision, will not examine its reasonableness and ‘will not substitute [its] views for those of the board if the latter’s decision can be attributed to any rational business purpose.’”[xi]
The business judgment rule is especially relevant during periods of economic disruption, such as in the current tariff environment. It enables directors to make difficult, proactive decisions without fear of personal liability, provided they follow an appropriate process.
Exculpatory charter provisions
Section 102(b)(7) of the Delaware General Corporation Law permits corporations to adopt provisions in their charters eliminating or limiting the personal liability of directors from liability for monetary damages for breaches of their fiduciary duty of care.[xii] (Directors may not be exculpated for breach of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, or any transaction from which the director derived an improper personal benefit.) Because exculpatory charter provisions have been broadly adopted, liability for breaches of the duty of care is rarely available as a remedy for stockholder plaintiffs.
IV. Recommendations for directors
In the face of the potential business disruption, how can boards fulfill their fiduciary duties of care and loyalty and discharge their oversight responsibilities?
As with any other acute and emerging area of business risk, directors should understand the types and magnitude of the particular risks the Liberation Day tariffs pose for company operations and financial performance – and tailor their oversight role accordingly.
While it is management’s responsibility to identify and quantify the tariffs’ specific impacts on the company’s supply chain, manufacturing process, customer pricing, revenues, operating costs and profitability, liquidity, and financial position, directors can help ensure that the company’s existing risk management policies and procedures are commensurate to the tariff-related risks (or modified as appropriate) and remain consistent with the company’s long-term strategy and risk appetite.
Directors may consider delegating oversight responsibilities for tariff impact risks to a dedicated ad-hoc or standing committee (such as audit or risk).
As they assess the adequacy of the company’s risk management policies, boards may also consider retaining their own trade counsel to advise them on mitigating tariff-related risks.
Further, boards are encouraged to document their strategies for monitoring tariff-related risks. As with other areas of enterprise risk, documented control and monitoring functions tailored to the scope and scale of tariff-related risks could help directors avoid Caremark liability.
Directors should consider requesting regular updates on senior management’s approach to identifying and mitigating such risks, instances of material risk management lapses, and action plans for mitigation and response. Within the changing trade policy environment, directors are further encouraged to remain available and engaged as the frequency of board meetings and calls could increase.
Prudent business judgment and collaboration with management could help mitigate risk of personal liability due to the inapplicability of Caremark duties, the protection of the business judgment rule, and charter provisions exculpating directors from breaches of the duty of care.
V. Conclusion
By taking steps to implement and monitor risk oversight processes tailored to tariff-related impacts, directors can promote long-term enterprise health, help preserve shareholder value, and minimize their own risk of personal liability.
With experience in Delaware corporate law, public company reporting and compliance, and global trade, DLA Piper advises companies and their boards on navigating economic uncertainty from new and anticipated tariffs. For more information, please contact the authors.
[i] Under the joint statement issued by the United States and China on May 12, 2025, during the 90-day pause, the United States would reduce the tariff on Chinese imports to 30 percent from its current 145 percent, while China would lower its import duty on American goods to 10 percent from 125 percent.
[ii] Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1150 (Del. 1989).
[iii] Obeid v. Hogan, 2016 WL 3356851, at *14 (Del. Ch. June 10, 2016).
[iv] Aronson v. Lewis, 473 A.2nd 805 (Del. 1984).
[v] Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
[vi] Stone v. Ritter, 911 A.2nd 362, 370 (Del. 2006).
[vii] In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 64 n. 102, 67 (Del. 2006) (internal quotation marks omitted) (citations omitted).
[viii] See, eg, Construction Industry Laborers Pension Fund et al. v. Bingle et al., C.A. No. 2021-0494-SG (Del. Ch. Sept. 6, 2022).
[ix] See, eg, In re ProAssurance Corp. Stockholder Deriv. Litig., C.A. No. 2022-0034-LWW (Del. Ch. Oct. 2, 2023) and Segway Inc. v. Hong Cai, C.A. No. 2022-1110-LWW (Del. Ch. Dec. 14, 2023).
[x] Aronson, 473 A.2nd at 812.
[xi] Paramount Commc’ns, Inc. v. QVC Network Inc., 637 A.2d 34, 45 (Del. 1994) (quoting Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 949 (Del. 1985) and Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971).
[xii] Section 102(b)(7) of the DGCL was amended in 2022 to allow Delaware corporations to adopt such exculpatory charter provisions for breaches of the duty of care by officers, other than in any action by or in the right of the corporation, including derivative claims, which are typically at the direction of the board of directors.