Key points to remember
- Section 102(b)(7) of the recently amended DGCL allows Delaware corporations to provide directors with exculpatory protections for personal monetary damages resulting from a breach of fiduciary duty in certain actions.
- Although the protections are subject to limits and are not as broad as those provided for directors, the amendment addresses the historically disparate treatment of officers and directors in class actions.
- A Delaware corporation seeking to extend exculpatory protections to officers must imperatively incorporate these protections into its certificate of incorporation.
A Delaware corporation can now provide its directors with exculpatory protections for personal monetary damages similar, but not identical, to those directors have long enjoyed. Historically, as a tool of protection for directors only, Delaware law eliminated or limited personal liability for monetary damages resulting from a breach of fiduciary duty, subject to certain limitations and as provided in the Certificate of constitution of the company. The exclusion of corporate officers from this protection has resulted in a proliferation of litigation against them when appeals against managers were not viable. In recognition of this disparity, the law has now been amended. Following a recent amendment to Section 102(b)(7) of the Delaware General Corporation Law (DGCL), effective August 1, 2022, the scope of available exculpatory protections now extends to corporate officers . Therefore, a Delaware corporation can act to protect its officers by affirmatively including an appropriate exculpatory provision in its certificate of incorporation.
The Delaware Legislature enacted Section 102(b)(7) of the DGCL in 1986 after the Delaware Supreme Court’s decision in Smith vs. Van Gorkom that it was extremely difficult for a corporation to obtain liability insurance for its directors at reasonable premiums. In Van Gorkom, the Delaware Supreme Court overturned a Chancery Court decision in favor of the defendant directors, provided that they performed their duty of care by approving a transaction without considering all material information. Section 102(b)(7) was historically limited only to directors of a corporation and did not extend to officers, largely due to the law’s emphasis on directors’ liability following of Van Gorkom and the prevailing view at the time that Delaware’s long arm law did not provide jurisdiction over corporate officers. In 2009, the Delaware Supreme Court in Gantler v. Stephens reaffirmed that officers of Delaware corporations have the same fiduciary duties as directors. In recent years, Delaware courts have seen an increase in litigation, particularly class action lawsuits, alleging officers and directors breached their duty of care. While administrators have seen such claims dismissed on the basis of Section 102(b)(7), executives have not. Indeed, by exploiting the disparate treatment of executives and directors when challenging the decision of a majority independent board, the plaintiffs’ bar managed to create a “back door” by naming executives as defendants. This, in turn, created a real need for amendment.
Under the amendment, a Delaware corporation can now take steps to enact a charter provision that effectively eliminates the personal liability of its covered officers for breach of duty of care for direct shareholder claims ( including class actions). These types of claims typically arise in the context of a merger and acquisition transaction.
This does not mean, however, that corporate officers and directors are now on an equal footing. Notably, the newly amended section 102(b)(7) does not eliminate liability of officers for breach of fiduciary duty arising from claims brought by the corporation itself or derivative claims brought by shareholders of the company on behalf of the company. This is a significant difference from the way the DGCL deals with the exoneration of directors. The amendment also prevents the elimination or limitation of liability for the types of claims in respect of which exculpation of directors is not permitted, such as (i) breach of duty of loyalty, (ii) acts or omissions in bad faith or which involve willful misconduct or willful violation of law, and (iii) any transaction from which the Agent has derived improper personal advantage.
Further, amended section 102(b)(7) only applies to certain officers, namely a person who (in the course of alleged wrongful conduct) (i) is or has been president, chief management, chief operating officer, chief financial officer, legal director, controller, treasurer or accounting director; (ii) is or has been identified in the company’s public filings with the United States Securities and Exchange Commission because that person is or was one of the company’s highest-paid executives; or (iii) has, by written agreement with the company, consented to be identified as an officer for the purpose of accepting service of process.
A Delaware corporation seeking to extend the benefits of the newly amended section 102(b)(7) to its officers must take steps to do so, as the protections will only come to life if and unless the certificate of incorporation of society does not expect it. , and only to the extent intended. When a new Delaware corporation is in the formation phase, planners should therefore consider including a provision expressly providing exculpatory protections for directors and officers. An existing Delaware corporation, on the other hand, should consider amending its certificate of incorporation to include a provision expressly covering officers who, according to the corporation’s organizational documents, may require board and shareholder approval. After obtaining the required approvals, an amendment certificate must be filed with the Delaware Secretary of State in order to effect the amendment.
If you have any questions regarding the above, please contact Asim Grabowski-Shaikh from the Capital Markets and Corporate Governance team or Matthew Gases from the Mergers & Acquisitions and Corporate Governance team.