Delaware now allows exoneration of corporate executives | Locke Lord LLP

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The Delaware General Corporations Act (§ 102(b)(7)) was amended, effective August 1, 2022, to allow for the exoneration of corporate officers, but in a more limited manner than the exoneration of administrators which has long been allowed. Unlike directors, officers can be exonerated by a provision of the certificate of incorporation only from personal liability to shareholders, but not from action by or in the law of the corporation. Officers are subject to the same exculpatory limitations that apply to directors (i.e. breach of duty of loyalty, acts or omissions in bad faith or involving willful misconduct or willful violation of law , and receipt of an improper personal benefit).

The exoneration of officers may be important because there has been a recent trend to include officers and other persons in breach of fiduciary duty in lawsuits against directors, as well as to bring claims against directors who also serve as leaders in their capacity as leaders.

Since the exoneration must be in the certificate of incorporation, shareholder action would be required for existing corporations to exonerate their executives. This may prove difficult for existing public companies, at least until more experience develops. However, executive exoneration should be considered for new companies, pre-IPO companies, and any other companies, such as controlled companies, for which shareholder approval can likely be obtained.

The form of the exculpation provision is likely to follow the existing exculpation of directors, either in a new provision covering officers or by amending an existing provision that already covers directors. Here is a typical form of exculpatory provision amended to include officers:

No director or officer of the Company shall be liable to the Company or its shareholders for damages for breach of fiduciary duty as a director or officer, except to the extent that such elimination or limitation of liability is not authorized under the general corporate law of Delaware as now in effect or as they may hereafter be amended. No modification or repeal of this provision shall apply or affect the liability of any director or officer of the Company for any act or omission of such director or officer occurring prior to such modification or repeal.

The full text of the amendments to §102(b)(7), as well as other amendments made to the Delaware General Corporation Law at the same time, is available at this link.

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