Proposed DGCL Amendment—Exemption of Senior Company Officers for Breach of Fiduciary Duty – Directors and Officers

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CONTEXT

Earlier this year, the Council of the Corporate Law Section of the Delaware State Bar Association (“Council”) announced its annual proposals for amendments to the Delaware General Corporate Law (” DGCL”) before the Delaware General Assembly. Historically, Council recommendations have generally been adopted by the Delaware General Assembly, and these new proposed amendments are likely to be adopted, with an effective date of August 1, 2022.

LIMITATION OF PERSONAL LIABILITY OF SENIOR OFFICERS UNDER DGCL § 102(b)(7)

One of the proposed amendments to the DGCL would allow a corporation’s certificate of incorporation to include a provision eliminating or limiting the pecuniary liability of certain corporate officers for breach of the fiduciary duty of care under the DGCL § 102(b)(7). Since 1986, DGCL § 102(b)(7) has permitted such exoneration of board members of such claims, but not of officers. If enacted, the proposed amendments would reduce, but not eliminate, differential treatment of directors and officers when faced with shareholder actions alleging breaches of the fiduciary duty of care.

Proposed amendments would allow certain officers to be exonerated only in direct shareholder claims, including class actions, but would not eliminate officers’ monetary liability for breach of fiduciary duties brought by the company itself or for derivative claims brought by shareholders on behalf of the company. As is the case for directors, the proposed amendments would not limit directors’ liability for: any breach of the duty of loyalty to the company or its shareholders, any act or omission in bad faith or involving willful misconduct or violation aware of the law, and any transaction from which the agent has taken improper personal advantage. If passed, the 2022 amendments to section 102(b)(7) of the DGCL would also prohibit retroactive amendments that would retroactively impose monetary liability on corporate officers.

In addition, not all officers would be entitled to the protection of an exculpation clause. Instead, only the following senior executives are entitled to the benefit of an exculpation clause: the Chief Executive Officer, the President, the Chief Financial Officer, the Chief Operating Officer, the Chief Legal Officer, the Controller, the Treasurer and the Chief Accounting Officer, as well as any other individuals identified as “Named Senior Officers” in the Company’s most recent SEC filings and other officers who consent in writing to accept service of process on the registered agent of the company for any action against the company to which the officer is a necessary party.

RECOMMENDATIONS

This new limitation of liability is not automatically effective, and board and shareholder approval would be required for an amendment to the certificate of incorporation to limit the monetary liability of officers. If the proposed amendments are passed, you should consult with your Kutak Rock attorney, or one of the attorneys listed at left, to discuss whether to amend your Delaware corporation’s certificate of incorporation to provide for the exoneration of executives. superiors.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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