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The Delaware General Assembly is set to consider amendments to the General Corporation Law of the State of Delaware (DGCL), already approved by the Corporation Law Section of the Delaware State Bar Association, to, among other things, allow Delaware corporations to adopt exculpation clauses limiting or eliminating the monetary liability of certain officers. The proposed amendment to Section 102(b)(7) of the DGCL addresses a growing concern over officer liability, albeit by providing narrower exculpation than is available to directors.
Background
Under Delaware law, directors and officers owe certain fiduciary duties, including duties of care and loyalty. Section 102(b)(7) authorizes Delaware corporations to include in their certificates of incorporation, “[a] provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director.” Such exculpatory provisions, however, cannot eliminate or limit the liability of a director for any breach of the duty of loyalty, for any acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for unlawful payment of dividends or unlawful stock repurchases, or where a director receives an improper personal benefit.
Delaware adopted Section 102(b)(7) in 1986 in response to the Delaware Supreme Court’s decision in Smith v. Van Gorkom. Van Gorkom held that a corporation’s directors breached their duty of care by failing “to inform themselves of all information reasonably available to them” before approving a merger agreement. Those directors were personally liable for the monetary damages resulting from their gross negligence. The prospect that a director could be held personally liable for negligence was perceived as creating two problems: (1) decreasing the pool of qualified individuals willing to serve as directors of Delaware corporations, and (2) drastically increasing the cost of D&O liability insurance. This “directors and officers insurance liability crisis” was the catalyst for the General Assembly’s decision to adopt Section 102(b)(7). Today, these exculpation provisions are ubiquitous among Delaware corporations.
Later, the Delaware Supreme Court clarified in its 2009 decision in Gantler v. Stephens that officers owe the same fiduciary duties as directors. In so holding, the Court discussed Section 102(b)(7), and concluded that “[a]lthough legislatively possible, there currently is no statutory provision authorizing comparable exculpation of corporate officers.”
In recent years stockholder plaintiffs have highlighted the difference in exculpation available to officers and directors by increasingly asserting breach of fiduciary duty claims against officers. This has resulted in decisions which deny motions to dismiss brought by officers while granting those same motions with respect to the corporation’s directors. This raises the issue of how to differentiate actions taken by someone who was both an officer and a director, with the Court of Chancery having stated that plaintiffs must draw the distinction between exculpated claims relating to the defendant’s role as a board member, and non-exculpated claims relating to their conduct as a company officer.
Proposed Amendments
To address this issue the proposed amendment would authorize a corporation to include in its certificate of incorporation a provision to eliminate or limit the monetary liability of certain officers for breach of the duty of care. In doing so, it does not copy the exculpation framework available to directors, but rather has important differences. What it does copy is the categories of conduct (relevant to officers) that cannot be exculpated (breach of the duty of loyalty, acts or omissions not in good faith, etc.); these are the same for officers as for directors.
As for the differences, unlike directors—who may be exculpated for both direct and derivative claims—officers, under the proposed amendment, may only be exculpated from liability relating to direct claims. Officers thus could still face monetary liability for derivative claims. Further, not all officers can be exculpated. The proposed amendment defines “officer” as “a person who at the time of such act or omission is deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to § 3114(b) of Title 10” the Delaware long-arm statute. Thus, only the individuals covered by that section qualify for exculpation.
Conclusion
As with those provisions for directors, the exculpation of officers is not automatic. If the proposed amendments become law, corporations will need to act affirmatively to include such a provision in their certificate of incorporation. The history of director exculpation provisions indicates that provisions exculpating officers will likely become ubiquitous for public companies incorporated in Delaware.
Nicholas D. Mozal (LAW ’11) is counsel in the Corporate Litigation Group at Potter Anderson & Corroon LLP. Nick focuses his practice on corporate and commercial litigation in the Delaware Court of Chancery and Supreme Court.
Lucille E. Wiesner (LAW ’21), is an associate in the Corporate Litigation Group at Potter Anderson & Corroon LLP. She focuses her practice primarily on corporate and commercial litigation in the Delaware Court of Chancery.