Delaware Authorizes 102(b)(7) Exculpation of Senior Officers
The Situation: Until now, Delaware corporations could eliminate or limit monetary liability for breaches of the duty of care only by directors—but not officers.
The Result: With the now-effective amendment to Section 102(b)(7) of the Delaware General Corporation Law, companies may extend limited exculpation protection to certain senior officers in addition to the more expansive exculpation afforded to directors.
Looking Ahead: Corporations should consider amending their certificates of incorporation to provide exculpation protections to senior officers.
Directors and officers alike owe fiduciary duties. But, until now, the Delaware General Corporation Law has authorized corporations to exculpate only directors, not officers, for certain breaches of fiduciary duty.
Section 102(b)(7) of the DGCL allows corporations to eliminate or limit directors' personal liability to the corporation or its shareholders for monetary damages stemming from breaches of the duty of care, and companies typically include such provisions in their certificates of incorporation. (Note that exculpation of directors under the DGCL is not unlimited; a corporation cannot exculpate directors for: breaches of the duty of loyalty; acts or omissions not made in good faith or involving intentional misconduct or a knowing violation of law; illegal stock redemptions, stock repurchases, or dividends; or any transaction in which directors derive an improper personal benefit.)
Newly amended Section 102(b)(7) now authorizes corporations to also extend some of that same exculpatory protection to certain corporate officers, including a company's president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer, as well as other individuals identified in public filings as the company's most highly compensated officers.
The protections available to directors and officers under Section 102(b)(7) are not, however, identical. The most important distinction is that corporations may not eliminate or limit liability of officers for claims brought by or on behalf of the corporation, including shareholder derivative claims. In contrast, corporations may exculpate directors for breaches of the duty of care however those claims are asserted, whether directly or derivatively. This structure means that the board retains its authority to assert the company's claims against officers who breach their duty of care (or, if the board is incapable of doing so, a shareholder may do so derivatively).
This development is, nonetheless, a welcome one. The inability to exculpate officers for breaches of care has allowed plaintiffs in M&A class action litigation to pursue claims against officers, even after courts have dismissed similar claims against directors. That means that companies have had to endure the ongoing distraction and cost of litigation (and the possibility of an adverse judgment, even if remote), so long as a plaintiff could show it was reasonably conceivable that officers acted in breach of their duty of care. Now that certain of the protections under Section 102(b)(7) are available to senior officers, companies that amend their certificates to include an officer exculpation provision will close this gap and potentially save both time and money.
Stockholders must approve amendments to certificates of incorporation, and we recommend that Delaware corporations consider a proposal to provide exculpation to officers for breaches of the duty of care to the greatest extent permitted under Delaware law. We hope that proxy advisors will support such proposals, which more closely align the protections already available to directors with those now available to officers.
Two Key Takeaways
- The amendment to Section 102(b)(7) took effect August 1, 2022, meaning that Delaware corporations are now authorized to include provisions in their certificates of incorporation that eliminate or limit monetary liability for breaches of the duty of care by senior officers, except in derivative litigation.
- Corporations should carefully consider amending their certificates to include exculpatory protections for officers that have been, to a similar degree, available to directors for many years.