Delaware Extends Exculpation from Personal Liability to Senior Officers

The Delaware legislature recently amended Delaware’s General Corporation Law (DGCL) to allow corporations to limit the personal liability of corporate officers for money damages for breaches of their fiduciary duty of care.[1]  Prior to this amendment, Delaware only allowed for such “exculpation clauses”—which must be set forth in the certificate of incorporation—for corporate directors.  This disparity resulted in increased litigation against officers for alleged breaches of duties of care when such claims against directors were not available.  The change in Delaware law is a much needed corrective that permits corporations to treat corporate officers and directors similarly.

What the Amendment Permits

Corporate officers and directors owe fiduciary duties of care and loyalty to the corporation and its shareholders.  Previously, DGCL Section 102(b)(7) permitted corporations to exculpate directors from claims for breaches of their duty of care, but did not permit any exculpation of corporate officers.  Claims against officers for breaches of their duty of care have become especially common in the context of M&A transactions.  The new amendment now allows for the exculpation of officers, with some specific limitations.  (As a matter of policy, Delaware law still does not permit exculpation of claims against directors or officers for breaches of the duty of loyalty.)

The amended Section 102(b)(7) applies only to certain senior officers—specifically, an individual who: (i) is or was president, chief executive officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer; (ii) is or was a “named executive officer” identified in the corporation’s SEC filings; or (iii) has, by written agreement with the corporation, consented to be identified as an officer for purposes of accepting service of process.[2]

Mirroring the previous scope of exculpation for directors, the amendment does not permit exculpation of officers from liability for: (i) breaches of duty of loyalty; (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; or (iii) any transaction from which a director or officer derives an improper personal benefit.[3]  And as with directors, while Section 102(b)(7) allows for exculpation of officers for monetary liability, it does not permit exculpation for equitable relief, which means officers (as was already the case with directors) may still be held liable for injunctive or rescissory relief in connection with a breach of fiduciary duty of care.

Finally, the amendment does not permit exculpation of officers for claims brought by or in the right of the corporation, including claims brought derivatively by the corporation against officers for breaches of the duty of care, or brought by stockholders derivatively on behalf of the corporation where demand on the board is properly excused.  Director exculpation is not subject to this same limitation.[4]

Requirements to Implement

Extending exculpation for duty of care claims to corporate officers under DGCL Section 102(b)(7) is not self-executing.  Corporations will need to amend their charters to include such a provision if they wish to provide such exculpation, and any amendments of this nature will require shareholder approval.  These kinds of proposals will require preliminary proxy statements, which corporations should consider in their annual meeting timeline.  We think that adopting such a provision makes good sense.  It corrects an imbalance that plaintiffs’ lawyers have been exploiting to bring often frivolous claims against officers that could not be maintained against directors, only to increase the settlement value of those lawsuits.  Adoption of a charter amendment will enable officers to avoid such liability to shareholder plaintiffs when acting in good faith, and for the early dismissal of such claims, while still preserving the ability of the company or shareholders to bring claims for breaches of the duty of loyalty or derivatively where appropriate.

Proxy Advisors’ Response

Some companies have, since the passage of the amendment, successfully amended their charters and ISS and Glass Lewis have generally supported these measures.

In its recently issued 2023 policy update, ISS indicated it will make recommendations on officer exculpation charter amendments on a case-by-case basis, “consider[ing] the stated rationale for the proposed change” and the extent to which the charter amendment would: (i) “[e]liminate directors’ and officers’ liability for monetary damages for violating the duty of care;” (ii) “[e]liminate directors’ and officers’ liability for monetary damages for violating the duty of loyalty”; and (iii) “expand coverage beyond legal expenses to include liability for violations of fiduciary duties that are more serious than acts of mere carelessness.”[5]  ISS appears to be focused on exculpation provisions that would extend to the duty of loyalty, but this is not permitted by the DGCL.

Meanwhile, Glass Lewis appears poised to take a stricter approach.  In its 2023 policy update, it indicates that it will generally recommend that shareholders vote against officer exculpation proposals that eliminate monetary liability for breach of duty of care unless the board has a “compelling rationale” and the provision is “reasonable.”[6]

Companies seeking to court the proxy advisors’ approval of officer exculpation proposals should avoid bundling these proposals with any other charter amendments proposed for adoption at the same meeting, given the advisors’ past criticism of bundled voting as not giving shareholders a proper opportunity to weigh in on each amendment.

Shareholder Challenges to Officer Exculpation Provisions

In two recent cases currently pending before the Delaware Court of Chancery, Electrical Workers Pension Fund, Local 103, I.B.E.W. v. Fox Corp.[7] and Sbroglio v. Snap, Inc.[8], certain classes of shareholders challenged Fox Corporation’s and Snap, Inc.’s attempts to amend their charters to include an exculpation provision for their top officers.  In both cases, plaintiff shareholders were part of a class of shareholders that the corporation excluded from voting on the charter amendment.  Plaintiff shareholders did not challenge the substance of the amendments or the corporations’ right to propose the changes but instead challenged them on the grounds that they violated section 242 of the DGCL, which gives holders of individual stock classes a right to vote on charter amendments if the amendment would “alter or change the powers, preferences, or special rights of the shares.”[9]

While Fox and Snap may have an impact on the process for adopting such provisions in the future and the classes of shareholders that are entitled to vote, the lawsuits do not challenge the legality or appropriateness of a corporation to propose such changes in the first place and should ultimately not impact a corporation’s decision whether to do so.

Takeaways With the amendment of DGCL Section 102(b)(7), Delaware corporations should seriously consider amending their corporate charters to allow for officer exculpation for breaches of fiduciary duty of care.  Doing so will allow corporations to provide to their officers nearly the same level of protection that they provide to their directors from claims for breaches of the duty of care.  This is especially important as the number of nuisance suits naming officers for breaches of their duties of care is on the rise, and its adoption should be a factor in ensuring the corporation is retaining top talent.  Corporations seeking such charter amendments will need to be prepared to articulate these benefits to their shareholders and the proxy advisors.

[1] This amendment is effective as of August 1, 2022 and is not retroactive.

[2] See § 102(b)(7).

[3] See § 102(b)(7)(i)-(iv).  Section 102(b)(7) also does not permit exculpation of liability for directors under Section 174 for unlawful dividends or stock repurchases.  Id.

[4] See § 102(b)(7)(v).

[5] Proxy Voting Guidelines, Benchmark Policy Changes for 2023: U.S., Canada, Brazil, and Americas Regional, ISS (Nov. 30, 2022), available here.

[6] 2023 Policy Guidelines, Glass Lewis, available here. 

[7] C.A. No. 2022-1007 (Del. Ch. Nov. 4, 2022).

[8] C.A. No. 2022-1032. (Del. Ch. Nov. 16, 2022); see also Dembrowski v. Snap, Inc., C.A. No. 2022-1042 (Del. Ch. Nov. 17, 2022) (consolidated with the Sbroglio case).

[9] DGCL § 242(b)(2).