Amendment to Delaware General Corporate Law Expands Personal Liability Protections to Corporate Officers; Updating Corporate Forms
Overview
Delaware General Corporation Law (the “DGCL”), Section 102(b)(7) was revised as of August 1, 2022, to allow Delaware corporations to provide their officers with exculpatory protections for personal monetary damages resulting from a breach of fiduciary duty in certain actions. While the protections are subject to limitations and not as broad as those provided for directors, the amendment addresses the historic disparate treatment of officers and directors in class action litigations.A Delaware corporation seeking to expand exculpatory protections to its officers must affirmatively include those protections into its certificate of incorporation. While a Delaware corporation may now provide its officers with exculpatory protections for personal monetary damages, the protections are not identical to those from which directors have long benefited. Historically, as a tool to protect directors only, Delaware law eliminated or limited personal liability for monetary damages resulting from a breach of fiduciary duty, subject to certain limitations and as provided for in the corporation’s certificate of incorporation. Extending exculpation to corporate officers could meaningfully reduce personal legal exposure and help curb corporate litigation costs. It may also help companies attract and retain qualified management teams.
The amendment to DGCL Section 102(b)(7) became effective on August 1, 2022, or, in some cases, is applicable only to transactions or other corporate actions entered into on or after August 1, 2022. The amendment could affect how you draft your corporate and M&A documents in the future.
The amendments to DGCL Section 102(b)(7) (as well as other amendments to DGCL, adopted at that time) can be found at the following link.
To Whom Does Exculpation Apply?
- The amended Section 102(b)(7) applies only to certain corporate officers, namely a person who:
- Is or was president, chief executive officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting office;
- Is or was identified in the corporation’s public filings with the U.S. Securities and Exchange Commission because such person is or was one of the most highly compensated executive officers of the corporation; or
- has, by written agreement with the corporation, consented to be identified as an officer for purposes of accepting service of process.
We recommend individual corporate office clients should consult with counsel to know whether they are individually eligible for exculpation under the new amendment and how they may proceed with their employers. Similarly, boards of directors should consult with counsel to determine if expanding the exculpation to qualifying officers is in the best interest of their corporations.
Limitations to Officer Exculpation
Importantly, corporate officers and directors are not on equal footing. Notably, the newly amended Section 102(b)(7) does not:- Eliminate liability of officers for breach of fiduciary duty arising out of claims brought by the corporation itself or for derivative claims brought by the corporation’s stockholders in the name of the corporation. This is a significant difference from how the DGCL treats exculpation of directors. Thus, a corporate officer may still have liability to the corporation for breach of the officer’s duty of care, for example.
- The amendment also precludes elimination or limitation of liability for the types of claims with respect to which exculpation of directors is not permissible, such as:
- a breach of the duty of loyalty,
- acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, and
- any transaction from which the officer derived an improper personal benefit.
Updating Your Corporate Forms for 2022 DGCL Amendment
- A Delaware corporation that plans to provide the benefits of the newly amended Section 102(b)(7) to its qualifying corporate officers must take action to do so by including appropriate provision in the corporation’s certificate of incorporation.
- Prior to filing their certificates of incorporation, new corporations should consider whether a provision adopting the protections for corporation officer should be included.
- Existing Delaware corporations must amend their certificates of incorporation to include a provision expressly covering officers. Such amendment generally will require both director and stockholder approval. After obtaining the requisite approvals, a certificate of amendment must be filed with the Delaware secretary of state to effect the amendment.
If you have questions regarding the amendment to DGCL Section 102(b)(7) or other recent amendments to the DGCL, please contact partner Allan Weiner.