A recent change in Delaware law is likely to trigger a wave of management-sponsored stockholder votes seeking to amend certificates of incorporation to protect corporate officers from liability for breaches of their fiduciary duty of care.
Effective August 1, 2022, the Delaware legislature amended Section 102(b)(7) of the Delaware General Corporation Law (“DGCL”) to allow companies to limit the monetary liability of certain executives for duty of care breaches.
Prior to the statutory amendment and since 1986, the protections in Section 102(b)(7) were only available to shield corporate directors from liability for breaches of their fiduciary duty of care—the fiduciary duty that requires directors and officers to make informed and careful business decisions that pursue the corporation’s interests. As amended, Section 102(b)(7) now states that a certificate of incorporation may expressly contain “a provision eliminating or limiting the personal liability of a director or officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty [. . . .]”
The statute states that an “officer” shall mean any person “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.” In effect, it would apply to any of the following individuals:
- a president, chief executive officer, chief operations officer, chief financial officer, chief legal officer, controller, treasurer, and chief accounting officer;
- someone identified in the corporation’s SEC public filings as a “highly compensated executive officer” of the corporation; and
- someone who has consented to being identified as an officer for purposes of accepting service of process.
No other officers, employees, and agents are entitled to the liability protections of Section 102(b)(7).
Despite this broad move toward insulating officers, the protections offered under Section 102(b)(7) have some limits. First, Section 102(b)(7) shields officers from liability only for monetary damages; an officer’s conduct is still subject to equitable remedies such as rescission (the undoing or cancellation of the contract between parties) or injunctive relief (such as an injunction delaying a vote on a merger or acquisition). Second, the statute only applies to breaches of the fiduciary duty of care and not breaches of the duty of loyalty. This is consistent with the prior version of Section 102(b)(7), which allowed for the exculpation of duty of care breaches by directors but not breaches of the duty of loyalty.
Third, and critically, Section 102(b)(7)(v) expressly excludes from its protective reach derivative actions brought by stockholders on behalf of the corporation, but instead include only direct actions (for example, a traditional class action securities lawsuit). This is in contrast to the breadth of protections offered to directors under Section 102(b)(7), which does not carve out derivative claims as assertable against directors. Thus, this exception in the new amendment allowing derivative claims to be brought against officers leaves open to plaintiffs an important mechanism for protecting shareholders and corporations. This exception was recently clarified to include oversight claims against officers by Vice Chancellor Laster, in In Re McDonald’s Corporation Stockholder Derivative Litigation, C.A. No. 2021-0324-JTL, 2023 WL 407668 (Del. Ch. Jan. 26, 2023).
From the stockholders’ perspective, approval of these broader protections for C-suite executives (albeit without exculpation from derivative claims) marks an additional erosion of their ability to take action for stamping out corporate mismanagement. As stockholders’ rights continue to erode, their check on the decisions of senior executives diminishes, which could lead to more reckless conduct by officers.
The defense bar has widely praised the DGCL amendment. First, those in that bar see the amendment as a means to attracting and retaining officer candidates and a key lever for lowering costs of Director & Officer Insurance. Some in the defense bar also see the amendment as creating an important deterrent against what they perceive to be frivolous plaintiff-driven litigation brought to secure excessive fees.
Still, it is unclear whether stockholders and proxy advisers will be eager to adopt these charter amendments in the coming year. The optics of asking stockholders at either a special or annual meeting to vote to limit the monetary liability of officers may cause some companies to refrain from pushing through a vote on this measure, as such an amendment would leave those voting stockholders with fewer tools to later address wrongful conduct on the part of the corporation and its officers.