Amendment to Delaware Law Permits Exculpation of Officers in Corporate Charters
Delaware has long permitted corporations to limit or eliminate monetary liability of directors from breach of fiduciary duty of care lawsuits. However, the same protections have not been afforded to a corporation’s officers. Effective August 1, 2022, the Delaware General Corporation Law (the “DGCL”) has been amended to address this discrepancy.
Section 102(b)(7) of the DGCL has been revised to permit an exculpation clause in a corporation’s charter that eliminates or limits the personal liability of the corporation’s officers for monetary damages. Importantly, this change in the law limits the ability of stockholders to bring a claim directly against corporate officers, including by means of a class action lawsuit.
As is the case for directors, the limitation is not absolute. A permitted exculpation clause may apply to claims for breach of an officer’s fiduciary duty of care but may not extend to claims for a breach of the duty of loyalty, intentional misconduct, or knowing violations of the law, or transactions where an officer derives an improper personal benefit. An additional carve-out from the permitted limitation for officers, which is not applicable to directors, is for actions “by or in the right of the corporation.” Claims brought against an officer by the corporation itself or by the board of directors, as well as derivative claims, are not restricted by this amended rule. In effect, stockholders that wish to make a claim against an officer in his or her personal capacity must first make a demand on the corporation’s board to bring a suit on behalf of the stockholder. Such stockholder claims would be restricted from proceeding except in infrequent cases where the demand on the board would be rendered futile as the result of a majority of the directors being compromised as to the officer in question.
This updated rule is not self-effectuating, meaning that a corporation must amend its certificate of incorporation to include this provision if it so chooses. Typically, this will require the consent of both the board of directors and the corporation’s stockholders.
All officers are not eligible for such treatment. Rather, the following officers may be covered by the exculpation clause: the president, CEO, COO, CFO, chief legal officer, controller, treasurer, chief accounting officer, the corporation’s most highly compensated executive officers as identified in SEC filings, and other officers who have consented to be identified as “named executive officers” in the corporation’s recent SEC filings.