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Delaware General Corporation Law expands exculpation rights to officers

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Inicio Perspectivas Delaware General Corporation Law expands exculpation rights to officers
Since 1986, section 102(b)(7) of the Delaware General Corporation Law (DGCL) has allowed a Delaware corporation to eliminate or limit a director’s personal liability to the corporation or its stockholders for monetary damages for breaches of fiduciary duty by including a provision in its certificate of incorporation. Effective August 1, 2022, Delaware amended the DGCL to permit a Delaware corporation to extend liability exculpation rights to certain officers of a corporation. The purpose of section 102(b)(7) is to attract highly qualified individuals to serve in leadership roles in Delaware corporations, and most Delaware corporations take advantage of this provision.

Prior to this amendment, officers of Delaware corporations, who often also serve as directors and are named in both capacities as defendants in lawsuits, were afforded asymmetrical protections based on whether their actions were taken in their capacity as an officer or as a director. If those defendants had acted in their capacity as a director, they were often shielded under section 102(b)(7). However, if those actions were taken in their capacity as an officer, section 102(b)(7) would not shield them from potential liability. Delaware corporations should consult with counsel to determine whether an amendment to their certificate of incorporation is necessary to extend section 102(b)(7) protections to their corporate officers.

The protections available to officers under the amended section 102(b)(7) are similar but not identical to the protections that are extended to directors. For example, corporations may not eliminate or limit the liability of officers for “any action by or in the right of the corporation.” Thus, claims may still be brought against officers by the corporation or derivatively by stockholders. These protections differ materially from the protections allowed for directors because corporations may exculpate directors against claims brought by the corporation or derivatively by stockholders.

The amendment does permit the elimination of liability for direct claims by stockholders (including class actions) against an officer. For purposes of the amended section 102(b)(7), an officer is limited to an officer of the corporation who, at the time of an act or omission as to which liability is asserted:

  1. Is or was the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer of the corporation.
  2. 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.
  3. Has, by written agreement with the corporation, consented to be identified as an officer for purposes of accepting service of process.

This amendment may be the result of a recent uptick in class action deal litigation involving officers of Delaware corporations. For example, in Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. Dec. 31, 2019), the Delaware Court of Chancery highlighted officer liability in the class action merger context in a case involving post-closing money damages for the sale of Fresh Market. The Court of Chancery dismissed duty of loyalty claims against the directors but allowed those claims to continue against Fresh Market’s general counsel and chief executive officer.