Effective August 1, 2022, amended Section 102(b)(7) of the Delaware General Corporation Law (“DGCL”) permits a Delaware corporation to implement a provision in its certificate of incorporation to eliminate or limit the personal liability of certain officers of the corporation for monetary damages to the corporation or its stockholders for the breach of the fiduciary duty of care (an “exculpation provision”). Prior to this amendment, Delaware corporations were only authorized to exculpate directors from personal liability for the breach of the fiduciary duty of care.
This amendment to Section 102(b)(7) of the DGCL is not self-executing nor retroactive. Therefore, a Delaware corporation must take affirmative action and adopt an exculpation provision in its certificate of incorporation or an amendment to provide for the limitation of liability. A Delaware corporation already in existence should consider amending its certificate of incorporation to expressly include exculpatory protections for officers, which may require both board and stockholder approval depending upon its governance documents. Any amendment will have a prospective effect only and shall not affect acts or omissions occurring before the effectiveness of the exculpatory provision.
However, the protection is not available to all officers. Title 10 Section 3114(b) defines an “officer” as the President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Legal Officer, Controller, Treasurer or Chief Accounting Officer, a person identified in the corporation’s SEC filing as one of the most highly compensated executive officers, or a person who agreed to be identified as an officer for purposes of section 3114(b).
Furthermore, the protections available to directors and officers under Section 102(b)(7) are not identical. The most crucial distinction is that corporations may not eliminate or limit liability of officers for claims brought by or on behalf of the corporation, including shareholder derivative claims. This structure allows the board to retain its authority to assert the company’s claims against officers who breach their duty of care. Additionally, an exculpatory provision cannot eliminate or limit the liability of an officer for:
1. any breach of the officer’s duty of loyalty to the corporation or its stockholders;
2. acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or
3. any transaction from which the officer derived an improper personal benefit.
While the protections are limited and not as broad as those provided for directors, the amendment to Section 102(b)(7) of the DGCL partially addresses the inconsistency in the treatment of directors and officers, both of whom have fiduciary duties.
Contact us today for personalized legal advice on this matter for your specific company.
