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For more than thirty-five years, Delaware law, pursuant to Section 102(b)(7) of the Delaware General Corporation Act, has allowed Delaware corporations to exculpate their directors...
For more than thirty-five years, Delaware law, pursuant to
Section 102(b)(7) of the Delaware General Corporation Act (DGCL),
has allowed Delaware corporations to exculpate their directors from
personal liability for damages resulting from such directors'
violations of their duties of care. It has become commonplace for
the certificates of incorporation of Delaware corporations to
expressly limit director liability based on Section 102(b)(7).
Until this past year, such protection was limited to directors
of Delaware corporations. In August 2022, however, Delaware amended
Section 102(b)(7) of the Delaware General Corporation Law (DGCL) to
provide that Delaware corporations may extend limited liability
protection to their senior officers, in certain circumstances. The
change has been embraced by Delaware corporations. It is quickly
becoming standard practice for Delaware corporations to amend their
governing documents to include express exculpation of both
directors and senior officers. However, the scope of the
exculpation allowed by Section 102(b)(7) has its limits, which are
worth reflecting on one year after the amendment.
Specifically, it is not clear where the line between
"senior" and "non-senior officers" should be
drawn for purposes of Section 102(b)(7). C-suite officers,
presidents, controllers, treasurers, the corporation's most
highly compensated executive officers, and certain officers who
consent to service of process should clearly fall within the
"senior" classification. On the other hand, we recommend
that any officers who do not clearly fall within these categories
inquire with their corporation's internal or external legal
counsel to determine whether they may be able to participate in the
protections permitted by Section 102(b)(7).
Additionally, while Section 102(b)(7) allows for exculpation
from certain breaches of fiduciary duty by such senior officers, as
with directors, Section 102(b)(7) does not protect senior officers
from personal liability for their breaches of the duty of loyalty,
acts or omissions not in good faith, transactions from which they
derive an improper personal benefit, or acts or omissions occurring
prior to the date that the provision in the certificate of
incorporation exculpating such senior officers becomes
effective.
Delaware corporations should remain mindful of these limitations
to the amendment. Furthermore, to the extent Delaware corporations
are interested in providing their senior officers with such
protections, they should amend their governance documents, if they
have not already, to expressly state that their senior officers
will be entitled to the protections of Section 102(b)(7). Only
directors and senior officers of Delaware corporations whose
certificates of incorporation include such language are eligible to
rely upon this protection.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
