Elimination Of The Duty Of Care In Delaware? Statutory Exculpation Of Officers: Recent Amendment To Section 102(B)(7) Of The Delaware General Corporation Law

• Published date: 22 September 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers
• Law Firm: Mintz
• Author: Mr Nicholas V. Perricone

Introduction

Effective as of August 1, 2022, the Delaware legislature adopted an amendment to Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") that 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").¹ Prior to such amendment and since 1986, Section 102(b)(7) of the DGCL was only available to exculpate directors of a corporation from personal liability for the breach of the fiduciary duty of care, but remained unavailable to corporate officers.² The Delaware General Assembly originally enacted Section 102(b)(7) to address a perceived crisis in the market for directors' and officers' liability insurance.³⁴ This article will address (1) key considerations concerning newly amended Section 102(b)(7), including, among other things, the limitations placed on exculpation, the types of claims subject to exculpation, the remedies that remain available with respect to exculpatory claims, the types of corporate officers to which exculpation may apply, and temporal requirements concerning the effectiveness of an exculpation provision in a corporation's certificate of incorporation, and (2) a model exculpation provision, including a discussion of its common features and the various terms and conditions to consider when drafting such a provision.

Key Considerations Concerning Newly Amended Section 102(B)(7)

A Delaware corporation itself does not owe fiduciary duties to its stockholders and cannot be sued by its stockholders for breach.⁵ Fiduciary duties are owed by the directors and officers to the corporation and its stockholders, and, therefore, they are personally liable for any such breach.⁶ Section 102(b)(7) of the DGCL allows a Delaware corporation to include an exculpatory provision in its certificate of incorporation that eliminates or limits the personal liability of an officer to the corporation or its stockholders for monetary damages for a breach of fiduciary duty, subject to the following conditions and limitations:

1. Only Applicable to the Fiduciary Duty of Care. Officers of Delaware corporations owe a fiduciary duty of care, and such duty is the same as that owed by directors of a Delaware corporation.⁷ If officers' actions qualify for the presumptions of the business judgment rule, the standard for a finding of a breach of the duty of care is gross negligence.⁸ Therefore, Delaware courts have held that, in essence, Section 102(b)(7) (given the other limitations on exculpation set forth in subsections (i), (ii) and, (iv) of Section 102(b)(7) discussed below), permits a corporation to protect its officers for duty of care violations only, that is, liability for gross negligence.⁹

2. Not Applicable to the Fiduciary Duty of Loyalty (including Bad Faith Conduct and Obtaining an Improper Personal Benefit). Section 102(b)(7)(i) provides that exculpation provisions may not apply to "[an] officer for any breach of . . . the duty of loyalty." Generally speaking, the duty of loyalty requires officers to act in good faith for the benefit of the corporation and its stockholders, not for their own personal gain.¹⁰ Further, the duty of loyalty requires officers to refrain from engaging in conduct that could harm the corporation and its stockholders, so that the duty may be applicable to conduct that involves a conflict of interest or involves bad faith on the part of an officer.¹¹ For that reason (and in support and augmentation of the exclusion of duty of loyalty claims from exculpation pursuant to subsection (i) of Section 102(b)(7)), subsections (ii) and (iv) of Section 102(b)(7) also prohibit exculpation provisions from applying to "[an] officer for acts or omissions not in good faith" and to "[an] officer for any transaction from which . . . the officer derived an improper personal benefit," respectively.¹² Thus, officers may still be found personally liable for monetary damages for breach of the fiduciary duty of loyalty.

3. Not Applicable to Intentional Misconduct or Knowing Violation of Law. Section 102(b)(7)(ii) provides that exculpation provisions may not eliminate or limit the liability of "[an] officer for acts or omissions . . . which involve intentional misconduct or knowing violation of law." These categories of exemptions attempt to distinguish between wrongful conduct that involves officer "intent" and conduct that is the result of an officer's lack of due care.

4. Only Eliminates or Limits Monetary Damages (not Equitable Relief or Related Claims). The plain language of Section 102(b)(7) makes it clear that the statute applies to the elimination of an officer's monetary liability only,¹³ and does not exculpate the underlying breach of the fiduciary duty. Therefore, under Delaware law, officers continue to be subject to the fiduciary duty of care and an officer's conduct is still subject to equitable remedies, including rescissory and injunctive relief.¹⁴ As a...