Should Delaware Corporate Officers Take Advantage Of "Shield" Amendment To DGCL Section 102(B)(7) Allowing For Limited Exculpation Of Officers?

• Published date: 29 December 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers
• Law Firm: Scarinci Hollenbeck LLC
• Author: Paul Lieberman

Should Delaware Corporate Officers Take Advantage of "Shield" Amendment to DGCL Section 102(b)(7)?

When is it not a good time for corporations to conduct an annual review of their governing documents to determine if any changes are needed? Entering 2023, Delaware corporations should consider amending their certificates of incorporation to exculpate officers from personal liability for monetary damages associated with breaches of the duty of care prong of fiduciary duty.¹

Let's Review Basics of Fiduciary Duties Owed to a Delaware Corporation

Members of a corporation's board of directors, as well as its corporate officers, owe fiduciary duties to the corporation. There are two separate prongs of fiduciary duty: a duty of loyalty and a duty of care.

Violating fiduciary duties can result in significant personal liability, which can make business people reluctant to serve as directors and officers. As a result, many states have laws in place that allow corporations to shield their officers and directors from potential liability. For more than three decades, Delaware has authorized corporations to exculpate directors but not officers from personal liability for monetary damages associated with breaches of the duty of care. Because officers were not entitled to such limited protections enjoyed by directors, they were often targeted in litigation. See, Amalgamated Bank v. Yahoo! Inc., 132 A 3d 752, 787 (Del. Ch. 2016).

Delaware's New Law Regarding Exculpation of Officers

Delaware amended its General Corporation Law to close the "loophole". Effective August 1, 2022, Section 102(b)(7) of the Delaware General Corporation Law provides that corporations may include in their certificates of incorporation, "[a] provision eliminating or limiting the personal liability of a director or officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer." The amendment is not self-effectuating, it must be elected by the Corporation through a charter amendment. Stockholders must approve amendments of certificates of incorporation.

Extending the same exculpatory protection that directors receive to certain officers, includes - President, CEO, COO, CFO, CLO, controller, treasurer or CAO, plus other individuals that public filings identify as the Company's "most highly compensated officers".

Notably, Delaware's officer exculpation provisions only cover breaches of the duty of care and do not apply to an officer's breach of...