Recent changes to Section 102(b)(7) of the Delaware General Corporation Law have enabled corporations to include a provision exonerating certain officers from personal liability for breaches of fiduciary duty of care. This is an important development for companies organized in Delaware as well as public entities incorporated there.
For years, exculpation provisions were reserved exclusively for directors–not officers. This distinction has persisted despite the fact that directors often perform similar duties to officers and can be sued in similar instances.
Exculpation of Fiduciary Duties
An LLC’s managers owe fiduciary duties to both their members and the corporation. Delaware law permits an operating agreement to reduce or eliminate these responsibilities, but the charter documents must be clear and unambiguous for it to take effect.
Recently, Chancellor Strine of Delaware reiterated that managers of Delaware LLCs still owe fiduciary duties unless their agreement specifically prohibits them. His opinion in Auriga Capital provided the most thorough explanation to date as to why this is true.
However, the court also held that even if an operating agreement restricts or eliminates fiduciary duty obligations, it does not suffice to disprove a claim of breach by a manager. The underlying act or transaction must still be conducted fairly and justly for all members of an LLC.
Exculpation of Personal Liability
LLCs provide their members with personal liability protection, few reporting and record-keeping requirements, and a lower level of self-employment tax than C-corporations. Nonetheless, they must register with the state and pay the state business license fee.
Delaware’s long-arm statute permits corporations to include an exculpation provision in their certificate of incorporation or an amendment thereto that eliminates or limits personal liability for money damages arising from breaches of fiduciary duty of care. Such provisions can shield such officers as president, chief executive officer, chief operating officer, financial officer, legal officer, controller treasurer or accounting officer of a public corporation (or for private companies the named executive officers listed on SEC filings) as well as any officer who has agreed to being identified for service of process.
Exonerating corporate officers may be a beneficial option for both new and existing Delaware companies. Public corporations require amending their certificate of incorporation in order to take effect, however.
Exculpation of Damages
For over three and a half decades, Delaware law has shielded directors from personal liability for damages caused by breaches of their fiduciary duty of care. Unfortunately, this protection did not extend to officers as well.
Recently, however, the legislature amended Section 102(b) (7) of the General Corporation Law to permit corporations to include an exculpation clause in their certificate of incorporation that shields officers from personal liability for breaches of fiduciary duty in actions brought against them other than those brought by or on behalf of the corporation.
This change offers corporate officers a means to address the growing concern over officer liability. Furthermore, it will help reduce some of the existing disparity between officers and directors in Delaware legal jurisprudence.
Although the new exculpation provision will not apply to all corporations, it is essential for any corporation to consider whether they should include a provision exempting officers from personal liability in their certificate of incorporation. Doing so will guarantee consistency between officers and directors of the company as well as address rising litigation and insurance costs.
Exculpation of Expenses
Limited liability companies (LLCs), although relatively new to the world of business entities, have quickly become the go-to choice for millions of American entrepreneurs. Not only do LLCs provide some tax benefits of a corporation and flexibility of a partnership or sole proprietorship structure, but they also give owners additional legal protections not available with other forms of entity.
Under Delaware law, directors and officers owe fiduciary duties of care and loyalty to their corporations. Therefore, Delaware corporations can include in their certificates of incorporation a maximum strength exculpation clause for directors that eliminates personal liability for monetary damages for breaches of this duty.
Officers of corporations are protected from liability, with rights to advancement of expenses and indemnification when threatened or made parties to various proceedings. Furthermore, Delaware corporations may purchase directors’ and officers’ liability insurance for additional protection.
