Delaware recently updated its corporate law to permit corporations to include provisions in their certificates of incorporation that eliminate personal liability of officers for breaches of fiduciary duty with financial damages, according to McDonald Hopkins attorneys. They discuss this significant new development.
Directors and officers owe fiduciary duties of care and loyalty to their corporations and stockholders, which can have serious ramifications should there be any disputes between them. How these obligations are interpreted could have serious ramifications.
Limits on Exculpation
For 35 years, Delaware law allowed corporations to protect directors from personal financial damages for breaches of fiduciary duties by including exculpation provisions in their charters. But such protection was only extended to directors; officers remained vulnerable against lawsuits alleging breaches of duty of care that were not covered under this old exculpation regime.
On August 1, 2022, Delaware law was amended to permit Delaware corporations to include exculpation provisions in their charters that protect officers from liability resulting from claims alleging breaches of duty of loyalty (though such claims would remain excluded by this change). Importantly, however, this amendment did not limit any actions by or in the right of either corporation or stockholders; hence maintaining traditional oversight and liability at Delaware corporations.
While this shift in law is welcome, there remain certain limits to officer exculpation which need to be considered. We will explore this topic further in a future article.
Exculpation of Managers and Controlling Members
Delaware company directors owe both loyalty and care to both their corporation and stockholders, respectively. Claims against directors for breaches of these duties have historically been dismissed with early-stage motions to dismiss, which allows quick and cost-efficient resolution without protracted litigation or settlement costs.
Now, Delaware corporations may include an exculpation clause in their certificate of incorporation to protect senior managers and controlling members from financial damages for breaches of fiduciary duties, but its precise scope remains undetermined. Unlike provisions in the Delaware General Corporation Law (DGCL) that permit exculpation for directors, such provisions don’t preclude actions brought directly against officers despite protection by such clauses – stockholders could still file direct suits against such officers in court.
McDonald Hopkins’ Delaware attorneys can assist clients in understanding these developments. Furthermore, while DGCL amendments permit contractual standards that approximate common law fiduciary duties to some degree, such as incentivizing (or not discouraging) risk-taking by members and managers while simultaneously providing means for policing and enforcing certain forms of misconduct.
Exculpation of Directors
Delaware Law now permits corporations to include in their articles of incorporation a provision exonerating corporate officers from personal monetary liability for breach of fiduciary duty claims, which corrects an imbalance created by plaintiffs’ lawyers who exploited frivolous litigation against corporate officers to increase settlement values of these claims. D&O insurance provides some protection from this form of financial risk but cannot fully address the time commitment associated with these legal suits.
The new provisions allow corporations to shield officers from claims based on similar alleged breaches of duty that can be brought against directors, while not restricting actions taken in or on behalf of the corporation (including derivative litigation subject to demand requirements). Publicly traded companies may implement this protection through a board-sponsored proposal submitted for stockholder approval at an annual meeting; hence this must be included as part of an annual planning process.
Exculpation of Officers
Due to decisions by the Delaware Supreme Court in Norton and Brinckerhoff, corporations have long been able to exonerate directors from liability for breaches of fiduciary duty. Now, with amendments to DGCL Section 102(b)(7), corporations may also exonerate officers.
McDonald Hopkins attorneys Jory Berg, Marc Carmel and Christal Contini explain a new law which will go into effect August 1, 2022, which permits corporations to include in their certificate of incorporation a provision that limits or eliminates personal liability of officers for breach of fiduciary duty claims by either their stockholders or themselves for damages related to breach. This provision offers protection to chief executive officers, presidents, chief financial officers, chief legal officers, controllers or treasurers occupying similar roles within a corporation.
Companies that adopt this exemption and indemnify their officers can expect reduced insurance premiums and settlement costs over time, so we advise discussing this matter with your corporate counsel.
