Proposed Statutory Officer Exculpation in Delaware
As we transition into spring, the minds of many corporate attorneys return to the annual updates proposed to the Delaware General Corporate Law (DGCL). If the changes proposed by the Council of Corporation Law Section of the Delaware State Bar Association are adopted (as they usually are), they will become effective on August 1, 2022. A few of this year’s proposed changes are of particular significance to officers of Delaware corporations.
As currently enacted, Section 102(b)(7) of the DGCL allows for a corporation to adopt a provision in its charter providing for exculpating its directors from monetary damages that would be due for a breach of their duty of care. Originally adopted in 1986 as a response to skyrocketing D&O insurance premiums after the case of Smith v. Van Gorkom (Jan. 29, 1985), the law excluded any reference to officers of a corporation. The proposed amendments would allow corporations to provide similar protection to officers of the corporation as well. This is significant for officers of Delaware corporations, as they were explicitly determined by the Delaware Supreme Court in Gantler v. Stevens (Jan. 27, 2009) to hold duties of care and loyalty, much like directors. Until these changes are enacted and effected, officers are not statutorily entitled to the same defenses as those available to directors. This change may be partially explained by the recent increases in D&O insurance premiums, with prices surging between 30%-100% in markets across the globe in 2021.
There are some caveats to the proposed amendment which bear examination. For instance: (i) not all officers of the corporation are includable under the proposed amendment, only those covered by Section 3114(b) of the DGCL (discussed below); and, (ii) officers may not eliminate or limit officer liability for derivative claims brought by or on behalf of the corporation. These carve-outs provide some significant limitations on the indemnification that may be provided by a company. Section 3114(b) officers are limited to:
- The president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer of the corporation at any time during the course of the wrongful conduct alleged in the action or proceeding.
- An officer identified in the corporation’s public filings with the SEC because the person is or was one of the most highly compensated executive officers at any time during the course of conduct alleged in the action or proceeding to be wrongful.
- An officer who has, by written agreement, consented to accept service of process on the corporation’s registered agent for any action against the corporation for which the officer is a necessary party.
This means that standard “officers” or “secretaries”, even those with signing authority for the corporation, are not subject to exculpation for money damages under the proposed changes. To the second point, with the rise of SPACs and activist shareholders, shareholders have increasingly looked to hold officers accountable for what they deem as breaches of the duty of care. In actions brought on behalf of the corporation, officers would be ineligible for the protections that can be afforded to directors against these claims. To plead a breach of the duty of care, a plaintiff is only required to allege that the subject was grossly negligent- a lower bar than under the duty of loyalty, which requires a showing of self-interest or bad faith. The proposed language still allows for an avenue for directors or activist shareholders to hold accountable officers who are responsible for the day-to-day management of a corporation.
The proposed updates to the DGCL regarding officer exculpation significantly level the landscape of authority of corporations to provide protections to officers in line with directors. While the updates might work to deter the trend in “kitchen sink” naming of officers in litigation, the proposed amendments still leave avenues for directors and shareholders alike to take action against executive officers for grossly negligent acts, or acts that shareholders claim damage them directly.