Since the 1980s, Section 102(b)(7) of the Delaware General Corporation Law (the “DGCL”) has enabled Delaware corporations to provide exculpation from breaches of the fiduciary duty of care to directors – but not officers – in certain circumstances. Officers can now come in from the cold, as Section 102(b)(7) has now been amended to provide similar protection for certain officers. Specifically, the amendments, which became effective on August 1, 2022, allow Delaware corporations to provide exculpation from breaches of the duty of care to specified officers in certain circumstances. The new provisions allow a qualifying officer to be exculpated from such claims made directly by stockholders but do not provide relief in connection with other fiduciary duties, derivative actions, or actions brought by a corporation’s board against its officers.
We view this amendment as a major forward step. If your company (or any subsidiary) is a Delaware corporation, you should seriously consider amending its certificate of incorporation to provide this protection. And if you are an officer of a Delaware corporation, you should make sure your board of directors is aware that this protection is available and urge your board to take the steps needed to provide the protection.
What officers are covered?
Amended Section 102(b)(7) applies to a person who at the time of the alleged breach is deemed to have consented to service by the delivery of process to the registered agent of the corporation under §3114(b) of Title 10 of the Delaware Code (Delaware’s “long arm” statute). This effectively covers (a) the corporation’s president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer; (b) any individual identified in a public filing as one of the most highly compensated officers of the corporation; and (c) any individual who, by written agreement with the corporation, has consented to be identified as an officer for purposes of Section 3114(b) of the Delaware Code.
What has to be done to obtain this protection?
This new protection for officers is not automatic. As was the case when Section 102(b)(7) was first enacted, Delaware corporations must make an appropriate amendment to the certificate of incorporation, and the amendment will require stockholder approval. Corporations did not encounter much difficulty obtaining stockholder approval in the 1980s, and while the influence of empowered investors and proxy advisory firms has changed since then, we believe that stockholders will generally support this amendment due to the benefits that will accrue to the corporation and its officers – possibly including reductions in the premiums being paid for D&O liability insurance. The wording of the amendment should be relatively straightforward in most cases.
A needed change
Various players in the Delaware corporation space have long supported this officer liability protection. This is primarily because prior law sometimes allowed inconsistent and unfair results, particularly in the mergers and acquisitions context. As a general example, a stockholder plaintiff who believed that a duty of care violation had occurred could sue the company’s board and its officers, but in most cases the directors could avoid the effects of this component of the legal action based on the exculpation available under Section 102(b)(7). The corporation’s officers would then be left to face the negative effects of the alleged duty of care violation. This sometimes led to officers incurring litigation costs while directors avoided such costs because of the protection available to them under Section 102(b)(7). This was particularly troublesome where an individual was both a director and an officer, as she could be exculpated as a director but held liable as an officer. These new additions to Section 102(b)(7) should largely correct this imbalance.
We believe that the additional protection now available under amended Section 102(b)(7) will be advantageous to most Delaware corporations. Most Delaware corporations have long since taken advantage of the similar protection previously available to directors under Section 102(b)(7), and it is difficult to see why similar protection now available to certain officers should not be put in place.
Please direct any questions or observations to Bob Lamm or Bob White. We will be happy to provide information and to work with you in evaluating these amendments and taking the actions needed to adopt them.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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