Take Note: Potentially Critical Amendment to DGCL §102(b)(7) Expanding Exculpation to Corporate Officers Under Consideration in Delaware

Types : Alerts

An important amendment to Section 102(b)(7) of the Delaware General Corporation Law currently is under consideration.  All who are in any way connected to the governance of a Delaware corporation should pay very close attention to this development, as immediate action (by way of a charter amendment) may be appropriate if the amendment ultimately is approved.

What is “Section 102(b)(7)”?  For the unanointed, Section 102(b)(7) (8 Del. C. § 102(b)(7)) authorizes (but does not mandate) the inclusion of a provision in the corporation’s certificate of incorporation (or “charter”) exculpating directors from personal liability for money damages associated with breaches of the duty of care.[1]  Exculpation does not extend to (i) breaches of the duty of loyalty; (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; (iii) unlawful dividends or stock repurchases under Section 174; and (iv) any transaction from which a director derives an improper personal benefit.  In short, a Section 102(b)(7) provision “can exculpate directors from monetary liability for a breach of the duty of care, but not for conduct that is not in good faith or a breach of the duty of loyalty.”

Of particular importance here, Section 102(b)(7) currently extends exculpation only to directors.  It does not extend protection to corporate officers.

The proposed amendment:  A Section 102(b)(7) charter exculpatory provision is more than merely window dressing:  102(b)(7) in fact has resulted in the dismissal of shareholder claims asserted against Delaware directors, and presumably has given pause to those considering litigation based on allegations that at base quibble with the level of care exercised by a board in connection with a particular course of action.  The amendment under consideration likewise is significant:  If approved, it would extend Section 102(b)(7) exculpation to officers as well as directors.[2]

Why close attention should be paid to this potential amendment:  Section 102(b)(7) does not automatically provide exculpation; rather, it authorizes (at the corporations’s election) the inclusion of an exculpatory provision in the company’s charter.  In other words, Section 102(b)(7) is not self-effectuating.  If extended to officers, and if a company wishes to avail itself of this new protection, the company’s charter must be amended.

For this reason, those involved with corporate governance, be they legal counsel, directors or officers, should pay close attention to how this important potential amendment plays out.

________________________

[1]   Section 102(b)(7) was enacted by the Delaware General Assembly in 1986 in response to what then was perceived to be two alarming prospects: (1) a decrease in the pool of qualified individuals willing to serve on the boards of Delaware corporations and (2) a potentially debilitating increase in the cost of D&O liability insurance.  These concerns were catalyzed by the Delaware Supreme Court’s decision in Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) (imposing millions of dollars of personal liability on directors for conduct found to be grossly negligent).

[2]   The limitations of 102(b)(7) vis-à-vis officers versus directors were driven home in a fairly recent decision by the Delaware Court of Chancery. Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 787 (Del. Ch. 2016).  In Amalgamated, a trustee representing stockholders of Yahoo! asserted claims against the company’s chief executive officer, as well as the board of directors, for, inter alia, breach of fiduciary duty.  Vice Chancellor Laster acknowledged Section 102(b)(7)’s plain exculpatory function as it concerns certain duties of directors, while letting the trustee’s claim proceed against the officer, unimpaired by Section 102(b)(7). Id. (“Section 102(b)(7) does not authorize exculpation for officers.”).