Delaware General Corporate Law Now Protects Corporate Officers

Delaware has long allowed corporations to limit or eliminate directors’ monetary liability for breaches of the fiduciary duty of care. However, the same protections have not been granted to the directors of a corporation. Effective August 1, 2022, the Delaware General Corporations Act (the “DGCL”) was amended to address this discrepancy.

Section 102(b)(7) of the DGCL has been revised to permit an exclusion clause in a corporation’s charter that eliminates or limits the personal liability of the corporation’s officers for monetary damages. It is important to note that this change in law limits the ability of shareholders to bring an action directly against corporate officers, including through a class action.

As with administrators, the limitation is not absolute. A permitted disclaimer may apply to claims for breach of fiduciary duty of care by an officer, but may not extend to claims for breach of duty of loyalty, willful misconduct, or knowing violation of law, or transactions where an officer obtains a personal benefit. A further exclusion from the limitation permitted for officers, which does not apply to directors, relates to actions “by or on behalf of the company”. Claims brought against an officer by the company itself or by the board of directors, as well as derivative claims, are not restricted by this amended rule. Indeed, shareholders who wish to bring an action against an executive in their personal capacity must first ask the board of directors of the company to bring an action on behalf of the shareholder. These shareholder claims would be prohibited from proceeding, except in rare cases where the request to the board would be rendered futile because a majority of the directors would be compromised with respect to the officer in question.

This updated rule does not apply on its own, which means that a company must amend its certificate of incorporation to include this provision if it wishes. Typically, this will require the consent of the company’s board of directors and shareholders.

Not all agents are eligible for such treatment. Instead, the following executives may be covered by the exculpation clause: President, CEO, COO, Chief Financial Officer, Chief Legal Officer, Controller, Treasurer, Chief Accounting Officer, the company’s top earners, as identified in SEC filings, and other executives. who have consented to be identified as “named officers” in the company’s recent filings with the SEC.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC All rights reserved.National Law Review, Volume XII, Number 262

Comments are closed.