Delaware provides exculpation protection to “officers”

Exculpation YouTube Thumbnail

Here’s an excerpt from this blog by Gunster’s Bob Lamm and Robert White:

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.

And here’s their bottom line:

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.