I think Gordon's got an excellent point. Ever since the Delaware supreme court held in Emerald Partners v. Berlin, 726 A.2d 1215, 1223-24 (Del. 1999), that a ? 102(b)(7) provision is an affirmative defense, thereby imposing on defendant directors the burden of proving that they are entitled to exculpation under the statute, a ? 102(b)(7) provision rarely entitles directors to a dismissal during the motions stage of the case. The legislative history of section 102(b)(7) is scant and thus does not allow confidence on this issue.If you are following the Ryan case, which I blogged about below, you will be interested to read the "Defendants' Memorandum of Law in Support of Their Application for Certification of Interlocutory Appeal and to Stay Proceedings Pending Appeal." (Whew!) The gist of the appeal is that Vice-Chancellor Noble's decision would "eviscerate" section 102(b)(7) because it conflates the duty of care and the duty of good faith. The crux of the argument is that the defendants were "properly motivated, unconflicted and independent directors." As Meatloaf reminded us, two out of three ain't bad.
Vice-Chancellor Noble's opinion acknowledges that the defendants were unconflicted and independent, so he ends up focusing on motivation: "the Board?s failure to engage in a more proactive sale process may constitute a breach of the good faith component of the duty of loyalty as taught in Stone v. Ritter." ...
In the final analysis, however, the defendants have a bigger problem: nothing in Vice-Chancellor Noble's opinion would "eviscerate" 102(b)(7), as claimed by the defendants, because the Lyondell directors can still get the benefit of the exculpation provision if they are found after trial to have breached only their duty of care. The problem with the decision is that they can't get a lawsuit like this dismissed. But I don't see how you can pin that on Vice-Chancellor Noble. He is just taking direction from the Delaware Supreme Court.
Regardless of whose fault the present state of the law is, however, the present state is most unfortunate. Because 102(b)(7) cannot reliably be invoked to result in a dismissal at the motions stage, plaintiffs will usually get to discovery, which some might call a fishing expedition, and the settlement value of shareholder claims will go up.
The time has come for the Delaware legislature to revisit the issues raised by section 102(b)(7). First, there is the broad issue of freedom of contract. Delaware has been a leader in allowing contractual limitations on fiduciary duty liability in public uncorporations such as LLCs. The legislature needs to start thinking about the extent to which those legal developments should carry over into the corporation law. Section 102(b)(7) would be a great place to start. In my view, it should be permissible for the articles to create a liability limitation provision that would entitle directors to get the case dismissed at the motions stage absent particularized allegations about a very narrow range of misconduct.
Second, although certainty and predictability long have been hallmarks of Delaware law, section 102(b)(7) was a botch job from the outset that has been made worse through judicial interpretation. It now wholly lacks certainy. When revisiting the issue, the Delaware legislature should bear in mind the considerations identified by the comments to the equivalent Model Business Corporation Act provision:
A coherent liability limitation provision would make clear whether it is intended to come into play pre- or post-trial, and identify with specificity the kinds of director misconduct for which monetary liability may still be recovered.As important as validating the shareholders' right to determine for themselves the extent of the directors' liability is stating the limits of this right in terms promoting a clear understanding of the conduct which is and which is not included in the limitation of liability. Terms such as ?duty of loyalty,? ?good faith,? ?bad faith,? and ?recklessness? seem no more precise than (and therefore as potentially expansive as) ?gross negligence.? All of these formulations are characterizations of conduct rather than definitions of it. Characterizations by nature tend to be more elastic than definitions.
Directors should be afforded reasonable predictability; they are entitled to know whether a contemplated course of action will result in personal liability for money damages. Limits on their exculpation from liability are appropriate but should be expressed in terms that minimize the opportunity for after-the-fact second-guessing.
As to the latter issue, Delaware could do worse than tracking MBCA section 2.02(b)(4)'s operative language:
The 4 exceptions to the prohibition of money damages here are far more precisely delineated than the vague and repetitive language of 102(b)(7).The articles of incorporation may set forth: (2) provisions not inconsistent with law regarding: (4) a provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director, except liability for (A) the amount of a financial benefit received by a director to which he is not entitled; (B) an intentional infliction of harm on the corporation or the shareholders; (C) a violation of section 8.33; or (D) an intentional violation of criminal law.
