There are a number of pending amendments to the Delaware General Corporation Law. Perhaps the most interesting of which is the expansion of exculpation to officers, albeit in a rather limited way. Sadden Apps summarizes the bill:
Since its adoption in 1986, Section 102(b)(7) has authorized a corporation’s certificate of incorporation to contain an exculpation clause that limits or eliminates the personal liability of its directors for monetary damages arising out of breaches of the fiduciary duty of care. The protection from monetary liability afforded by Section 102(b)(7) historically has been expressly limited to directors, and not available for officers. In recent years, the prevalence of fiduciary duty claims against officers has increased significantly, particularly in the context of class action M&A litigation seeking monetary damages. In many instances, the same breach of fiduciary duty claims are brought against both directors and officers, and while directors are able to have such claims dismissed based on Section 102(b)(7) exculpation clauses, officers are not. In some circumstances, individuals that serve a dual role as both director and officer will have such claims dismissed in their capacity as a director based on a Section 102(b)(7) exculpation clause, but they will remain in the case and subject to liability in their capacity as an officer with respect to the very same underlying allegations.
The proposed amendments to Section 102(b)(7) seek to reduce (but do not eliminate) this imbalance in the treatment of directors and officers. Notably, the proposed amendments would authorize exculpation of officers only in connection with direct claims brought by stockholders, including class actions, but would not eliminate monetary liability of officers for breach of fiduciary duty arising out of claims brought by the corporation itself or for derivative claims brought by stockholders in the name of the corporation.
In addition, not all officers would be entitled to the protection of an exculpation clause. Rather, only the following senior officers may be entitled to the benefit of an exculpation clause: the CEO, president, CFO, COO, chief legal officer, controller, treasurer and chief accounting officer, as well as any other persons identified as “named executive officers” in the corporation’s most recent SEC filings. Moreover, the same exclusions from exculpation applicable to directors (i.e., liability arising out of a breach of the duty of loyalty, acts or omissions not in good faith, or involving intentional misconduct or knowing violation of law or transactions from which the director derives an improper personal benefit) also would apply to officers under the proposed amendments, other than the exclusion for liability for unlawful dividends, since only directors are authorized to declare and cause the corporation to pay dividends.
I assume that the bill is a response to Morrison v. Berry. In that case, the target company's defendant directors obtained dismissal of a class action seeking post-closing claims for money damages arising out of the sale of Fresh Market. The target had a 102(b)(7) exculpation clause, which precluded monetary liability for breach of the duty of care on the part of the directors. The court allowed care claims to go forward against the CEO and general counsel. Although I have not conducted a careful count, I have the strong impression that there has been an uptick in the number of deal-related class actions being brought against corporate officers. So I assume this amendment is motivated by a wish to preclude those claims.
It's not clear to me why the bill is limited to direct claims, given that directors also get protection in derivative claims. I assume the intent is to allow corporations to sue officers, but why allow shareholders to sue?
The unfortunate thing is that the legislature did not see fit to use this opportunity to correct the basic flaws with Section 102(b)(7). The exculpation statute has been aptly described as “an internally contradictory botch job.” Christopher M. Bruner, Good Faith, State of Mind, and the Outer Boundaries of Director Liability in Corporate Law, 41 Wake Forest L. Rev. 1131, 1155 (2006).
That the statute is intended to permit exculpation of care violations is obvious; care is not among the exceptions to exculpation. Beyond that, however, the relative meanings of, and interrelationship among, the various exceptions is far from clear--a problem that, given Delaware's influence in the field of corporate law, has propagated itself elsewhere. . . . Notably, as one Vice Chancellor would later put it, “its subparts all illustrate conduct that is disloyal,” as that term has traditionally been understood, rendering it difficult to ascribe distinct conceptual content to each of the exculpation exceptions. . . .
Neither the statute nor the legislative comment, however, offers any interpretive guidance with respect to the exceptions.
Failing to address these problems with the statute makes the proposed amendments a missed opportunity.
