New Delaware exculpation law provides protection for officers
In the article below, McDonald Hopkins attorneys Jory Berg, Marc Carmel, and Christal Contini address the recently amended Delaware General Corporation Law, which now permits corporations to exculpate their officers from personal liability from monetary damages. Previously, Delaware law only provided for director exculpation. The recent amendments permit important liability protections that corporate officers should be aware of.
As part of their roles working for corporations, directors and officers owe certain duties to the corporation and its equity holders. Specifically, directors and officers owe fiduciary duties including the duty of care and the duty of loyalty. The duty of loyalty requires directors and officers to put the best interests of the corporation and shareholders above their personal interests and to act in good faith. On the other hand, the duty of care requires directors and officers to make informed decisions.
While both directors and officers owe a duty of care, until recently, the consequences of a breach of this duty have greatly varied depending upon whether the accused individual was a director or officer and whether the corporation agreed to exculpate its directors.
Effective August 1, 2022, under the newly amended section of the Delaware General Corporation Law (DGCL), corporations can now protect certain officers from personal liability for claims related to the breach of the duty of care. Specifically, Section 102(b)(7) of the DGCL permits corporations to include in their certificates of incorporation, “[an exculpation] provision eliminating or limiting the personal liability of a director or officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer” (emphasis added).
To “exculpate” means to “clear from alleged fault or guilt.” Exculpation provisions in a corporation’s charter provide that directors, and, as of August 1, 2022, officers, are not personally liable to a corporation or its equity holders for monetary damages for breaches of fiduciary duty, except under certain limited circumstances. This means that if a stockholder plaintiff attempts to assert a claim against an officer that is covered by the corporation’s exculpatory provision, the claim is subject to dismissal and the officer is, therefore, protected from being held personally liable. This also protects a corporation from being responsible for indemnifying its officers if the corporation provides that benefit.
To exculpate an officer, the corporation must take affirmative action by including in its certificate of incorporation a provision eliminating or limiting the personal liability of an officer to the corporation or its stockholders for monetary damages for a breach of fiduciary duty to the maximum extent permitted by law. Corporations formed on or after August 1, 2022, may include an officer exculpation provision in their certificate of incorporation when initially adopted, and corporations formed prior to August 1, 2022, must amend their certificate of incorporation to provide for such exculpation. Notably, the exculpation provision only provides protection from actions or inactions of officers that occur after the provision is included in the certificate of incorporation, so the sooner this change is made, the sooner officers receive its benefit.
Including an officer exculpation provision in a corporation’s certificate of incorporation reduces officers’ legal exposure and may help reduce corporate litigation costs. In addition, inclusion of such provision may help companies attain and retain talented businesspeople who may otherwise be hesitant to join without such protections. Officer exculpation provisions will also alleviate litigation issues involving individuals serving dual roles as both corporate directors and officers. In such instances, the provision will now protect these individuals in their capacity as officers.
McDonald Hopkins is continually following and synthesizing the latest corporate law issues, and we possess the expertise to guide our corporate clients through the unique operational issues our clients may face.
For guidance on implementing officer exculpation provisions and shielding officers from certain liabilities, please contact one of the McDonald Hopkins attorneys with whom you have a relationship (or reach out to Jory Berg, Marc Carmel, or Christal Contini). While this particular amendment only applies to corporations organized in Delaware, there may be other protections for entities organized in different states or in different forms (like limited liability companies), so reaching out to McDonald Hopkins may still be relevant even if your company is not organized as a Delaware corporation.