The amendments to Section 102(b)(7) of the Delaware General Corporation Law (“DGCL”) went into effect on August 1, 2022. As a result, corporations are now permitted to include an exculpation clause in their certificate of incorporation that eliminates or limits the personal liability of the corporation’s senior officers for monetary damages for breaches of fiduciary duty—such exculpation was previously only permitted for directors, not officers. Below, we walk through key aspects of the DGCL amendment and how corporations are reacting to it.
Which Officers Can Be Covered: Officers that may be covered by the exculpation clause include:
- Chief Executive Officer
- Chief Operating Officer
- Chief Financial Officer
- Chief Legal Officer
- Chief Accounting Officer
- The corporation’s “named executive officers” (generally, the three most highly compensated executive officers, aside from the principal executive and financial officers, as identified in SEC filings)
- Other persons who have consented in writing to be identified as officers for service of process
There Are Exclusions: The protection afforded by the amendment includes the same carve-outs as those applicable to directors (i.e., does not apply to breaches of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or knowing violations of the law, or transactions in which officers receive improper personal benefits) and one additional exclusion: the protection does not apply to liability for claims brought against officers by, or in the right of, the corporation (i.e., derivative actions).
Approach to Charter Amendments: According to a Deal Point Data study, only 16 of the Russell 3000/S&P 1500 companies have proposed charter amendments to include officer exculpation as of the time of this publication, and of those proposals, half have passed, two have failed, and six are pending. This low number of amendment proposals is unsurprising given the August timing of the DGCL amendment—a majority of companies have not yet had their regularly scheduled annual stockholders’ meeting, which would be the most likely time that such a proposal would be put to a vote. It is also notable that ISS and Glass Lewis’ 2023 proxy voting guidelines were not yet in effect with respect to the proposals that have already gone to a stockholder vote to date. For companies considering the inclusion of such a charter amendment proposal in connection with their 2023 annual meeting, it is critical to understand the proxy advisory firms’ views—which, are not in agreement.
- ISS: Will recommend proposals providing for officer exculpation provisions in a company’s charter on a case-by-case basis, taking into account the stated rationale and other enumerated factors, such as the extent to which the proposal would:
- Eliminate officers’ liability for monetary damages for violating the duty of care and/or the duty of loyalty;
- Expand coverage beyond legal expenses to liability for acts that are more serious violations of fiduciary obligations than mere carelessness; and
- Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts for which the company was previously permitted (at the discretion of the board), but not required, to provide indemnification.
- Glass Lewis: Will evaluate proposals to adopt officer exculpation provisions in company charters on a case-by-case basis but will generally recommend against provisions that would eliminate monetary breaches of the duty of care for certain corporate officers unless there is a compelling rationale provided by the board of directors and the provisions are reasonable. No guidance on what would be considered “compelling” or “reasonable” was provided.
As companies venture to test the waters on officer exculpation charter amendments in the 2023 proxy season, we expect to get more clarity on how the proxy advisory firms are analyzing and making recommendations on these proposals.