- Delaware courts have held that officer exculpation amendments do not require a separate class vote. For corporations with multiple classes of stock, this provides certainty to those that have already adopted such amendments and a clear path for corporations that plan to propose them.
- The vast majority of public company proposals to adopt officer exculpation amendments have been successful; however, only a minority of Delaware S&P 500 companies have made such proposals.
- Proxy advisor guidance on officer exculpation amendments remains unchanged for 2024, with both ISS and Glass Lewis voting on a case-by-case basis. So far, negative recommendations do not seem to have had a noticeable impact on the passage of proposals.
As noted in our previous Legal Update, the August 2022 amendments to Section 102(b)(7) of the Delaware General Corporation Law (DGCL) permits a Delaware corporation to include an officer exculpation provision in its certificate of incorporation, providing officers protection similar to that previously only afforded to directors. Specifically, the provision allows corporations to eliminate or limit personal liability for monetary damages for breaches of the duty of care by certain senior officers of the corporation. Exculpation of officers is not permitted for breaches of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct, knowing violations of law, or transactions where the officer receives an improper personal benefit, or claims brought by or in the right of the corporation (derivative claims).
In order to provide for officer exculpation, a corporation must include an officer exculpation provision in its certificate of incorporation. For existing corporations, amending the certificate of incorporation to provide for officer exculpation requires board and stockholder approval. Below we discuss recent developments affecting corporations that are seeking to adopt these amendments.
No Separate Class Vote for Officer Exculpation Amendments
The Delaware Supreme Court in In re Fox Corporation/Snap Inc.1 affirmed that certificate of incorporation amendments to adopt an officer exculpation provision generally do not require a separate class vote of the stockholders. This holding will allow Delaware corporations with multiple classes of stockholders to more easily adopt officer exculpation provisions and other amendments that do not affect rights specific to a class of stock.
Each of Fox Corporation and Snap Inc. had classes of voting and non-voting common stock, and both corporations approved officer exculpation amendments without a separate class vote. The non-voting stockholders of both Fox and Snap filed class action complaints, claiming that they were entitled to vote on the amendments separately as a class under DGCL Section 242(b)(2), which requires a class vote if an amendment would “alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.” The stockholders argued that “powers” should be interpreted to refer to fundamental powers of stock ownership, including the ability to sue officers for duty of care violations. They reasoned that the officer exculpation amendment would limit the power of non-voting classes of stock to sue officers and therefore should require a separate class vote under Section 242(b)(2). The Court of Chancery acknowledged the plaintiffs’ “plain-meaning argument,” but ultimately rejected their analysis of the DGCL and related cases, granting summary judgment in favor of Fox and Snap.
On appeal, the Supreme Court affirmed the Court of Chancery’s ruling. It noted that although the terms “powers,” “preferences,” and “special rights” are not defined, an examination of the relevant DGCL provisions together shows that Section 242(b)(2) is intended as a safeguard to protect the powers, preferences and special rights of stock that are authorized by the DGCL to be expressed in a corporation’s charter and is not a broad grant of the right to vote on any amendment affecting any attribute of stock ownership. In other words, “the ability to sue directors or officers for duty of care violations is an attribute of the Companies’ stock, but not a power, preference, or a special right of the [non-voting] common stock.”
The court held that a charter amendment exculpating corporate officers for breaches of their duty of care does not require a separate class vote. For corporations with multiple classes of stock, the Court’s decision removes uncertainty about the validity of officer exculpation amendments that already have been adopted and offers a clear path for corporations that plan to propose such amendments.
Stockholder Approval of Officer Exculpation Amendments
Delaware public companies began seeking stockholder approval for officer exculpation charter amendments soon after the DGCL was amended in August 2022. Tracking data available from Deal Point Data (“DPD”) report that, as of the end of January 2024, 271 Delaware public companies included in any of the NASDAQ 100, Fortune 500, S&P 1500 and Russell 3000 indices have held stockholder votes to approve officer exculpation amendments (215 doing so during the April-July 2023 annual meeting season), with 85% of such proposals being approved.2
Of these 271 companies, 56% were small-cap companies (under $2 billion market cap), 29% were mid-cap companies ($2-10 billion market cap), and 15% were large-cap companies (over $10 billion market cap). Ninety-four percent of the proposals by mid- and large-cap companies passed, while 77% of proposals by small-cap companies passed.
The DPD data reported that for the proposals that passed, an average of 81% of the outstanding voting shares were present at the stockholders meeting, while for the proposals that failed, the average was only 54%. Because a passing vote typically requires approval of a majority of the total voting shares outstanding (or a supermajority threshold, if required under a corporation’s certificate of incorporation), stockholder turnout at the meeting can prove to be an important factor. Average stockholder turnout appears to have been somewhat stronger among mid-and large-cap companies (84% of outstanding voting shares present at the meeting) compared to small-cap companies (70%).
According to the DPD data, for all proposals (whether they passed or failed), an average of 88% of shares present at the meeting voted “for” the proposal. Even where the proposals failed, an average of 83% of the shares present at the meeting voted “for” the proposal; however, as noted, such support can still be insufficient for approval of the amendment if the corporation’s charter required a supermajority threshold for approval or stockholder turnout was low.
Per the DPD data, among the 323 Delaware corporations in the S&P 500 index, only 29 have sought approval of officer exculpation amendments, with 28 of them having been successful.3 The one corporation for which the amendment did not pass obtained approval from 64% of its voting shares outstanding, but was still short of the 2/3 majority required under its charter.4 Finally, of the 23 Delaware dual-class companies in the S&P 500 index, only Fox Corporation has sought stockholder approval for an officer exculpation amendment.5
Proxy Advisor Guidance
With respect to voting on officer exculpation amendments, Institutional Shareholder Services (ISS) and Glass Lewis have left their 2023 proxy voting guidelines unchanged for 2024. Both firms state that they will continue to evaluate such proposals on a case-by-case basis.
Specifically, ISS will consider, among other factors, the stated rationale for the proposed change and whether the amendment would eliminate an officer’s liability for monetary damages for violating the duty of care.6 In over 80% of the 271 proposals mentioned above, ISS has recommended that stockholders vote “for” the proposal.7 For the proposals that ISS recommended voting “against,” over 90% of the proposals passed notwithstanding ISS’s recommendation. From anecdotal evidence, ISS is more likely to recommend voting against an officer exculpation proposal when the corporation’s governance structure limits accountability to stockholders (such as through the presence of controlling stockholders, classified boards, lack of independent directors, a record of poor board attendance, and restrictions on proxy access). In such circumstances, ISS contends that stockholders should be allowed to hold officers accountable through litigation.
Likewise, Glass Lewis will generally recommend voting against officer exculpation amendments that eliminate monetary liability for breaches of the duty of care, unless the board provides a “compelling rationale” and the provisions are “reasonable.”8 Based on anecdotal information, Glass Lewis typically recommends against officer exculpation amendments, but such recommendations seem to have had a limited effect given the overall high rate of passage of these proposals.
Although it remains to be seen what continuing impact ISS and Glass Lewis will have on stockholder voting on officer exculpation amendments, particularly as more Delaware corporations make proposals to amend their certificates of incorporation to include officer exculpation, it appears thus far that their guidance and ultimate voting recommendations have not resulted in a significant headwind to obtaining stockholder approval of such proposals.
The outlook for Delaware corporations interested in adopting officer exculpation amendments appears to be favorable. Delaware corporations that have proposed such amendments have generally experienced high passage rates and sufficient stockholder support to overcome negative recommendations from proxy advisors. Although few S&P 500/large-cap companies have proposed officer exculpation charter amendments, we expect that the results obtained by companies that have been early adopters of officer exculpation will encourage more companies to propose such amendments in the coming proxy season. Likewise, the Delaware Supreme Court’s clarification that no separate class vote is required on such proposals, should encourage more dual-class corporations to adopt officer exculpation amendments.
1In re Fox Corporation/Snap Inc. Section 242 Litigation, C.A. Nos. 2022-1007, 2022-1032 (January 17, 2024, as revised January 25, 2024).
2All data in this section is taken or derived from Deal Point Data at https://www.dealpointdata.com. Broker non-votes are excluded from calculations.
3The companies successfully obtaining approval are Align Technology, Inc., APA Corporation, Arthur J. Gallagher & Co., Caesars Entertainment, Inc., CDW Corporation, CF Industries Holdings, Inc., The Cigna Group, Crown Castle Inc., DaVita Inc., Devon Energy Corporation, Diamondback Energy, Inc., eBay Inc., Edwards Lifesciences Corporation, Entergy Corporation, Fortinet, Inc., Fox Corporation, General Dynamics Corporation, Globe Life Inc., Halliburton Company, Hormel Foods Corporation, Jacobs Solutions Inc., Kinder Morgan, Inc., Loews Corporation, Monster Beverage Corporation, Roper Technologies, Inc., RTX Corporation, Skyworks Solutions, Inc., and Viatris Inc.
4Paycom Software, Inc., Current Report on Form 8-K (May 1, 2023).
5Fox Corporation, Current Report on Form 8-K (November 3, 2022).
6ISS Proxy Voting Guidelines, effective February 1, 2024.
7Based on information provided by Georgeson.
8Glass Lewis 2024 Benchmark Policy Guidelines, effective January 1, 2024.