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August 16, 2022 | By Patrick T. McCloskey
Effective as of August 1, 2022, Section 102(b)(7) of the Delaware General Corporation Law (the “DGCL”) was amended to permit charter provisions exculpating officers from personal liability for monetary damages for certain breaches of fiduciary duty.
Before giving effect to the amendment, DGCL 102(b)(7) only covered directors. Those provisions remain unchanged, but a Delaware corporation can now expand any exculpation provision in its certificate of incorporation to cover officers as well as directors, subject to certain limits.
Just like the exclusions that have historically applied to directors, officers may not be exculpated from (i) breaches of the duty of loyalty, (ii) actions or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) any transaction from which the officer received an improper personal benefit. This a long way of saying that the exculpation is generally limited to breaches of the duty of care. The amendment provides for an additional exculpation exclusion that does not apply to directors: officers may not be exculpated in any action by or in the right of the corporation.1
Importantly, officers will only have the protection if the corporation amends its certificate of incorporation to add officers to the exculpation provision. This assumes the corporation already has a 102(b)(7) clause in its certificate of incorporation. If not, a corporation could amend its certificate of incorporation to include an exculpation provision that covers both directors and officers, subject to the limits set forth in DGCL 102(b)(7), as amended.
Under the DGCL, an amendment to the certificate of incorporation must be authorized by the board of directors and then approved by the stockholders,2 subject to any additional approval requirements in the corporation’s certificate of incorporation, bylaws and, if applicable, any stockholders’ agreement.
A charter amendment adding officers to the exculpation clause will be helpful to founders, who are almost always an executive officer of their startup company. The sooner a founder pushes for this charter amendment, the better. Multiple rounds of equity financing will increase the stockholder base (which could make stockholder approval of a charter amendment more challenging), and may result in veto rights for certain investors.
As the expression goes “if you don’t ask, you don’t get.” Founders should not be shy about approaching their board on this topic, perhaps with support from co-founders and other officers who are part of the senior management team. If applicable, founders should point out that directors are already covered by an exculpation provision, so extending the protection to officers is only fair. This plea may carry more weight if the corporation does not have a D&O coverage policy in place,3 as founders can explain that this type of charter amendment will be an inexpensive way to give them some protection.
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This post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).
1See The director exclusion for liability under DGCL § 174 (personal liability for unlawful dividends) does not apply to officers, but there was no reason to provide for that because officers cannot authorize dividends.
2See DGCL § 242(b).
3Even if the corporation has a D&O policy in place, one would expect officer exculpation to enhance the profile of the insured(s) for premium and deductible purposes.
