Earlier this year, the governor of Delaware signed Senate bill 273 which amended various provisions of the Delaware General Corporation Law (GCL). The changes became effective August 1, 2022. Most notable among the changes was the amendment of Section 102(b)(7) of the GCL to allow corporations to exclude or limit certain officers from personal liability for breaches of their fiduciary duty of care. In order for corporations to take advantage of this change in the law, companies must include a provision in their certificate of incorporation eliminating or limiting its officers from personal liability for breaches of the duty of care.
Under Delaware corporate law, directors and officers of Delaware corporations owe the corporation and its shareholders certain fiduciary duties. One of the two chief fiduciary duties that directors and officers owe to the corporation and shareholders is called the duty of care. The duty of care requires directors and officers to exercise care and act in an informed manner when acting for the corporation and making decisions on its behalf.
Since 1986, with the addition of Section 102(b)(7) to the GCL, corporations have been authorized to eliminate or limit the personal liability of directors for monetary damages for breaches of the duty of care. However, until passage of the amended Section 102(b)(7) this year, corporations could not do the same for its officers, even though the Delaware Supreme Court repeatedly affirmed that officers owe the same fiduciary duties as directors. Now corporations can insulate its officers as well as directors from personal liability for breaches of the duty of care.
It is important to understand the limits of this newly amended Section 102(b)(7). First, it doesn’t apply to all officers but only to those officers “deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to § 3114(b) of Title 10” which includes the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer along with anyone identified in the corporation’s SEC filing as one of the most highly compensated executive officers, or anyone who has, by agreement with the corporation, consented to be identified as an officer for the purposes of Section 3114(b) of the GCL.
Second, it does not insulate officers from liability for breaches of the duty of care in all circumstances. Corporations will not be allowed to limit or eliminate officer liability in circumstances where: (i) the breach of a duty of care also implicates a breach of the duty of loyalty, (ii) the acts or omissions of the officer were not in good faith or involved intentional misconduct, or a knowing violation of law, or (iii) the officer received an improper personal benefit from the transaction in question. Further, a corporation is prohibited from seeking to insulate an officer against any actions by the corporation itself or on behalf of the corporation (e.g. a derivative action).
The decision to allow corporations to provide senior officers with some protections from liability for breaches of the duty of care likely stems from a several different factors including recent increases in litigation, particularly class action lawsuits alleging officers violated their duty of care, increased difficulties obtaining D&O insurance, and the perceived arbitrariness in allowing directors to escape personal liability, but not officers, for the same alleged breach of duty.
Over the past three decades, it has become commonplace for Delaware corporations to provide exculpation to their directors to the full extent permitted by Delaware law. Most sophisticated directors now demand exculpation as a requisite to agreeing to serve on a board. It is expected that most corporations seeking to retain or attract sophisticated management talent in the United States will likely elect to extend this protection to their officers in response to the change in Delaware law.
Our Chicago breach of fiduciary duty and business litigation attorneys have defended and prosecuted breach of fiduciary duty, shareholder oppression, and business divorce lawsuits for more than three decades. In recognition of their stellar track record and experience, Super Lawyers named DuPage and Cook County business litigation and fiduciary duty attorneys Peter Lubin and Patrick Austermuehle a Super Lawyer and Rising Star respectively in the Categories of Business Litigation, Class Action, and Consumer Rights Litigation. We handle high-stakes breach of fiduciary duty lawsuits and emergency business litigation involving injunctions, TROS, and declaratory judgments in a variety of corporate disputes. If you’d like to discuss how the experienced Illinois breach of fiduciary duty attorneys at Lubin Austermuehle, P.C. can help, we would like to hear from you. To set up a consultation with one of our Chicago business attorneys and Chicago trial lawyers, please call us locally at 630-333-0333 or contact us online.