Section 102(b)(7) of the General Corporation Law of the State of Delaware was amended to permit Delaware corporations to exculpate certain corporate officers from monetary liability for breaches of the fiduciary duty of care.  

Previously, similar protections were available only to directors. This change came as a result of the increasing number of instances in which a person serving as both an officer and a director was exculpated in his or her capacity as a director, but not in his or her capacity as an officer. In addition, an increase in class action lawsuits naming officers as parties, raising the cost of director and officer liability insurance, has risked making it more difficult for Delaware corporations to attract top talent.

What You Need to Know:

• Due to recent changes in Delaware law, exculpation of officers is now permitted.
• Exculpation for officers of Delaware corporations is not automatic, so action is required to opt-in.
• Delaware corporations should consider amending their Certificate of Incorporation to exculpate corporate officers.

For purposes of exculpation, the definition of “officer,” found in 10 Del. C. § 3114(b), includes:

• a president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer;
• those identified in the corporation’s public filings with the SEC because such person is one of the most highly compensated executive officers of the corporation; and
• anyone who has consented by written agreement with the corporation to be identified as an officer.

The amendment extends to officers the same protections previously available only to directors pursuant to Section 102(b)(7) of the General Corporation Law. The new amendment goes only to an officer’s monetary liability for breaches of the duty of care, and does not provide for exculpation of officers in connection with breaches of the duty of loyalty, breaches of the duty of good faith, intentional acts or omissions, nor to transactions where officers derive an improper personal benefit. 

Importantly, these new protections are not self-executing. In order to implement these protections, provisions must be included in the Certificate of Incorporation. As a result, existing Delaware corporations can only opt-in to these protections by an amendment to the Certificate of Incorporation. These protections cannot apply retroactively and therefore are not available for any acts or omissions which occur prior to that amendment. 

For these reasons, directors and stockholders of Delaware corporations should consider amending the Certificate of Incorporation to exculpate officers.