On August 1, 2022, the Delaware General Corporation Law Section 102(b)(7) was amended to extend exculpation rights to executive officers. The new amendment permits a corporation to adopt exculpatory language in its certificate of incorporation to limit the personal liability of not only directors, but also officers. Officers, including the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, chief accounting officers, and others “identified in the corporation’s public filings with the SEC” or who have consented through a written agreement to accept service of process on the corporation’s behalf, can be shielded from personal liability for duty of care violations.

Unlike similar protections afforded to directors, however, officer exculpation provisions will only shield officers against direct claims brought by stockholders. Officers can still face liability in derivative suits and claims brought by the board, whereas director exculpation is not subject to the same limitation.

Board and stockholder approval is required to amend the certificate of incorporation to effectuate the change.

The amendment was passed in response to the increasing prevalence of officers being targeted in negligence and breach of duty claims in stockholder litigation. Historically, officers were rarely targeted in stockholder suits. Some of the reasons often attributed to the rise in suits against officers are the ease of naming all requisite parties in a single action and the motivation of plaintiffs to increase settlement value. It has been noted that many of these cases against officers involved conflict of interest claims, calling into question the usefulness of the amendment in shielding officers, since the exculpation provision would only protect officers from duty of care claims. Regardless, although the changes are too recent to draw any conclusions, corporations that adopt officer exculpation may benefit from lower insurance premiums and lower settlement costs. Moving forward, companies going public should strongly consider including the officer exculpation provision in their IPO charters. In this scenario, the company receives the benefits of officer exculpation without the potential downside of stockholder concern that the added protection could lead to inadequate risk management by officers.

Proxy Advisory Services

In light of the new amendment, both ISS and Glass Lewis have weighed in with their views on how stockholders should consider officer exculpation provisions. So far, ISS has voted to generally allow for the approval of officer exculpation provisions to the extent permitted under applicable state law. In its rationale, ISS noted that the exculpation would not include the breach of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, or any transaction in which the officer derived an improper personal benefit. The exculpation provisions can also not be applied retroactively. In 2023, ISS will make its recommendations on a “case-by-case” basis.

Glass Lewis, on the other hand, stated that it will generally recommend stockholders vote against proposals eliminating monetary liability for breaches of the duty of care for certain corporate officers, unless compelling reasons for the adoption are provided by the board, and the provisions are reasonable. However, initial proposals that were submitted to a stockholder vote this fall have been supported by Glass Lewis. It is not clear why Glass Lewis has seemingly reversed its position on officer exculpation going forward, or what would constitute a “compelling rationale” and “reasonable” provision.

Institutional investors such as BlackRock, State Street, and Vanguard have yet to release their 2023 voting policies.

Key Considerations

With the 2023 proxy season approaching, companies considering an amendment to their charters to provide for officer exculpation should consider the following:

• Current governance structures and best practices relating to the management and oversight of executive officers. If they are convinced that the board of directors adequately supervises and disciplines executive officers, and provides timely disclosure of corporate transactions, stockholders are more likely to vote in favor of officer liability exculpation.
• Relationships with stockholders and ability to effectively communicate the need for this amendment. Aside from providing a strong rationale for extending exculpation to officers, corporations should also seek a favorable turnout at the stockholder meeting. Some recent proposals have failed due to a high number of abstentions and broker non-votes.[1]
• . Recently, Glass Lewis voted against a proposal that bundled amendments to the certification of incorporation, on the basis that shareholders should be allowed to judge each amendment on its own merits. This suggests that an officer exculpation amendment may have a greater chance of passing if evaluated separately.
• Eligibility of non-voting stock classes to approve exculpation amendments. Two separate lawsuits have been filed in the Delaware Court of Chancery seeking to invalidate exculpation amendments. The complaints raise the question of whether a class of non-voting shares is entitled to vote on officer exculpation.[2]

[1] Officer exculpation proposals failed due to supermajority requirements at Team, Inc. (Special Meeting, Nov. 08, 2022) and TSR, Inc. (Annual Meeting, Nov. 30, 2022).

[2]Electrical Workers Pension Fund, Local 103, I.B.E.W. v. Fox Corp., C.A. No. 2022-1007, compl. (Del. Ch. Nov. 4, 2022); Karen Sbroglio v. Snap, Inc., C.A. No. 2022-1032, compl. (Del. Ch. Nov. 16, 2022).

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