Effective August 1, 2022, Section 102(b)(7) of the Delaware General Corporation Law (DGCL) was amended to permit a Delaware corporation to include in its charter a provision eliminating or limiting the personal liability of certain officers for direct claims for breaches of their fiduciary duty of care. While this amendment extends to a corporation’s officers certain protections long afforded to directors, there are limitations including:

• Charter amendment. Although newly formed corporations may include this provision in their charter at the time of incorporation, existing corporations with stockholders would need to amend their charters to adopt an officer exculpation provision. Such an amendment requires both board and stockholder approval and, for public companies, requires the filing of a preliminary proxy statement.

• Claims covered. Unlike directors, officers cannot be exculpated from liability for derivative duty of care claims brought by or in the right of the corporation. As with directors, officers also cannot be exculpated for breaches of the duty of loyalty, or for acts or omissions not taken in good faith or that involve intentional misconduct or a knowing violation of the law. In addition, Section 102(b)(7) prohibits exculpation of liability for any acts or omissions that occurred prior to the corporation’s adoption of the exculpation provision.

• Officers covered. Only the following officers may be covered by an exculpation provision: 1) the corporation’s president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer; 2) any officer who is or was identified in the corporation’s SEC filings as one of the corporation’s most highly compensated executive officers at the time of alleged wrongdoing; or 3) any officer who has, by written agreement with the corporation, consented to be identified as an officer for purposes of 10 Del. C. §3114(b). See 10 Del. C. §3114(b).

As we discussed in our previous Client Alert, despite these limitations, the incremental protection available under amended Section 102(b)(7) may be helpful for officers and in mitigating certain types of stockholder litigation.

Against this backdrop, we reviewed the proxy statement filings of the Silicon Valley 150 (SV150)^[1] to see how many of the SV150 companies included an officer exculpation proposal in their proxy statement for stockholder meetings held on or after August 1, 2022.^[2]

Of the 143 SV150 companies that are incorporated in Delaware, only nine companies, or approximately 6.3 percent, included an officer exculpation proposal in their proxy statement.^[3] Of those nine proposals, five required the affirmative vote of a majority of the voting power of the outstanding stock entitled to vote on the proposal (the default voting requirement under the DGCL for an amendment to the charter), and four required the affirmative vote of a supermajority (generally, 66 ²/₃ percent) of the voting power of the outstanding stock entitled to vote on the proposal. Seven of the nine proposals, or approximately 78 percent, passed. The failed proposals were comprised of two of the four proposals that required a supermajority vote and, although they both received significantly more affirmative votes than “against” votes, they failed to attain the affirmative vote of a supermajority of the voting power of the outstanding stock entitled to vote thereon.

While these initial numbers are low, the success by the early adopters of the officer exculpation amendment may portend a higher number of such proposals in future proxy seasons. In addition, at least some multiclass companies may have taken a “wait and see” approach to officer exculpation proposals given early challenges in the Delaware Court of Chancery where stockholders of two multiclass corporations claimed that the DGCL requires separate class votes to adopt an officer exculpation provision. As discussed in our previous Client Alert, the Court of Chancery recently ruled that the two corporations were not required, under Section 242 of the DGCL, to obtain separate class votes of their stockholders to amend their certificates of incorporation to provide for exculpation of their officers—welcome news for multiclass companies looking to adopt officer exculpation. That decision is currently on appeal to the Delaware Supreme Court.  

^[1] The Lonergan Silicon Valley 150 ranks the top 150 public companies with headquarters in Silicon Valley by annual sales. For more information on the methodology used to prepare the Lonergan Silicon Valley 150, please visit https://lonerganpartners.com/assets/pdfsdownloads/2023-LSV-150-Company-Ranking.pdf.

^[2] For purposes of determining whether a corporation had included an officer exculpation proposal in a proxy statement, we reviewed all proxy statements for annual and special meetings held from August 1, 2022, through the date of publication of this blog post.

^[3] Of these 143 corporations, 1) two were acquired in May 2023 and did not seek to amend their charter prior to acquisition and 2) one has not yet filed a proxy statement for a stockholder meeting (annual or special) to be held on or after August 1, 2022.