Legislation Enacted: Critical Amendment to DGCL §102(b)(7) Expanding Exculpation to Delaware Corporate Officers

Types : Alerts

In April this year, we reported on an important proposed amendment to Section 102(b)(7) of the Delaware General Corporation Law (extending director exculpation to officers as well). We noted that close attention should be paid to this development, because prompt action (by way of a charter amendment) may be appropriate if the amendment were approved. The prior alert issued by our firm may be viewed here.

We write to report that the amendment to Section 102(b)(7) has been approved by the legislature, effective as of August 1, 2022.[1]

As explained in our prior notice, Section 102(b)(7) (8 Del. C. § 102(b)(7)) authorizes the inclusion of a provision in the corporation’s certificate of incorporation (or “charter”) exculpating directors from personal liability for money damages associated with breaches of the duty of care. Exculpation does not extend to (i) breaches of the duty of loyalty; (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; (iii) unlawful dividends or stock repurchases under Section 174; and (iv) any transaction from which a director derives an improper personal benefit. In short, a Section 102(b)(7) provision “can exculpate directors from monetary liability for a breach of the duty of care, but not for conduct that is not in good faith or a breach of the duty of loyalty.”

The amendment authorizes the extension of this protection to certain officers of the corporation, with one noteworthy carve-out: the amendment precludes exculpation for claims brought by or in the right of (i.e., derivatively) the corporation.

The amendment is not self-effectuating, meaning that if a corporation wishes to extend the scope of exculpation as permitted by the new legislation, a charter amendment will be necessary. Prompt consideration should be given to such a charter amendment, as stockholder claims directed specifically to the conduct of corporate officers has, by some accounts, been on the rise. With an eye toward maintaining favorable footing with D&O carriers and protecting corporate officers, we anticipate that many Delaware corporations and their advisors will determine that a charter amendment effectuating the amendment to Section 102(b)(7) is appropriate.

[1]  On July 27, 2022, Senate Bill 273 amending certain provisions of Titles 8, 9 and 29 of the Delaware Code was signed into law. The amendment to 102(b)(7) was part of that bill. Senate Bill 273 may be viewed here.