by Blake Vick
Introduction
For several decades, Delaware law has permitted corporations to eliminate or limit corporate directors’ personal liability to the corporation or its stockholders for monetary damages arising from breaches of a director’s fiduciary duty of care.[1] This corporate elimination or limitation of directors’ personal liability is known as exculpation. Traditionally, Delaware law permitted exculpation from personal liability only as to directors.[2] Corporate exculpation of director liability has become “ubiquitous” in the 35-plus years since its introduction to corporate law.[3] Effective August 1, 2022, Section 102(b)(7) of the Delaware General Corporation Law has been amended to extend the traditional, director-only exculpation allowance.[4] Per the amendment, Delaware corporations may now exculpate from personal liability both corporate directors and certain executive officers.[5]
I. Pre-Amendment Delaware Law & the Resultant Ubiquity of Director Exculpation
In 1985, the Delaware legislature enacted a statute permitting corporations to eliminate or limit a director’s personal liability for monetary damages for breach of certain fiduciary duties.[6] At the time of its enactment, some viewed this legislation as another tool in the ongoing effort by states to generate revenue by incentivizing corporations to incorporate under their laws.[7] But former Section 102(b)(7) was enacted, at least in part, in response to a perceived crisis in the director and officer insurance market[8] following the Delaware Supreme Court’s decision in Smith v. Van Gorkom,[9] which ultimately stoked fears that Delaware corporations would struggle to find qualified directors to serve on their boards.[10] Legislative impetus notwithstanding, permitting exculpation of directors from personal liability arising from certain claims gained momentum quickly; numerous other state legislatures enacted statutes like Delaware’s into law shortly after Delaware pioneered such legislation in 1985.[11]
However, only directors—and not officers—could be exculpated from personal liability under former Section 102(b)(7).[12] Further, former Section 102(b)(7) did not permit exculpating directors from personal liability arising from all claims. In fact, the statute outlined claims from which a director’s liability could be exculpated and specifically prohibited exculpation in certain, enumerated circumstances.[13] Further, exculpation under former Section 102(b)(7) was not self-executing and instead must have been approved by shareholders to take effect as to directors of a corporation.
A. Exculpation Under Former Section 102(b)(7)
Former Section 102(b)(7) permitted corporations to exculpate only directors’ liability and, even then, only as to certain claims against exculpated directors.[14] The former statute expressly permitted corporations exculpating directors “from personal liability to the corporation or its stockholders for monetary damages for breach of fiduciary duty as director.”[15] Notably, by its plain language, the statute addresses only claims against directors personally seeking monetary damages, thus excluding injunctive proceedings based on gross negligence, for example, that otherwise would be covered if the claim sought monetary relief.[16] But not all claims seeking monetary relief from directors personally were eligible to be exculpated from a director’s personal liability under the former exculpatory regime. In fact, former Section 102(b)(7) expressly prohibited exculpation from personal liability for certain claims.
1. Prohibition Against Exculpating Directors’ Personal Liability for Certain Claims Under Former Section 102(b)(7)
Despite the general allowance to exculpate directors from liability for breaches of fiduciary duties, former Section 102(b)(7) proceeds to explicitly prohibit exculpating a director from personal liability based on claims:
(i) For any breach of the director’s duty of loyalty to the corporation or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
(iii) [for conduct in violation of provisions of the Delaware General Corporate Law concerning illegal stock repurchases, stock repurchases or dividends]; or
(iv) for any transaction from which the director derived an improper personal benefit.[17]
First, former Section 102(b)(7) distinguished between the duty of care and the duty of loyalty, permitting corporations to exculpate directors from personal, monetary liability arising only from breaches of their duty of care. Thus, a claim that a director breached his or her duty of loyalty did not qualify as one from which the director could be exculpated from personal liability.
In contrast, however, “[Delaware] jurisprudence since the adoption of the statute has consistently stood for the proposition that a Section 102(b)(7) charter provision bars a claim that is found to state only a due care violation.”[18] So, directors found no protection under former Section 102(b)(7) for duty of loyalty violations.[19] But the statute can be viewed as a vehicle for corporations to protect their directors from monetary liability for duty of care breaches or, in other words, gross negligence.[20]
Second, the former statute carved out exculpation when a director allegedly acted “not in good faith”—thus precluding directors from raising exculpation as a defense to claims that the director conducted themself “not in good faith.”[21] However, the statute itself does not define “good faith,” and Delaware courts have made clear that good faith cannot be defined generally but instead is a creature of context.[22] Third, former Section 102(b)(7) precluded its assertion against claims based on another specific provision of the Delaware General Corporate Law concerning illegal stock redemptions, stock repurchases, or dividends.[23] Finally, the statute prohibited exculpating directors from liability for claims that the director received an improper benefit from a transaction executed in his or her capacity as director.[24] Thus, no claim within one of these four categories could be dismissed based on exculpation under former Section 102(b)(7).
2. Effect of Pleading an Exculpated Claim Under Former Section 102(b)(7)
The Delaware Supreme Court has made clear that when a director of a corporation is subject to a claim from which the director has been exculpated from personal monetary liability, the claim must be dismissed, regardless of the standard of review underlying the claim against the director. In 2015, the Delaware Supreme Court held that “[a] plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review [applicable to the challenged director] conduct—be it Revlon, Unocal, the entire fairness standard, or the business judgment rule.”[25] In the seven years since its promulgation, the Delaware Court of Chancery has interpreted broadly and applied rigidly the rule from Cornerstone.[26]
Exculpation under former Section 102(b)(7), when raised by a director-defendant to avoid personal liability, is “in the nature of an affirmative defense”; thus, the director-defendant generally must raise and prove exculpation.[27] However, Delaware courts previously addressed whether the defense may be properly considered by a court considering a motion to dismiss. In Townson, the Delaware Supreme Court upheld the Court of Chancery’s consideration of an exculpatory provision in ruling on a Rule 12(b)(6) motion to dismiss.[28] The Court of Chancery apparently took judicial notice of the relevant corporate charter containing the applicable exculpatory provision, without the director-defendant introducing the charter, and thereby dismissed the claims based on exculpation under former Section 102(b)(7).[29] Although the Townsend court found no error in considering the charter on a motion to dismiss and affirmed dismissal of the claims, it noted that the Court of Chancery should have treated “the motion as one for summary judgment once the Section 102(b)(7) charter provision was interposed by the [defendant-director].”[30]
B. Implementing Former Section 102(b)(7): Provisions Exculpating Directors’ Personal Liability
As discussed above, exculpation under former Section 102(b)(7) afforded meaningful protection from personal liability to corporate directors against whom certain covered claims were filed. However, the exculpatory protections afforded to directors under former Section 102(b)(7) were not self-executing: A corporation’s directors were exculpated from liability for breaches of the duty of care only if the corporation included in its charter or certificate of incorporation a provision stating such elimination or limitation of directors’ personal liability to the corporation or its shareholders.[31]
Thus, former Section 102(b)(7) did not unilaterally alter the consequences of a director’s breach of the duty of care. Instead, the pre-amendment statute left to each corporation’s respective shareholders the determination whether to affect such a change.[32] And if a certain corporation’s shareholders voted to approve adding an exculpatory provision to the corporation’s certificate of incorporation, that exculpation was effective only as to directors serving on the board of that corporation, rather than a blanket statutory alteration to the duty of care seen in other states following Delaware’s enactment of former Section 102(b)(7).[33]
C. Resounding Stockholder Approval of Director Exculpation Under Former Section 102(b)(7)
Shareholders responded to the enactment of former Section 102(b)(7) with resounding approval; in fact, “a high percentage of Delaware corporations have exculpatory provisions for duty of care liability,”[34] and director exculpation has now become “ubiquitous”[35] in Delaware and other states across the country. Because of this director-exculpation ubiquity and other problems attendant to permitting exculpation as to only directors, the Delaware legislature recently revisited Section 102(b)(7) and responded with an addition to the traditional director-exculpation regime that has been in place for over three decades.[36]
II. Exculpation Extended: Post-Amendment Delaware Law
Effective August 1, 2022, amended Section 102(b)(7) now permits Delaware corporations to include or amend into their charters or certificates of incorporation provisions exculpating executive officers from personal liability.[37] This officer exculpation allowance operates in some ways like—but in several key aspects different from—director exculpation under former Section 102(b)(7). This amendment came about at least in part as a response to several perceived issues with limiting exculpation to only directors. Although officer exculpation was merely added to the former exculpation regime as an amendment to former Section 102(b)(7), there are several key differences in application of exculpatory provisions to officers, and the breadth of claims covered differs from that of director exculpation also.
A. Impetus Behind Permitting Exculpation of Executive Officers Under Amended Section 102(b)(7)
The Delaware legislature amended Section 102(b)(7) to address several deficiencies that the former, director-only exculpation regime created and exacerbated. First, plaintiffs in shareholder suits have increasingly used the unavailability of officer exculpation as a means of circumventing director exculpation under former Section 102(b)(7). By asserting breach of fiduciary duty claims against officers, some of whom concurrently serve as both an officer and a director, plaintiffs used to their own advantage the disparate treatment of officers and directors’ personal liability under the former exculpation regime. Second, that procedural loophole has sparked concern about over-exposing corporate officers to personal liability. These concerns have, in turn, rekindled some of the original fears that motivated the 1985 enactment of former Section 102(b)(7).
1. Delaware Supreme Court Exposes Concerning Loophole Allowing Plaintiffs to Circumvent Former Section 102(b)(7)
In recent years, plaintiffs in both direct and derivative shareholder suits have usurped the inability to hold exculpated directors personally liable for monetary damages by asserting breach of fiduciary duty claims against corporate officers.[38] This trend comes on the heels of the Delaware Supreme Court’s 2009 decision in Gantler v. Stephens.[39] In Gantler, shareholders sued officers and directors of First Niles, a Delaware corporation.[40] Before addressing the officers’ alleged misconduct, the court held that corporate officers owe fiduciary duties identical to those that directors owe.[41] The court recognized, however, that its holding did not mean that “the consequences of fiduciary breach by directors or officers, respectively, would necessarily be the same.”[42] In so recognizing, the court noted the disparate treatment between directors and officers under former Section 102(b)(7): “Although legislatively possible, there currently is no statutory provision [in Delaware] authorizing comparable exculpation of corporate officers.”[43] Thus, Gantler became the first case in which the state’s high court recognized that officers had no statutory protection against the same personal liability from which directors could be exculpated.
In the wake of Gantler, shareholder plaintiffs used the gap in exculpatory protections to seek from officers monetary relief for fiduciary-duty breaches that directors otherwise could be shielded from under former Section 102(b)(7). Inevitably, the procedural loophole that Gantler exposed sparked a rapid rise in shareholder litigation as plaintiffs increasingly asserted breach of fiduciary duty claims against officers of Delaware corporations.[44] But the fallout of the Gantler decision did not end there, as the rise in shareholder claims against officers exacerbated other deficiencies under the former exculpation regime.
Courts soon began grappling with how to address breach of fiduciary duty claims against defendants who served concurrently as both an officer and a director at the time of the alleged misconduct.[45] These claims presented courts the novel issue of how to differentiate the actions of a defendant in his or her capacity as director from the same defendant’s actions taken in his or her capacity as officer.[46] Such a defendant simultaneously could be exculpated from personal liability for a fiduciary duty breach while acting in his or her capacity as a director but face personal liability for breaching the same fiduciary duty in his or her capacity as officer. This created a judicial conundrum: Courts found themselves granting motions to dismiss relating to a defendant’s role as a director based on exculpatory charter provisions but then grappling with motions to dismiss similar claims concerning actions taken by the same defendant in his or her capacity as an officer.[47] This disparate standard essentially allowed plaintiffs two shots at liability for many defendants who served concurrently as directors and officers of a corporation; a defendant’s personal liability could be exculpated only as to the former under the past exculpation regime.
For example, the Court of Chancery’s analysis in In re Essendant, Inc. Stockholder Litigation highlighted this double-jeopardy-like issue. In Essendant, one defendant (the “dual defendant”) simultaneously faced fiduciary duty breach claims that alleged misconduct in both of his capacities with the corporation—director and CEO.[48] The plaintiffs alleged that members of the company’s board, including the dual defendant, breached their fiduciary duties in connection with a transaction that resulted in the corporation being acquired by another company.[49] In the same complaint, however, the Essendant plaintiffs claimed against the dual defendant individually in his capacity as CEO.[50]
First, the court granted the director-defendants’ motions to dismiss as to all three claims brought against the company’s board.[51] The court initially clarified that to succeed on any claims against the board of directors, the plaintiffs must adequately plead non-exculpated claims.[52] In other words, to survive a motion to dismiss brought by an exculpated director, a plaintiff’s complaint “must invoke loyalty [or] bad faith claims.”[53] But largely based on the plaintiffs’ unsatisfactory factual allegations, the court held that the plaintiffs failed to adequately plead each of the three claims against the board.[54] Thus, the court dismissed with prejudice all of the plaintiffs’ claims against the board, including those against the dual defendant in his capacity as a director.[55]
Next, the court turned to the plaintiffs’ claim that the dual defendant breached his fiduciary duties in his capacity as an officer of the corporation.[56] The court first noted that the plaintiffs’ claims against the dual defendant in his capacity as CEO are subject to a different standard than the claims against the dual defendant in his capacity as an exculpated director.[57] This is so, the court reasoned, because “[former] Section 102(b)(7) [did] not exculpate a corporate officer’s breach of fiduciary duty . . . .”[58] Thus, to survive the dual defendant’s motion to dismiss in his capacity as an officer, the “[p]laintiffs need[ed] only plead facts supporting a reasonable inference that [the dual defendant] breached his fiduciary duty of care in his official capacity as CEO . . . .”[59]
Despite these differing standards to which the respective claims were subject, the Essendant court clarified that the plaintiffs bore the burden of distinguishing between exculpated claims against the dual defendant as a director and non-exculpated claims “relating specifically to [the dual defendant’s] as CEO . . . .”[60] However, the court highlighted that the plaintiffs’ complaint stated only action taken by the dual defendant in his official capacity as an officer. Further, the court found this single action insufficient to state a valid claim for breach of the dual defendant’s duty of care in his capacity as an officer.[61] Thus, the court dismissed with prejudice the plaintiffs’ claim against the dual defendant in his capacity as the company CEO.[62]
Although the Essendant plaintiffs failed to plead a viable claim against the dual defendant in his capacity as an officer, the court’s opinion underscored key features of the traditional, director-only exculpation regime under former Section 102(b)(7). Under the former statute, a plaintiff bore the burden of drawing the distinction between exculpated and non-exculpated claims when alleging fiduciary duty breaches against defendants who served concurrently as a director and an officer. Only those actions taken by a defendant solely in his or her capacity as an officer fell outside the exculpatory purview of former Section 102(b)(7).[63] However, if a plaintiff adequately distinguished the claims with facts supporting a defendant’s fiduciary duty breach solely in his or her capacity as officer, then an otherwise exculpated director-defendant could still be personally liable in his or her capacity as an officer.[64]
Further, Essendant was not the only opinion in which Delaware courts illustrated these principles. The Court of Chancery also recognized the disparate treatment of fiduciary-related claims against directors as compared to those against officers in Amalgamated Bank v. Yahoo! Inc.[65] In Yahoo! Inc., the court addressed fiduciary duty breach claims against exculpated members of the defendant-corporation’s board separately from breach claims against the corporation’s CEO, whose personal liability could not be exculpated under former Section 102(b)(7).[66] The court noted evidence supporting an inference of potential misconduct by the CEO-defendant in her capacity as such and stated that “[a] suit solely against [the CEO-defendant in that capacity] would face legal hurdles, but the [defendant-corporation’s] exculpatory [charter] provision is not one of them.”[67]
Like Essendant, the Yahoo! Inc. court both recognized the disparate treatment of directors and officers under the former exculpation regime and highlighted that exculpatory protections were not available to officers under former Section 102(b)(7). Further, these two cases represent only a fraction of the uptick in litigation over officer liability after Gantler, which the Delaware legislature apparently viewed as problematic.[68] Thus, former Section 102(b)(7) was amended—at least in part—due to the “perverse outcome[s]” seen during the post-Gantler, pre-amendment era, in which courts necessarily dismissed claims for breach of fiduciary duties against directors, while allowing the same or similar claims against officers of the same corporation to proceed.[69]
2. Concern About Over-Exposing Executive Officers to Personal Liability Under Former Section 102(b)(7) Motivates Change
Before the amendment to former 102(b)(7), officers could be subject to personal liability from which directors had been exculpated.[70] This stoked concerns over the extent to which officers were being held personally liable for monetary damages. Like the concern about over-exposing directors to personal liability that motivated the initial enactment of former Section 102(b)(7), exposing officers to liability from which directors are often exculpated risks decreasing the pool of individuals qualified to serve as executives of Delaware corporations. Finally, over-exposure to liability as an officer gives rise to similar concerns over director and officer insurance availability that directors faced before the enactment of former Section 102(b)(7).
B. Director & Officer Eligibility for Exculpation Under Amended Section 102(b)(7)
The foregoing concerns about the disparate treatment of officers and directors under former 102(b)(7) only intensified as Delaware courts continued to grapple with litigation over officer liability in the post-Gantler era. Ultimately, in early 2022, the Delaware Bar Council proposed an amendment to former Section 102(b)(7) to allow exculpation for both directors and officers.[71] As is often the case, the Delaware legislature adopted those proposals,[72] ultimately amending former 102(b)(7) to allow corporations the discretion to exculpate officers from personal liability.[73]
Like director exculpation under the former statute, amended Section 102(b)(7) requires that a corporation include an exculpatory provision in its charter or certificate of incorporation.[74] But not all aspects of director exculpation under the pre-amendment statute mirror that of officers under amended Section 102(b)(7). Amended Section 102(b)(7), like its predecessor, permits exculpating any member of a corporation’s board of directors from personal liability.[75] Also, a non-director may be exculpated as if he or she were a director in certain circumstances.[76]
However, amended Section 102(b)(7) restricts the class of persons eligible for exculpation as an officer. Specifically, the amended statute includes in its definition of officer “only [those] person[s] who at the time of an act or omission as to which liability is asserted is deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to [Delaware law].”[77] Exculpation as an officer under amended Section 102(b)(7) is available only to a defendant who, at the time of the alleged misconduct, acted in his or her capacity as:
-
the corporation’s president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer;
-
a person identified in the corporation’s SEC filings “because such person is or was [one] of the most highly compensated executive officers of the corporation”; or
-
a person who, by written agreement with the corporation, consented to be identified as an officer and to service of process.[78]
Despite defining officer more rigidly than director, amended Section 102(b)(7) includes in its definition of officer a broad class of individuals. Further, this definition explicitly encompasses the executive positions that are traditionally associated with the term officer, in addition to classes of persons who may not otherwise be considered officers for less technical purposes. Nonetheless, Delaware corporations and executives should remain mindful of the nuances of exculpation eligibility for officers compared to directors.
C. Claims Eligible for Exculpation Under Amended Section 102(b)(7)
Like the varied constraints on individual eligibility for exculpation discussed above, amended section 102(b)(7) also differentiates between directors and officers insofar as the claims to which exculpation applies for each. For exculpated directors, the claims to which exculpation applies—as well as those for which exculpation is prohibited—remain the same after the amendment as under former Section 102(b)(7).[79] In other words, directors may still raise exculpation as a defense to claims for breach of their fiduciary duty of care; corporations remain unable to exculpate directors for breaching their duties of good faith and loyalty or acts involving intentional misconduct or knowing violations of the law.[80]
Amended Section 102(b)(7) sets forth identical exculpation allowances and exclusions for officers as it does for directors, with two key differences. First, unlike directors, officers may not be exculpated from claims brought against them by or in the right of the corporation.[81] Thus, corporations and boards retain the right to bring actions against officers for breach of the duty of care.[82] Also, based on this additional, officer-specific exclusion, shareholders retain the ability to bring derivative claims against officers for duty of care breaches.[83] Second, amended Section 102(b)(7)(iii)—which by reference to another statute prohibits exculpating directors from liability for illegal redemptions, stock repurchases, or dividends—does not apply to officers.[84]
D. Implementing Officer Exculpation Under Amended Section 102(b)(7)
Like its predecessor, amended Section 102(b)(7) requires affirmative board action and shareholder approval to implement its exculpatory protections.[85] To give effect to the exculpation contemplated under amended Section 102(b)(7), a corporation must include in its certificate of incorporation or charter “eliminating or limiting the liability of a director or officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer . . . .”[86] Also, corporations that previously adopted exculpatory charter or certificate of incorporation provisions under former Section 102(b)(7) cannot rely on those provisions to exculpate officers from liability.[87] Instead, any corporation seeking to exculpate its officers must amend its charter or certificate of incorporation to include a provision to that effect.[88]
Conclusion
Delaware’s recent shift to allow officer exculpation represents an important and long-needed shift in the state’s corporate law. This amendment will address many of the issues that were created or exacerbated by the disparate treatment of officers and directors under former Section 102(b)(7). Delaware corporations, and more so their executives, should warmly receive the amendment. If the past is any indicia of what is to come, officer exculpation—like its prior, director-only counterpart—will become ubiquitous quickly.
[1] Del. Code Ann. tit. 8, § 102(b)(7) (1986). For purposes of this article, § 102(b)(7), as enacted prior to the August 1, 2022 amendment, is hereinafter referred to as “former Section 102(b)(7).”
[2] See id.
[3] See Exculpation of Officers of Delaware Corporations from Liability for Breach of Fiduciary Duties Now Permitted, Baker Botts (Aug. 18, 2022), https://www.bakerbotts.com/thought-leadership/publications/2022/august/exculpation-of-officers-of-delaware-corporations [https://perma.cc/6XLE-8J93] [hereinafter Exculpation of Officers].
[4] Del. Code Ann. tit. 8, § 102(b)(7) (2022).
[5] Compare Del. Code Ann. tit. 8, § 102(b)(7) (1986) (permitting corporations to include in their certificates of incorporation “[a] provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as director”), with Del. Code Ann. tit. 8 § 102(b)(7) (2022) (permitting corporations to include in their certificates of incorporation “[a] provision eliminating or limiting the personal liability of a director or officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer” (emphasis added)). For the purposes of this article, § 102(b)(7), as enacted after the August 1, 2022 amendment, is hereinafter referred to as “amended Section 102(b)(7).”
[6] See Del. Code Ann. tit. 8, § 102(b)(7) (1986).
[7] Carl Samuel Bjerre, Evaluating the New Director Exculpation Statutes, 73 Cornell L. Rev. 786, 786 (1988) (citing and discussing William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 Yale L.J. 663, 705 (1974)) (“The [director exculpation] statutes epitomize the tendency of corporation law toward what Professor Cary has labeled a ‘race for the bottom, with Delaware in the lead.’ The ‘race’ consists of states’ competing efforts to generate revenue by enticing corporations’ management to incorporate under their laws. . . . [T]his race [is labeled as] ‘one for the bottom’ because, [Professor Cary] believes, the resultant pro-management laws exploit shareholders.”). Cf. Ralph K. Winter, Jr., The Development of the Law of Corporate Governance, 9 Del. J. Corp. L. 524, 527–28 (1984) ([T]his competition among states leads to optimal rules governing the relationship of shareholders to corporations. . . . I would submit . . . that the race is to the top.”).
[8] See, e.g., Malpiede v. Townson, 780 A.2d 1075, 1095 (Del. 2001) (“[Former] Section 102(b)(7) was adopted by the Delaware General Assembly in 1986 following a directors and officers insurance liability crisis [arising from the Smith v. Van Gorkom decision].”).
[9] Smith v. Van Gorkom, 488 A.2d 858, 893 (Del. 1985) (affirming personal judgment against directors for monetary damages for breach of fiduciary duty of care through gross negligence in connection with decision to approve proposed acquisition). For context, the Van Gorkom decision led the directors named as defendants in that case to later settle for $23.5 million, although the directors had only $10 million in total director and officer insurance coverage. See Stephen A. Radin, The Director’s Duty of Care Three Years After Smith v. Van Gorkom, 39 Hastings L.J. 707, 719 (1988) (citing Notice to Former Stockholders of Trans Union Corporation Regarding Settlement and Stipulation and Agreement of Compromise and Settlement, reprinted in 4 R. Balotti & J. Finklestein, Delaware Law of Corporations and Business Organizations § 4.7, at 805–15 (1988)).
[10] See 1 David A. Drexler et al., Del. Corp. Law & Prac. § 6.02[7] n.54 (2002) (noting Van Gorkom was “widely cited as contributing to directors’ concerns with personal liability”).
[11] By 1988, exculpation statutes nearly identical to Delaware’s had been enacted in the following ten states: Arizona, Idaho, Iowa, Massachusetts, Pennsylvania, South Dakota, Tennessee, Texas, Utah, and Washington. See Bjerre, supra note 7, at 795 n.65. Other states enacted exculpation statutes similar to, but distinct from, Delaware’s. For example, although Indiana’s legislation largely mirrored Delaware’s non-self-executing scheme, its exculpation statute made no distinction between breaches of the duties of care and loyalty. See Ind. Code Ann. § 23-1-35-1 (2009).
[12] See Del. Code Ann. tit. 8, § 102(b)(7) (1986).
[13] See id. § 102(b)(7)(i)–(iv).
[14] For a discussion of the reasons why the Delaware legislature limited exculpation under former Section 102(b)(7) to only directors, see 2022 Proposed Amendments to the General Corporation Law of the State of Delaware, Richards, Layton & Finger, P.A. (Apr. 21, 2022), https://www.rlf.com/2022-proposed-amendments-to-the-general-corporation-law-of-the-state-of-delaware/ [https://perma.cc/W9JZ-SFEW] [hereinafter 2022 Proposed Amendments]. In that article, the authors explained:
The original omission of officers [from eligibility for exculpation under former Section 102(b)(7)] was deliberate. First, it was believed that officers would bring matters to the board of directors and would be protected by the fact that the board will have made the decision. Second, at the time [former] Section 102(b)(7) was adopted, Section 3114 of Title 10 [of the Delaware General Corporation Law] provided that directors were deemed to consent to service of process in the State of Delaware, but it did not apply to officers. Thus, other than officers who also served as directors, it was difficult for non-resident officers to be named as defendants in proceedings in Delaware. In 2003, however, in the wake of a series of corporate scandals involving Enron, World[C]om and others, and in light of the fact that changes in corporate governance stemming from, among other things, the Sarbanes-Oxley Act resulted in a reduction in the number of inside directors, Section 3114 was amended to add the executive officers noted above.
Id. The authors reasoned that the amendment to Section 3411 diminished and effectively defeated that statute as a valid reason to exclude officers from exculpatory eligibility under former Section 102(b)(7), especially considering more recent changes in the M&A litigation landscape that have made executive officers targets for breach of fiduciary duty claims. Id.
[15] See Del. Code Ann. tit. 8, § 102(b)(7) (1986) (emphasis added).
[16] See Malpiede v. Townson, 780 A.2d 1075, 1095 (Del. 2001).
[17] Del. Code Ann. tit. 8, § 102(b)(7)(i)–(iv) (1986).
[18] Townson, 780 A.2d at 1095 (citations omitted); see also In re Cornerstone Therapeutics, Inc., S’holder Litig., 115 A.3d 1173, 1176 (Del. 2015) (“Because a director will only be liable for monetary damages if she has breached a non-exculpated duty, a plaintiff who pleads only a due care claim against that director has not set forth any grounds for relief. In such a case, as a matter of law [] [former] Section 102(b)(7) would bar the claim.”) (first alteration in original).
[19] See, e.g., William T. Allen et al., Realigning the Standard of Review of Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and Its Progeny as a Standard of Review Problem, 96 Nw. U. L. Rev. 449, 463 n.46 (2002) (“The statutory examples of conduct that cannot be exculpated under [former Section] 102(b)(7) are all, in our opinion, examples of loyalty violations.”). Notably, despite the limited protection afforded to directors for duty of loyalty violations under both former and amended Sections 102(b)(7), see also generally infra Part II., breaches of that duty are rarely the subject of successful litigation. See James D. Cox & Randall S. Thomas, Delaware’s Retreat: Exploring Developing Fissures and Tectonic Shifts in Delaware Corporate Law, 42 Del. J. Corp. L. 323, 335 (2018) (“[I]t is difficult to [successfully] frame a breach of loyalty claim except in the very unusual circumstance of self-dealing by target directors.”).
[20] See, e.g., 1 R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corporations & Business Organizations § 4.29 (3rd ed. 2004 supp.) (“In essence, [former] Section 102(b)(7) permits a corporation . . . to protect its directors from monetary liability for duty of care violations, i.e., liability for gross negligence.”). But see John L. Reed & Matt Neiderman, “Good Faith and the Ability of Directors to Assert § 102(b)(7) of the Delaware General Corporation Law as a Defense to Claims Alleging Abdication, Lack of Oversight, and Similar Breaches of Fiduciary Duty, 29 Del. J. Corp. L. 111, 114 (2004) (“[H]owever, [former] § 102(b)(7) might more accurately be described as [exculpating] director liability for either (1) pure duty of care violations or (2) some duty of care violations. The latter being stated as such to accommodate those who maintain the view that a knowing or egregious violation of the duty of care (i.e., a violation that has especially egregious consequences or amounts to more than gross negligence) is still a duty of care violation as opposed to a violation of the duty of loyalty or the duty of good faith.”).
[21] See Del. Code Ann. tit. 8, § 102(b)(7)(ii) (1986). Despite that the Delaware Supreme Court previously dubbed directors’ fiduciary duties a “triad”—including the duties of care, loyalty, and good faith—some argue that there is little if any true distinction between the duties of loyalty and good faith. See In re Gaylord Container Corp. S’holders Litig., 753 A.2d 462, 476 n.41 (Del. Ch. 2000) (reasoning that, although Delaware Supreme Court has in past noted that the duties are a triad, the court had in the same opinion equated good faith with loyalty); see also, e.g., Nagy v. Bistricer, 770 A.2d 43, 49 n.2 (Del. Ch. 2000) (“By definition, a director cannot simultaneously act in bad faith and loyally towards the corporation and its stockholders.”); Emerald Partners v. Berlin, No. Civ.A. 9700, 2003 Del. Ch. LEXIS 42, at *39 n.133 (Del. Ch. Apr. 28, 2003) (reasoning that some of the categories in former Section 102(b)(7) are superfluous because (i) good faith is a fundamental component of loyalty and (ii) receiving an improper personal benefit from a transaction both amount to “quintessentially disloyal conduct,” yet both hold categories of exclusion distinct from duty of loyalty violations).
[22] For a more comprehensive discussion of the meaning and application of the “good faith” standard under former Section 102(b)(7), see Reed & Neiderman, supra note 20.
[23] See Del. Code Ann. tit. 8, § 102(b)(7)(iii) (1986); see also Del. Code Ann. tit. 8, § 174 (provision referenced in Former Section 102(b)(7)).
[24] Del. Code Ann. tit. 8, § 102(b)(7)(vi) (1986).
[25] See In re Cornerstone Therapeutics, Inc. S’holder Litig., 115 A.3d 1173, 1175–76 (Del. 2015). Delaware courts determine whether directors have fulfilled their fiduciary duties by evaluating the challenged director conduct through the lens of the applicable standard of review. However, it should be noted that the requirement of dismissal regardless of standard of review noted in Cornerstone is nuanced in the context of the entire fairness rule. When the entire fairness standard of review applies ab initio to claims that otherwise might be subject to dismissal based on exculpation under former Section 102(b)(7), the reviewing court must undertake that analysis nonetheless. See Emerald Partners v. Berlin, 787 A.2d 85, 94 (Del. 2001). The court, in so analyzing, must “identify the breach or breaches of fiduciary duty upon which liability [for monetary damages] will be predicated in the ratio decedendi of its determination . . . .” Id. “[T]he breach or breaches of fiduciary duty upon which substantive liability for monetary damages is based become [] determinative [of whether a certain claim or claims must be dismissed].” Id. Thus, any exculpated claims subject ab initio to the entire fairness rule must still be dismissed after the reviewing court has concluded its initial review. Id.
[26] See, e.g., In re Essendant, Inc. S’holder Litig., C.A. No. 2018-0789-JRS, 2019 WL 7290944, at *7 (Del. Ch. Dec. 30, 2019) (“In other words, ‘regardless of the underlying standard of review for the board’s conduct,’ [a complaint claiming monetary damages against an exculpated director personally] must ‘invoke loyalty or bad faith claims.’”) (quoting In re Cornerstone, 115 A.3d at 1175, 1179; Malpiede v. Townson, 780 A.2d 1075, 1094 (Del. 2001)).
[27] See, e.g., Boeing Co. v. Shrontz, No. 11,273, 1992 Del. Ch. LEXIS 84, at *10 (Del. Ch. Apr. 20, 1992).
[28] See Townson, 780 A.2d at 1101.
[29] See id. at 1101. The Court of Chancery apparently had made common practice of taking judicial notice of such exculpatory charter provisions before the Townsend decision. See, e.g., In re Ply Gem Indus. S’holders Litig., No. 15,779-NC, 2001 Del. Ch. LEXIS 84, at *38–39 (Del. Ch. June 26, 2001).
[30] Id.
[31] See Del. Code Ann. tit. 8, § 102(b)(7) (1986) (permitting a corporation to exculpate its directors from personal liability, provided that the corporation includes a provision to that effect in its charter or certificate of incorporation (emphasis added)).
[32] Under Delaware General Corporation Law, amendments to a corporation’s charter or certificate of incorporation generally must be approved by a majority shareholder vote. See Del. Code Ann. tit. 8, § 242(b)(1) (1953).
[33] For example, Oklahoma enacted a self-implementing exculpation statute that, by its enactment alone, abolished the fiduciary duty of care for all corporate directors; the statute thereby shifted the onus back to the corporation and its shareholders, recognizing personal director liability for breach of the duty of care only as to directors serving on the boards of corporations that opted back into the common-law regime that traditionally governed duty of care breaches and attendant liability. See Okla. Stat. Ann. tit. 18, § 1006(B)(6) (1987).
[34] Cox & Thomas, supra note 19, at 335; see also Bjerre, supra note 7, at 787 (noting that in wake of enactment of former Section 102(b)(7), “Delaware corporations [] rushed to adopt the newly permitted [exculpatory] provision, and many out-of-state corporations [] even re-incorporated in Delaware in order to do the same.”).
[35] See Exculpation of Officers, supra note 3; see also Nicholas D. Mozal & Lucille E. Wiesner, Delaware Set to Expand Exculpation to Certain Officers of Corporations, The Temple 10-Q (Aug. 3, 2022), https://www.law.temple.edu/10q/elaware-set-to-expand-exculpation-to-certain-officers-of-corporations/ [https://perma.cc/77HW-QV2T].
[36] See Del. Code Ann. tit. 8, § 102(b)(7) (2022).
[37] See id. The amended statute states, in relevant part, the following:
[A corporation’s] certificate of incorporation may [] contain any or all of the following matters: . . . [a] provision eliminating or limiting the personal liability of a director or officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer, provided that such provision shall not eliminate or limit the liability of:
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a director or officer for any breach of the director’s or officer’s duty of loyalty to the corporation or its stockholders;
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a director or officer for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
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a director [who violates another provision of the Delaware General Corporations Law concerning illegal stock redemptions, stock repurchases or dividends];
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a director or officer for any transaction from which the director derived an improper personal benefit;
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an officer in any action brought by or in the right of the corporation.
Id. (emphasis added).
[38] See Mozal & Wiesner, supra note 35.
[39] See Gantler v. Stephens, 965 A.2d 695 (Del. 2009).
[40] Id. at 698–703.
[41] Id. at 708–09. Notably, the Delaware Court of Chancery previously had held the same as the Gantler court concerning the overlap between directors’ and officers’ fiduciary duties. See, e.g., Ryan v. Gifford, 935 A.2d 258, 266 (Del. Ch. 2007) (holding that officers and directors owe identical fiduciary duties). Yet Gantler was the first case in which the Delaware Supreme Court expressly recognized that officers and directors owed identical, co-existent fiduciary duties. Gantler, 965 A.2d at 708 n.35. The court explained:
That issue—whether or not officers owe fiduciary duties identical to those of directors—has been characterized as a matter of first impression for this court. In the past, we have implied that officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors. We now explicitly so hold.
Id. at 708 (emphasis added); c.f. In re Walt Disney Co., Deriv. Litig., 2004 Del. Ch. LEXIS 142, at *3 (Del. Ch. Sept. 10, 2004) (“To date, the fiduciary duties of officers have been assumed to be identical to those of directors.”).
[42] Gantler, 965 A.2d at 709 n.37.
[43] Id. (citing Del. Code Ann. tit. 8, § 102(b)(7) (1986)).
[44] See generally Mozal & Weisner, supra note 35.
[45] See id.
[46] See, e.g., Arnold v. Soc’y for Savings Bancorp, Inc., 650 A.2d 1270, 1288 (Del. 1994) (affirming dismissal of fiduciary duty claims against officer because plaintiff “failed to highlight any specific actions [the officer] undertook as an officer (as distinct from actions as a director)” (emphasis added)).
[47] See, e.g., In re Essendant, Inc. S’holder Litig., C.A. No. 2018-0789-JRS, 2019 WL 7290944 (Del. Ch. Dec. 30, 2019).
[48] See id. at *6, *15.
[49] Id. at *6–*14 (addressing three separate claims alleging that members of corporation’s board breached various fiduciary duties by terminating a merger agreement with an entity in favor of merging with another, third-party entity).
[50] Id. at *15 (addressing claim brought against defendant in his capacity as officer).
[51] Id. at *7 (quoting In re Cornerstone Therapeutics, Inc. S’holder Litig., 115 A.3d 1173, 1175, 1179 (Del. 2015); Malpiede v. Townson, 780 A.2d 1075, 1094 (Del. 2001)).
[52] In re Essendant, 2019 WL 7290944, at *7. Notably, the corporation for which the director-defendants served as members of the board had implemented the exculpatory protections available to officers under former Section 102(b)(7) by including a provision in its charter that exculpated directors from personal liability. See id.
[53] Id. at *15 (internal quotation marks omitted).
[54] Id. at *9–*10, *12.
[55] Id. at *18.
[56] Id. at *15.
[57] Id.
[58] Id.
[59] Id.
[60] Id. (citing Arnold v. Soc’y for Savings Bancorp, Inc., 650 A.2d 1270, 1288 (Del. 1994)).
[61] Id.
[62] Id. at *18.
[63] See, e.g., Arnold, 650 A.2d at 1288 (citing Balotti & Finkelstein, supra note 20, § 4.19, at 4–335).
[64] C.f. In re Essendant, 2019 WL 7290944, at *15 (recognizing that the dual defendant could still be personally liable in capacity as CEO despite that court already concluded claims against dual defendant in capacity as director were without merit).
[65] Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (Del. Ch. 2016).
[66] Id. at 787.
[67] Id. (emphasis added).
[68] C.f. 2022 Proposed Amendments, supra note 14 (“The lack of exculpation for officers gives stockholder plaintiffs the ability to continue to exert litigation pressure to drive a settlement. Despite the difficulty those plaintiffs would face in proving, after trial, that an officer was grossly negligent, defendants rationally may wish to settle the claims to avoid the costs and distraction of litigation.”).
[69] Id.
[70] See, e.g., Gantler v. Stephens, 965 A.2d 695, 708 n.35 (Del. 2009).
[71] See Theodore N. Mirvis et al., Delaware Bar Council Proposes Allowing Exculpation of Officers from Personal Liability, Wachtell, Lipton, Rosen & Katz (Apr. 14, 2022), https://www.wlrk.com/docs/D elaware_Bar_Council_Proposes_Allowing_Exculpation_of_Officers_from_Personal_Liability.pdf [https://perma.cc/Y97B-A3T8].
[72] See id. (“In the past, the Council’s recommendations have generally been adopted by the Delaware Legislature.”).
[73] See Del. Code Ann. tit. 8, § 102(b)(7) (2022).
[74] Id. For an in-depth discussion about implementing exculpatory protections under amended Section 102(b)(7), see infra Part II.D.
[75] Del. Code Ann. tit. 8, § 102(b)(7) (2022).
[76] See id. (“All references in this paragraph to a director shall also be deemed to refer to such person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with [Delaware General Corporations Law § 141], exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.”).
[77] Id. (defining officer with reference to Del. Code Ann. tit. 10, § 3114(b)).
[78] See Del. Code Ann. tit. 8, § 102(b)(7) (2022); see also id. § 3114(b)(1)–(3) (defining officer as pertains to deemed consent to service of process for Delaware non-residents).
[79] Compare Del. Code Ann. tit. 8, § 102(b)(7) (1986), with Del. Code Ann. tit. 8, § 102(b)(7) (2022). For a more comprehensive discussion of the claims from which a director’s personal liability could be exculpated under former Section 102(b)(7), see infra Part I.A.1.
[80] See Del. Code Ann. tit. 8, § 102(b)(7)(i)–(ii), (iv) (2022); see also id. § 102(b)(7)(iii) (prohibiting exculpation of a director from claims of illegal stock redemptions, stock repurchases or dividends).
[81] Id. § 102(b)(7)(v).
[82] See Mirvis et al., supra note 71.
[83] Amended Sections 102(b)(7)(i) and 102(b)(7)(ii) directly preclude exculpating officers from claims for breaches of the duties of loyalty and good faith. But by its language, this amended Section 102(b)(7)(v) precludes exculpating an officer from any fiduciary duty breach claims when brought either by the corporation directly or by its shareholders in a derivative action. See Mellissa Campbell Duru et al., Delaware Permits Exculpation of Officers, Covington & Burling LLP (Aug. 11, 2022), https://www.cov.com/en/news-and-insights/insights/2022/08/delaware-permits-exculpation-of-officers [https://perma.cc/GML6-SPCW] (noting that under amended Section 102(b)(7) “officers may not be exculpated from claims brought against them by or in the right of the corporation (such as through derivative actions)” (emphasis added)).
[84] See Del. Code Ann. tit. 8, § 102(b)(7)(iii) (2022) (prohibiting exculpating from liability “a director under § 174 of this title” (emphasis added)); see also 2022 Proposed Amendments, supra note 14.
[85] The steps required to exculpate directors under former Section 102(b)(7) are discussed more thoroughly at supra Part I.B.
[86] Del. Code Ann. tit. 8, § 102(b)(7) (2022).
[87] See Mirvis et al., supra note 71.
[88] Id.