Corporate Safeguard or Accountability Dodge? The Effects on Officer Exculpation

By: Matt Duffy

Effective August 1, 2022, §102(b)(7) of the Delaware General Corporation Law now allows a Delaware corporate to include an officer exculpation provision in its certificate of incorporation, which would permit corporations to limit the personal liability of certain officers to the corporation or its shareholders for monetary damages for breaches of the duty of care.[1] However, the provision shall not eliminate or limit the liability of: any breach of the duty of loyalty or acts or omissions not in good faith. §3114(b) of Title 10 of the Delaware Code defines which officers are provided exculpation, which include: the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer, other highly compensated executive officers identified in SEC filings and other officers who have consented to being identified as an officer and to service of process.[2] Moreover, the adoption of this provision generally will not “require a separate class vote” of its shareholders which in turn will allow Delaware corporations with multiple classes of shareholders to more easily adopt these provisions, as well as other similar amendment.[3] Only when the “peculiar, or special quality with which [the class shares] are endowed is adversely affected” is a class vote required.[4]

Historically, these exculpation provisions were permitted only for directors, which led to officers bearing the brunt of “meritless litigation” and “unfair targeting” for due care claims by shareholders which as a result, increased settlement values in suits and costs to the corporation.[5] Now, since the exculpation provisions seem to reduce the likelihood of liability, it suggests that corporations will see a reduction on their indemnification burden, lower costs of settlement and, possibly, reduced D&O insurance premiums. However, some argue that this last benefit is unlikely as the exculpatory provision would likely become a point of discussion during future D&O insurance program renewals.[6] On the other hand, there is concern that the inclusion of an exculpatory provision would limit officer accountability. As accountability methods are taken away, “there are less incentives to remain diligent, especially considering the greater influence officers have in modern corporations.”[7] As a shareholder, is it worth it to receive lower premiums and other intangibles in exchange for, arguably, less power? Time will tell.

Since the adoption of this amendment, numerous statistics come in and most of them are positive. By the end of May 2024, 443 Delaware public companies included in major indices (i.e., S&P 500) have voted on officer exculpation amendments, with roughly 88% of them getting approved by shareholders.[8] Interestingly enough, so far only 22% of Delaware S&P 500 companies have adopted the provision with low voter turnout and supermajority requirements being the leading cause of its failure.[9] In sum, it suggests that the concerns of disloyal officers and less shareholder power seem to be a fleeting thought in the minds of shareholders. With the recent assassination of United healthcare CEO Brian Thompson on the front of everyone’s minds, it will be interesting to see how officers react to public sentiment and shareholder opinions in the way that they run their corporations.