Amendment to DGCL Section 102(b)(7): Implications for 2024

A 2022 amendment to Section 102(b)(7) of the Delaware General Corporation Law (DGCL) permits Delaware corporations to eliminate or limit in their certificates of incorporation, or charters, the personal liability of corporate officers for monetary damages to stockholders for breaches of their fiduciary duty of care.

Previously, such protections were available only to directors.  Like directors, officers may not be exculpated for breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or any transaction from which the officer derived an improper personal benefit.  However, unlike directors, officers would still be subject to liability for breaches of their duty of care in any action by or in the right of the corporation, including derivative claims, which are typically at the direction of the board of directors.

Officers subject to exculpation pursuant to the amendment to Section 102(b)(7) of the DGCL may include any individual who: 

• Is or was president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful
  
  
• Is or was identified in the corporation's filings with the US Securities and Exchange Commission because such person is or was one of the mostly compensated executive officers of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful, or
  
  
• Has, by written agreement with the corporation, consented to be identified as an officer for purposes of accepting service of process.

2023 proxy season results and implications for the 2024 proxy season

As a result of this new rule, many public Delaware corporations sought stockholder approval to amend their charters to allow for officer exculpation.  There appears to have been significant stockholder support for such proposals during the 2023 proxy season, particularly at S&P 500 corporations.  Accordingly, this purported support might encourage others to consider pursuing a charter amendment for officer exculpation at their 2024 annual meeting of stockholders.  Only 1 of the 26 S&P 500 corporation proposals failed to receive the necessary support to amend the charter during the 2023 proxy season.  However, that corporation required a two-thirds supermajority to amend its charter and came within just 3 percent of adopting the amendment, suggesting overall support for the amendment.  

Looking beyond just the S&P 500, during the 2023 proxy season, 288 Delaware corporations included a proposal in their proxy statements requesting stockholder approval for a charter amendment to adopt an exculpatory provision for officers.[1] Stockholders approved such proposals at 231, or 80.2 percent, of the 288 companies.[2]  Finally, after the amendments to Section 102(b)(7) took effect, close to 60 percent of Delaware corporations revising their certificates of incorporation during an IPO have incorporated officer exculpation provisions. 

Guidance from ISS, Glass Lewis, and institutional investors

Both ISS and Glass Lewis amended their voting policies in 2023 in anticipation of officer exculpation charter amendment proposals.  ISS will make recommendations on such proposals on a “case-by-case” basis, similar to how it assesses director and officer indemnification and other liability protections, considering the stated rationale for the proposed change and taking into account the extent to which the proposal would:

• Eliminate directors’ and officers’ liability for monetary damages for violating the duty of care
  
  
• Eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalty
  
  
• Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than mere carelessness, and
  
  
• Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for, at the discretion of the company's board (ie, “permissive indemnification”), but that previously the company was not required to indemnify.

Glass Lewis also evaluates such proposals on a “case-by-case” basis but, citing the differences in the roles of directors and officers, specifically noted, “We will generally recommend voting against such proposals eliminating monetary liability for breaches of the duty of care for certain corporate officers, unless compelling rationale for the adoption is provided by the board, and the provisions are reasonable.”  

During the 2023 proxy season, ISS largely recommended “for” the adoption of officer exculpation, while Glass Lewis largely recommended “against.”  Indeed, ISS supported 233 of the 288 company proposals, or 80.9 percent.[3]

As of yet, the largest institutional investors, such as BlackRock, Vanguard, and State Street, have not weighed in with proxy voting guidelines on officer exculpation.

Rationales provided for officer exculpation amendments in 2023; plan for 2024 proxy season

During the 2023 proxy season, in their proxy disclosures, corporations that included a proposal to amend their charters to allow for officer exculpation often cited the below rationales:

• Fairness for officers
  
  
• The ability to attract and retain qualified officers
  
  
• Possible reduction in litigation costs, distractions, and D&O insurance premiums
  
  
• Adapting to industry trends

In some cases, corporations also noted to investors that officers would remain personally liable to the corporation for breach of fiduciary duty of care claims, including derivative claims.

To plan for 2024, boards of directors should consider reviewing the rationale for an officer exculpation amendment to their charters after seeking input from counsel and potentially from large stockholders.  With about one in five proposals failing,[4] crafting a thoughtful approach is encouraged.  Corporations should also keep in mind that a charter amendment proposal requires the filing of a preliminary proxy statement at least ten days before the definitive proxy statement is first sent or given to security holders.  Additionally, a charter amendment proposal to adopt officer exculpation provisions is considered a nonroutine agenda item under New York Stock Exchange Rule 452, meaning that brokers are not able to vote uninstructed shares.  Any broker “non-votes” that result from brokers not receiving instructions from the beneficial owners of the shares would have the same effect as a vote “against” such proposal. 

Please contact a member of your DLA Piper team to discuss these issues further.

 

[1] Numbers based on ISS voting records between August 1, 2022 and August 10, 2023 for companies for which they made a recommendation (either for or against) with respect to a proposal included in such companies’ proxy statements to amend such companies’ charters to adopt an exculpatory provision for officers.

[2] Ibid.

[3] Ibid.

[4] Ibid.