Aon  |  Financial Services Group

For years, Delaware corporations could eliminate or limit monetary liability for breaches of the duty of care only for directors. Such protections were codified in Delaware General Corporation Law (DGCL) §102(b)(7) and permitted the elimination of directors’ personal liability except for (1) a breach of the duty of loyalty; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; and (3) any transaction from which the officer derived an improper personal benefit.

Delaware has now adopted significant amendments to its DGCL that would expand the right of a corporation to adopt an “exculpation” provision in its certificate of incorporation to cover not only directors, but now also corporate officers. The expansion of DGCL §102(b)(7) would include the same personal protections as that of directors. However, an important distinction is that corporations may not eliminate or limit officers’ liability for claims brought by or on behalf of the corporation, including shareholder derivative claims. In contrast, corporations currently may exculpate directors for breaches of the duty of care however those claims are asserted, whether directly or derivatively.

All Delaware corporations should consider proposing amendments to their exculpation provisions to extend this protection to corporate officers. Companies engaging in an initial public offering can consider implementing such protections in connection with the new company’s certificate of incorporation. Publicly traded companies may amend their charter to reflect such a provision after a board-sponsored proposal and vote of shareholders. Such developments are likely to sit favorably not only with officers of Delaware corporations but also with D&O insurers.