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Delaware Permits Corporations to Limit the Personal Liability of Senior Officers

US Updates / February 05, 2023

Written by Oded Kadosh, Guy Milhalter, and Austin Ochoa

On August 1, 2022, several amendments to the Delaware General Corporation Law (the “DGCL”) went into effect.

One of the key changes involve an amendment to Section 102(b)(7) of the DGCL, which previously permitted a corporation to include a provision in the corporation’s certificate of incorporation that eliminates or limits the personal liability of directors. Under the amendment, Section 102(b)(7) now allows corporations to extend these protections to senior officers of the corporation.

As amended, Section 102(b)(7) states as follows:

The [corporation’s] certificate of incorporation may also contain…: (7) A provision eliminating or limiting the personal liability of a director or officer [emphasis added] 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: (i) A director or officer for any breach of the director’s or officer’s duty of loyalty to the corporation or its stockholders; (ii) A director or officer for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) A director under § 174 [Liability of directors for unlawful payment of dividend or unlawful stock purchase or redemption; exoneration from liability; contribution among directors; subrogation] of this title; (iv) A director or officer for any transaction from which the director or officer derived an improper personal benefit; or (v) An officer in any action by or in the right of the corporation.

Officers Protected by the 2022 Amendment

The amendment to Section 102(b)(7) permits a corporation to adopt language in its certificate of incorporation limiting the personal liability of both directors and officers. The Delaware statues define an “officer” as follows: (i) the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, and chief accounting officer; (ii) individuals identified in the corporation’s public filings with the United States Securities and Exchange Commission; and (iii) individuals who have consented by written agreement to accept service of process on behalf of the corporation. See 10 Del. C. § 3114(b).

Next Steps for Delaware Corporations

Existing corporations who want to eliminate or limit the personal liability of its officers as well as its directors in accordance with Section 102(b)(7) may consider amending the certificate of incorporation and those who are considering forming a new corporation may also consider a certificate of incorporation form that includes a provision similar to the following provision:

 “The personal liability of the directors and officers of the Corporation to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer shall be eliminated to the fullest extent permitted by Section 102(b)(7) of the Delaware General Corporation Law as it exists or may be amended.”

Such amendment to an existing Delaware corporation’s certificate of incorporation would require board approval and may require stockholder approval, followed by a filing with the Delaware Secretary of State.

Considerations

Entrepreneurs thinking about forming a corporation in Delaware, as well as existing corporations considering amending the certificate of incorporation to eliminate or limit the liability of its officers, should take into consideration the implications of such exculpation, including the attitude of existing stockholders and potential insurance implications, as it may affect the corporation’s directors and officers insurance coverage.

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