The Delaware General Assembly recently adopted amendments to the Delaware General Corporation Law (the “DGCL”), effective as of August 1, 2022. Among other changes, the amended DGCL provides for exculpation of officers from liability for breaches of the duty of care and also expands the ability of boards to delegate authority to members of management in connection with the issuance of shares of common stock and options. The change with the most potential for far-reaching impact is with respect to officer exculpation. For existing corporations, a charter amendment is required to take advantage of the new officer exculpation, and it is an open question as to whether shareholders (and proxy advisory firms) will support extending exculpation to officers.
Section 102(b)(7) of the DGCL previously allowed for director (but not officer) exculpation from money damages regarding breaches of fiduciary duty not involving breaches of the duty of loyalty, actions taken not in good faith, and certain other exceptions. In 1986, when Section 102(b)(7) of the DGCL was originally adopted, legislators declined to grant officers protection thereunder. Over time the difference in protections typically afforded to officers and directors has occasionally seemed unjustified. In 2009, the Delaware Supreme Court in Gantler v. Stephens found that officers and directors alike owe the same fiduciary duties of care and loyalty; however, as expressly acknowledged by the court, officers and directors have faced disparate outcomes upon a determination of a breach of such duty.
Under the 2022 amendments to the DGCL, a corporation’s Certificate of Incorporation may now provide for exculpation of senior officers – the CEO, CFO, chief legal officer and “named executive officers” identified in SEC filings, among others – from the duty of care in certain circumstances. Unlike directors, officers may not be exculpated from liability with respect to claims brought directly by the corporation or derivative suits brought by stockholders on behalf of the corporation.
Corporations have routinely adopted these liability limitations for directors, but as noted above, to extend this protection to officers will require a charter amendment authorized by a vote of stockholders. The main motivating factor behind the DGCL amendment may have been a desire to shut down a particular motion practice tactic of the plaintiff’s bar – namely, the exploitation of the anomalous lack of officer exculpation to extend the life of otherwise meritless claims past a motion to dismiss, significantly increasing the cost of litigation and settlement. While extending exculpation to officers may eliminate the use of this tactic and resolve the inequities between directors and officers that were highlighted in Gantler, it is unclear at this point whether these arguments will motivate stockholders (and proxy advisors) to vote/recommend in favor of decreasing the liability of officers to shareholders for breaches of the duty of care.
This will be an interesting area to watch next proxy season.
Delegation of Authority for Stock and Option Issuances
The amended DGCL also expands the ability of boards to delegate authority in connection with the granting of shares and options. In recent years, the DGCL has been amended to provide boards of directors with the ability to delegate authority to corporate officers to allocate grants of shares and options (or other rights to acquire shares), subject to certain parameters. The amended DGCL harmonizes the statutory provisions covering this delegation of authority as it relates to shares, on the one hand, and options and other rights to acquire shares, on the other hand.
Specifically, the amended DGCL provides greater flexibility in connection with the delegation of authority as it relates to options and other rights to acquire shares, because such delegation may now be made to any individual or entity, and would allow such individual or entity to set the terms of the awards (as opposed to the board). To establish such a designation, the board must still pass a resolution that specifies: (i) the maximum number of shares that may be issued; (ii) the time period during which such shares may be issued; and (iii) the minimum amount of consideration to be received for those shares. This amendment is expected to eliminate potential “foot faults” that may have otherwise arisen under prior delegations of authority and will provide boards of directors with greater flexibility to delegate authority to design equity awards for lower-level employees to groups of management.
Several miscellaneous changes were also effected by the 2022 amendments, including revisions to Section 262 that decrease procedural impediments to exercising appraisal rights. Beneficial owners may now assert appraisal rights on their own behalf (instead of through the record owner), subject to the beneficial owner’s maintenance of continuous ownership and certain procedures. Additionally, these modifications establish appraisal rights for stockholders in connection with a conversion of a Delaware corporation to another entity.
- Corporations should consider amending their charter to extend exculpation to officers. This amendment will require approval by both the board of directors and stockholders. Accordingly, the likely reaction of shareholders (and if, applicable, proxy advisors) as well as the timing of the amendment in conjunction with the corporation’s annual meeting should be considered.
- If amending organizational documents, perform a broader review. SAmending a certificate of incorporation requires stockholder approval. Given this obstacle, companies do not frequently review their certificates of incorporation to ensure that contain state of the art defensive provisions. If a company wishes to extend exculpation to officers, they may wish to consider whether other changes may be beneficial.
- With respect to delegations of authority to issue shares and options, boards of directors and compensation committees will have greater clarity and flexibility in terms of the ability to allow members of management to design equity awards. Although the changes to the DGCL relating to delegations of authority to issue stock and options serve to build upon existing delegation rights that have been in effect for years, the new provisions will provide additional flexibility by broadening the world of individuals to whom such authority may be granted and clarifying that the person or person(s) who are delegated such authority may design the terms and conditions of the grants.
- Changes to appraisal rights may–but probably won’t–increase exercise of appraisal rights. The changes to the DGCL permitting beneficial owners, in addition to record owners, to exercise appraisal rights serves as an acknowledgement of the manner in which the vast majority of stockholders hold their shares. Previously, stockholders were required to engage the record owner (typically Cede & Co.) to make the appraisal demand. Stockholders seeking appraisal of their shares in connection with a business combination will find the process slightly more streamlined. However, given the number of other procedural steps in the appraisal process, permitting a beneficial owner to make the initial appraisal demand is unlikely to significantly increase the number of stockholders seeking to exercise appraisal rights in connection with an eligible transaction.