New Year, New Certificate of Incorporation?

Officers Gain Protections Previously Afforded to Directors Only: Observations and Recommendations for Your Corporation

Tara Bailes and Angie Fletcher

States are beginning to extend exculpation protections to corporate officers that were previously afforded only to directors.  Depending on where your corporation is chartered, you may soon be considering the opportunity to amend your corporate governance documents to take advantage of these new laws.

In 2009, the Supreme Court of Delaware held that, “Officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors.” See Gantler v. Stephens, 965 A.2d 695, 708-09 (Del. 2009). The court made clear that its holding did “not mean, however, that the consequences of a fiduciary breach by directors or officers, respectively, would necessarily be the same,” as at the time, while a corporation could adopt a provision in its certificate of incorporation exculpating its directors from monetary liability for an adjudicated breach of their duty of care, there was no “statutory provision authorizing comparable exculpation of corporate officers.” See id. at 709 n.37 (emphasis added). However, the court noted that such statutory provision was “legislatively possible” – and the Delaware legislature has since made that possibility a reality.

Delaware

Delaware corporations now have an opportunity to protect their officers from personal monetary liability for breach of fiduciary duty of care claims asserted against them. An amendment to Section 102(b)(7) of Delaware’s General Corporation Law (“DGCL”), which took effect August 1, 2022, permits corporations to now amend their Certificates of Incorporation to include protective language for its officers as well.

Section 102(b)(7) now provides:

“(7) A provision eliminating or limiting the personal liability of a director or officer 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:

  • A director or officer for any breach of the director’s or officer’s duty of loyalty to the corporation or its stockholders;
  • A director or officer for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
  • A director under § 174 of this title;
  • A director or officer for any transaction from which the director or officer derived an improper personal benefit; or
  • An officer in any action by or in the right of the corporation.

“No such provision shall eliminate or limit the liability of a director or officer for any act or omission occurring prior to the date when such provision becomes effective.

“An amendment, repeal or elimination of such a provision shall not affect its application with respect to an act or omission by a director or officer occurring before such amendment, repeal or elimination unless the provision provides otherwise at the time of such act or omission.

“All references in this [subsection] to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation …, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.

“All references in this [subsection] to an officer shall mean only a person who at the time of an act or omission as to which liability is asserted is deemed to have consented to service by the delivery of process to the registered agent ….”

Only certain senior officers are afforded protection: the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, chief accounting officer, and other individuals identified in public filings as the company’s most highly compensated officers.  (8 DCGL § 102(b)(7) (referencing officers who have consented to service pursuant to 10 DCGL § 3114(b))).

Officers are also not protected in derivative actions. Unlike officers, directors are still afforded protection for a breach of fiduciary duty of care. Under the revised statute, an officer is still liable for a claim asserted by the corporation or in the case of a shareholder derivative suit against the officer on behalf of the corporation for the officer’s breach of their fiduciary duty of care.  Directors are protected against both direct and derivative claims.

Colorado

Colorado has not yet adopted a similar amendment to its Corporation Business Corporation Act. However, Colorado, like most states, permits corporations to include a provision protecting directors, but not officers, from monetary liability subject to certain exceptions, including instances in which a director (1) receives a financial benefit they are not entitled to receive; (2) inflicts intentional harm on the corporation or the shareholders; (3) makes an unlawful distribution; or (4) intentionally violates criminal law. (§ 7-102-102(2)(d ), C.R.S.).

We continue to recommend that corporations maintain their Directors and Officers Liability Insurance Policy to protect directors and officers of the corporation individually from personal monetary liability during their tenure.

Observations and Recommended Measures

The law prior to DGCL Section 102(b)(7), and similar provisions, was concerning to most businesspeople because while both directors and officers were held to the same, or nearly the same, fiduciary duties, they were not afforded the same protections. Therefore, consequences of a breach, or alleged breach, were also not the same. Ironically, if a director and officer were found to commit the same breach, the director could be shielded from personal liability while the officer could be held personally liable for the same breach. Such inconsistency is even more problematic where an individual holds both a director and officer role. There was, and continues to be, a concern that individuals would step down from, or avoid entirely, officer positions to evade potential personal liability.

We recommend Delaware corporations consider amending their Certificate of Incorporation to provide exculpation protections to senior officers. The law will not automatically protect corporation’s officers unless the board of directors and shareholders have adopted the language to a part of the corporation’s Certificate of Incorporation. New Delaware corporations may include the protective language in their original filed Certificate of Incorporation.  Corporations registered in other states should be prepared to include these protections in their corporate governance documents as other states continue to follow Delaware’s lead.

The following is a proposed provision:

“A director or officer of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of their fiduciary duty as a director or officer, except for 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 shareholders, (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 Section 174 of the Delaware General Corporation Law, or (iv) a director or officer for any transaction from which the director or officer derived any improper personal benefit or (v) an officer in any action by or in the right of the Corporation. If the Delaware General Corporation Law is amended after the filing of this Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors or officers, then the liability of a director or officer of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

“Any repeal or modification of the foregoing paragraph by the shareholders of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification.”

It is likely that other states, including Colorado, will follow Delaware’s lead. Seven other states – Louisiana, Maryland, Nevada, New Hampshire, New Jersey, Utah, and Virginia – already have statutes extending protections to officers, in addition to directors. Corporations should be prepared to amend their corporate governance documents to take advantage of these new laws.

While the protection is not automatically guaranteed by law, each corporation must affirmatively include the relevant language in their incorporation documents.   If you need help reviewing your corporate documents, please contact Sherman & Howard’s attorneys Angie Fletcher and Tara Bailes.