Aaron Wendt is a Research Director and Brianna Castro is a Senior Director at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum.
Recent amendments to the Delaware General Corporation Law (“DGCL”) have led public companies to propose new protections for their corporate officers, thereby forcing shareholders to consider whether they should give up their right to sue those officers for claims of negligence and breaches of their fiduciary duty of care.
Companies incorporated in Delaware, with the approval of shareholders, now have the ability to adopt “officer exculpation” provisions in their certificates of incorporation to provide certain officers with liability protection previously available only to corporate directors. The Delaware law on exculpation was originally designed to only apply to directors, as their role is so different from that of officers, and it made sense to protect directors from liability so they could properly serve shareholders. Although the roles of directors and officers have not changed since the law was initially crafted, the amended law now makes those same liability protections available to officers.
The amendments were prompted in part by the prevalence of litigation directed at companies, particularly in the context of mergers and acquisitions. Difficulties hiring executives and frivolous litigation, along with insurance and other cost issues, are a few of the reasons why companies may seek to adopt officer exculpation provisions.