New Delaware Law Enables Executive “Exculpation” Clause

Per recent amendments to the state’s General Corporation Law, Delaware corporations are now allowed to adopt an exculpation provision for corporate officers in their bylaws, thus giving them the same protections Delaware already provides to directors at Delaware chartered corporations. It would shield corporate officers from personal monetary liability for fiduciary duty claims, with the exception being claims of breaches of the duty of loyalty; intentional misconduct or knowing violations of law; and claims against officers “in any action by or in the right of the corporation.”

A post from the Harvard Law School Forum on Corporate Governance underscores the fact that this provision is not “self-effectuating,” i.e., companies must act before the protection is operative. The authors make clear they think that’s advisable, citing a recent article they consider authoritative, and the work of the Delaware Corporation Law Council. Enactment of this provision also warrants the support of institutional investors and advisory firms, according to the writers. Specifically in reference to duty-of-care lawsuits targeting officers when directors are protected, they maintain the sole effect is to “increase the cost and therefore settlement value of stockholder suits with little or no discernible value to the corporation or its stockholders, who ultimately bear those costs either directly or indirectly through increased insurance premiums.”

More than 65 percent of Fortune 500 companies and half of U.S. publicly-traded companies are incorporated in Delaware, according to the site delawareinc.com from Harvard Business Services, Inc. (not associated, it notes in a disclaimer, with the University or with the state of Delaware). Aimed at the mass market, this site lays out in plain language the advantages of Delaware incorporation (offering to facilitate the process for as low as $179, and $50 per year). The company has been in business for more than 40 years and says it has facilitated 270,000 business formations.