ANALYSIS: Few Delaware Boards Capitalize on Officer Exculpation

For more than a year and a half, Delaware has allowed incorporated companies to take advantage of exculpation clauses for corporate officers. But as beneficial as this risk-aversion step could be for Delaware companies, only a relative few have actually added such clauses to their company charters.

In mid-2022, Delaware amended its code to let companies add a clause to their charters—with an approved shareholder vote—that would eliminate or limit the personal liability of certain officers in the event of a fiduciary duty breach.

Even though shareholder challenges ensued, the Delaware Supreme Court in January 2024 issued an important ruling, In re Fox Corp. Section 242 Litig., clarifying that companies are not required to hold a vote for its nonvoting stock classes. This decision further simplified the process to amend a company charter to add an officer exculpation clause.

Exculpation can protect a company’s officers against shareholder litigation, which could also enhance officer candidate recruitment. But while the developments in Delaware are fairly positive for incorporated companies, it does not appear that these corporate boards are taking advantage of officer exculpation.

A Bloomberg Law EDGAR Advanced Search reveals that, in all of 2023, only 206 Delaware public corporations filed a definitive proxy statement for a shareholders’ vote to provide for officer exculpation. That total accounts for about 6% of the roughly 3,600 public companies in the US, the majority of which are incorporated in Delaware.

One reason to potentially explain this discrepancy is that boards may not be as prepared to implement exculpation clauses as they could be.

In a State of Practice Survey administered by Bloomberg Law in early 2023, after the Delaware amendment took effect, corporate attorneys were asked about the preparedness level of the boards or board members they advised with regard to the issues of director and officer exculpation.

Few attorneys viewed the boards or board members that they advised as fully prepared in either director exculpation (13%) or officer exculpation (11%). (Respondents to the survey were limited to attorneys who advise corporate boards.)

As time goes on, corporate boards may gain a better grasp on exculpation—especially now that In Re Fox has been decided. This could translate into more officer exculpation clauses in Delaware company charters.

Bloomberg Law subscribers can find a variety of Practical Guidance documents, workflow tools, and reference materials for corporate counsel in our Corporate Practice Center resource.

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