The Delaware Supreme Court recently expressly held that officers and directors of Delaware corporations owe essentially the same fiduciary duties of care and loyalty to corporations and their stockholders. However, while Delaware statutes permit corporations to eliminate directors' personal liability for most breaches of the duty of care through so-called "exculpatory" charter provisions, Delaware law does not extend similar protection to officers from such liability.
Except in cases of specific acts of malfeasance or defalcation, claims against officers for breach of fiduciary duty have not been the subject of extensive litigation. However, in light of this recent Delaware Supreme Court ruling, it is possible that claims against officers challenging business decisions could now become more common.
Officers of Delaware corporations should be aware that the statute permitting corporations to provide exculpation to their directors for breaches of the fiduciary duty of care does not extend to them. Accordingly, as discussed below, we recommend that concerned officers seek indemnification agreements and appropriate insurance arrangements to provide protection in the event that such a claim is brought against them.
In Gantler v. Stephens, stockholders of a Delaware corporation sued certain officers and directors of the corporation, alleging that they violated their fiduciary duties by rejecting an opportunity to sell the corporation. The stockholders claimed that the officers and directors instead decided to reclassify the corporation's shares to benefit themselves and disseminated a materially misleading proxy statement to gain shareholder approval for the reclassification.
The Delaware Chancery Court dismissed the complaint, holding that the stockholders ratified the reclassification following full disclosure, which was sufficient to protect the decision to reclassify the benefit under the business judgment rule. However, on appeal, the Delaware Supreme Court reversed the lower court's ruling, holding that the complaint pled facts sufficient to overcome the business judgment presumption and to state fiduciary duty claims.
In reaching that decision, the Delaware Supreme Court expressly held that "officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and the fiduciary duties of officers are the same [as those of] directors." Although this proposition has been implied in the past, the Delaware Supreme Court for the first time expressly held so in this case.
The Court also made clear that the consequences of a fiduciary breach by directors or officers would not necessarily be the same. Specifically, Section 102(b)(7) of Delaware corporation law provides that corporations may include provisions in their certificates of incorporation that would avert personal liability for a director's breach of his or her duty of care. Currently, there is no similar provision that would so limit an officer's liability, and viability of legislation extending that protection to officers in the current political environment is uncertain.
Critical Role of Indemnification Agreements and Officer Insurance
The Gantler ruling clearly establishes that officers of Delaware corporations owe the same fiduciary duties as their directors, but that they cannot rely on Delaware's exculpation statute to allow the corporation to limit their liability through charter provisions.
As a result, at least until any new legislation amends the current Delaware statute, concerned officers should consider insisting that indemnification agreements and officer insurance are in place to offer them protection against liability should they face a claim that they breached their fiduciary duties.
Contribution provisions in such an agreement could also provide additional protection if indemnification is unavailable for public policy or other reasons. Such a provision would provide for contribution based on the relative economic benefit of the challenged transaction to the corporation and the officers. In a case where the officer derived little or no economic benefit, a contribution provision could dramatically reduce an officer's exposure to liability.
Further, officers may wish to consider requesting that these agreements contain covenants not to sue for personal liability for breaches of duty of care (subject to the same exceptions contained in director exculpatory provisions), where governing state law would permit such an advance covenant to be enforced.