D&O Exculpatory Provisions

Delaware corporations can exculpate a director from personal monetary liability for breaches of fiduciary duty

Per DGCL § 102(b)(7)
Subject to specified exceptions, permits stockholders,
in the certificate of incorporation, to exonerate directors from personal liability for gross negligence
Adopted in 1986 in response to Smith v Van Gorkom (Del 1985)
Doesn't affect courts ability to set aside the underlying transaction

Cannot eliminate or limit personal liability for:

Breach of the duty of loyalty to the corporation and its stockholders
Acts or omissions not in good faith, or involving intentional misconduct or a knowing violation of the law
Illegal distributions
Where the director derived an improper personal benefit

Because of these exclusions, characterization of claim can affect whether exclusion applies

Whether alleged violation was of the duty of loyalty or duty of good faith (which can't be excluded) versus the duty of care (which can)
Recent cases have found that "no care" can violate
duty of loyalty and be outside exculpation provision

In re The Walt Disney (Del Ch 2005)

Ruling by Chancellor Chandler 8.09.05
Opinion
Disney directors didn't violate their fiduciary duties by ratifying CEO Eisner's decision to fire COO Ovitz in a way that entitled Ovitz to $140 million severance
While the directors' conduct "fell significantly short of the best practices of ideal corporate governance," board members did not violate their duties or waste Disney resources

Ruling by Chancellor Chandler 825 a.2D 275
Derivative claim asserted breach of directors' fiduciary duty over Michael Ovitz' employment agreement and its termination
Complaint survives motion to dismiss
"cognizable question whether the defendant directors should be held personally liable for a knowing or intentional lack of due care"

Pleaded facts were outside protection of DGCL § 102(b)(7) exculpatory charter provision

Do not implicate merely negligent or grossly negligent decision-making
Suggest instead that the directors failed to exercise any business judgment
Suggest they failed to make any good faith attempt to fulfill their duties
When a director consciously ignores duties,
thereby causing injury to the corporation,
director's actions are either "not in good faith" or
"involve intentional misconduct",
making DGCL § 102(b)(7) exculpation unavailable

Court rejected directors' contention that their approval of a sale of assets was within scope of DGCL § 102(b)(7) exculpation
726 A.2d 1215 (Del. 1999).
A directors claim for exculpation from liability under section 102(b)(7) is "in the nature of an affirmative defense"

Malpiede v Townson 780 A2d 1075 (Del 2001)

Supreme Court affirmed the Court of Chancerys grant of a
motion to dismiss the plaintiffs due care claims because of the corporations 102(b)(7) exculpation provision
Chancery had also dismissed, and the Supreme Court affirmed, the plaintiffs duty of loyalty and disclosure violation claims
Thus, in order to achieve exculpation in Malpiede, the directors were not required affirmatively to prove the lack of a breach of loyalty
Emerald Partners permits dismissal of a complaint upon invocation of the corporations 102(b)(7) provision if the complaint "unambiguously and solely asserted only a due care claim."

In Re Abbott Laboratories (7th Cir 3.28.03)

Held, facts supported that there was a "sustained and
systematic failure of the board to exercise oversight"
Intentional as the directors knew of violations but failed to act, which would establish lack of good faith
If facts proven, DGCL § 102(b)(7) exculpation unavailable

Grogan v O'Neil (D KS 2003)

Court rejected directors' contention that their approval of a sale of assets was within scope of DGCL § 102(b)(7) exculpation

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