The Delaware Law Series

Officer Exculpation Under Delaware Law—Encouraging Results in Year One

Brian V. Breheny, and Allison L. Land are Partners and Ryan J. Adams is Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is by Mr. Breheny, Ms. Land, Mr. Adams, Alexander J. Vargas and Melanie Yeames, and is part of the Delaware law series; links to other posts in the series are available here.

Effective August 1, 2022, Section 102(b)(7) of the Delaware General Corporation Law (the “DGCL”) was amended to permit Delaware corporations to exculpate certain senior officers, to provide them with protection from liability for monetary damages that is similar to the protection that has been available for directors under the DGCL for nearly 40 years.  To provide for officer exculpation, however, a Delaware corporation must amend its certificate of incorporation, which requires stockholder approval.  Heading into the 2023 proxy season, it was unclear how many Delaware corporations would seek to take advantage of this new officer exculpation provision and, if so, whether their stockholders and the proxy advisory firms would support proposed amendments to certificates of incorporation to effect this change.  With many annual meetings completed, initial results have been very encouraging.  To date, over 260 publicly traded Delaware corporations have proposed amendments to their certificates of incorporation to provide for officer exculpation, and have submitted such proposed amendments to their stockholders for approval at their 2023 annual meeting.  With nearly half of those annual meetings completed, the vast majority of such proposals have received stockholder approval, often by an overwhelming majority of the votes cast.


Section 102(b)(7) of the DGCL was amended less than a year ago to authorize exculpation of certain senior officers of Delaware corporations from personal liability for monetary damages in connection with breaches of their fiduciary duty of care (the “Officer Exculpation Amendment”).  This was viewed by many as a welcome and necessary change, putting such senior corporate officers on similar footing with directors, who have long been afforded protection from personal liability, [1] although the officer exculpation provisions are more limited than the protection available to directors.[2] In recent years, the frequency with which officers of public corporations have been targets of stockholder lawsuits has increased significantly, emphasizing the need to provide them with protection from personal liability.


Importance of Special Litigation Committees in Maintaining Board Control Over Derivative Litigation

Gail Weinstein is Senior Counsel, and Scott B. Luftglass and Peter L. Simmons are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Luftglass, Mr. Simmons, Philip RichterSteven Epstein and Warren S. de Wied and is part of the Delaware law series; links to other posts in the series are available here.

There has been strong focus on derivative suits in recent years in the context of M&A-related fiduciary claims, as well as Caremark oversight claims and COVID-19-related claims, being asserted by stockholders against corporate directors and officers on behalf of the corporation. In In re Baker Hughes, a GE Company, Deriv. Litig. (April 17, 2023), the Delaware Court of Chancery granted a motion to terminate a derivative suit brought against the former directors of Baker Hughes Incorporated that challenged the fairness of the company’s merger with an affiliate of its controller. The decision serves as an important reminder to boards that a properly formed and functioning special litigation committee (“SLC”)—comprised of independent and disinterested members, which acts in good faith and reaches reasonable conclusions—is a potent tool for a corporation to retain control over derivative claims, even when the plaintiffs have excused demand on the board to bring the litigation based on the board’s non-independence or conflicts.


Chancery Rejects Dismissal of Caremark Claims Against Walmart’s Officers and Directors

Gail Weinstein is Senior Counsel, and Philip Richter, and Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Weinstein, Mr. Richter, Mr. Epstein, Andrew J. Colosimo, Brian T. Mangino and Adam B. Cohen and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamann.

In Ontario Provincial Council of Carpenters’ Pension Trust Fund v. Walton (Apr. 12, 2023), the
Delaware Court of Chancery, at the pleading stage of litigation, rejected dismissal of Caremark
claims brought against Walmart Inc.’s officers and directors in connection with the company’s role in the national opioid epidemic. The decision is a narrow one in that the court, at this early
stage of the litigation, addressed only the issue whether the claims were timely made. Notably,
however, the decision is another in a recent trend of decisions indicating increased judicial
receptivity to Caremark claims at the early pleading stage of litigation—although in most cases the court has continued ultimately to dismiss Caremark claims at the pleading stage, even in the context of arguably egregious factual situations.

Key Points

  • Although this and other recent decisions have indicated increased judicial receptivity to Caremark claims, it remains very difficult for plaintiffs ultimately to achieve success on such claims. The court has moved away from its historical trend of almost invariable dismissal of Caremark claims at the early pleading stage; and recent decisions, including Walton, have expanded the parameters for potential liability under Caremark. Nonetheless, it remains very difficult for plaintiffs to achieve ultimate success on Caremark claims—primarily because they must demonstrate that the defendants acted knowingly and intentionally in violating their oversight duties, and must establish that it would have been futile to bring demand on the board to bring the derivative litigation. However, the court’s increased receptivity to Caremark claims over the past few years has provided plaintiffs with more leverage to negotiate settlement of such claims.


Delaware M&A: Spring 2023

Andre BouchardKyle Seifried, and Laura C. Turano are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on their Paul Weiss memorandum and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.

Claims That SPAC Directors, Sponsors Breached Fiduciary Duties Survive Motions to Dismiss in Pair of Opinions

In two opinions by Vice Chancellor Will, Delman v. GigAcquisitions3, LLC and Laidlaw v. GigAcquistions2, LLC., the Delaware Court of Chancery held on motions to dismiss that it was reasonably conceivable that the directors of the respective special purpose acquisition company (SPAC) and their sponsors breached their fiduciary duties by disloyally depriving the SPAC public stockholders of information material to their decision on whether to redeem their shares in connection with the applicable deSPAC transaction. In both opinions, the court evaluated the claims under the stringent entire fairness standard. The SPAC’s sponsor qualified as a controlling stockholder due to its control and influence over the SPAC, even though it held a minority interest, and, in both opinions, the court concluded that the SPAC directors lacked independence from the sponsor. In addition, in both opinions, entire fairness review was warranted based on the divergent interests between the sponsor and public stockholders that are inherent in the SPAC structure, including the sponsor’s unique incentive to take a “bad deal” over a liquidation of the SPAC and returning the public stockholders’ investment. The opinions provide important key takeaways for sponsors, directors and investors in Delaware SPACs. For more on the Delman opinion, see here.


The New Unocal

Robert B. Thompson is the Peter P. Weidenbruch, Jr. Professor of Business Law at Georgetown University Law Center. This post is based on his recent paper and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Case against Board Veto in Corporate Takeovers by Lucian Bebchuk; and Toward a Constitutional Review of the Poison Pill (discussed on the Forum here) by Lucian Bebchuk, and Robert J. Jackson Jr.

American corporate law has remained remarkably stable for decades. The stakeholder movement of recent years has unleashed extensive discussions about ESG, corporate purpose, diversity, and benefit corporations. Yet change in actual legal rules has been slow to appear. Against that backdrop, the decisions by the Delaware courts in the Williams Companies Stockholder Litigation suggest a significant adaptation. (In re the Williams Cos. S’holder Litig., 2021 WL 754593, (Del. Ch. Feb. 26, 2021) aff’d The Williams Companies, Inc. v. Wolosky, (Del. Nov. 3, 2021)). The Williams decisions reinterpret parts of Unocal Corp. Inc. v. Mesa Petroleum Co., a key case in the current corporate law paradigm. In doing so, they shifted Delaware law as to several key Unocal elements as developed over the last four decades in ways that increase the likelihood of some director governance decisions, such as a poison pill, failing judicial review. The ideological underpinning for this change is not, however, the reasoning of the stakeholder movement, which likewise has sought to alter the exercise of director power. Rather, this shift reflects Delaware’s embrace of technological innovations and market changes, particularly those reshaping the role of shareholders.

This article makes three contributions to understanding this evolution. First, it resets the frame for viewing the current Delaware governance paradigm that arose in response to the tight spot in which corporate management found themselves in the 1980s as hostile takeovers accelerated. Unocal (and two other Delaware decisions shortly thereafter—Revlon and Blasius) are at the core of what was a fundamental change. In those decisions Delaware judges expressed dissatisfaction with the capacity of their traditional frame for judicial review to adequately deal with director decisions in takeovers: “Our corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs” the Court said as it inserted a third, enhanced, level of scrutiny between the two existing standards of business judgement deference and entire fairness. The focus in each of these new cases was on giving room for shareholders to check the extensive power that corporate law traditionally has provided to directors. Blasius explicitly sets out the ideological foundation for this change—the shareholder franchise is “critical to the theory that legitimates the exercise of power by some (directors and officers) over vast aggregations of property that they do not own.”


Flawed sale process places directors, executives and acquirers in harm’s way

George Bason is partner and Chair of the Mergers and Acquisitions practice, and Andrew Ditchfield and Paul S. Scrivano are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Bason, Mr. Ditchfield, Mr. Scrivano, James P. Dougherty, Louis L. Goldberg, and William H. Aaronson and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.

The recent Mindbody decision provides a useful refresher on the pitfalls to avoid when selling or buying a Delaware publicly traded company.

The recent Delaware Chancery Court decision in In re Mindbody, Inc. Stockholder Litigation is noteworthy as one of the few instances in recent years of plaintiff stockholders prevailing on a Revlon claim (and being awarded damages of $1 per share or approximately $44 million against the target’s CEO, for the Revlon claim and disclosure claims, and against the acquirer (a private equity sponsor), for aiding and abetting the disclosure claims). However, given the alleged conduct of the parties, the decision is unsurprising both as a ruling for the plaintiff stockholders on a “paradigmatic Revlon claim” and on disclosure claims.


When a Delaware corporation is in Revlon mode (as the target in Mindbody was, because it was selling itself for all cash), the directors must act reasonably to obtain the highest price reasonably available to the stockholders under the circumstances. As the Revlon line of cases have held, there is “no single blueprint” for maximizing stockholder value, so long as the directors chose a reasonable route to arrive at that outcome. As a result, the Delaware courts have traditionally been focused on board process and take a dim view of actions by directors or officers that fail to satisfy their Revlon duties.


Extending Dual Class Stock: A Proposal

David J. Berger is a partner at Wilson Sonsini Goodrich & Rosati, Jill E. Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Carey Law School and Steven Davidoff Solomon is Alexander F. and May T. Morrison Professor of Law, U.C. Berkeley School of Law. This post is based on their recent paper, forthcoming in Theoretical Inquiries in Law, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), The Perils of Small-Minority Controllers (discussed on the Forum here), Keynote Presentation on The Lifecycle Theory of Dual-Class Structures (discussed on the Forum here) all by Lucian Bebchuk and Kobi Kastiel.

Dual class stock has become common and ubiquitous in U.S. capital markets. Dual class structures, which have evolved over the last decade, now often include a variety of sunset mechanisms. These come in various flavors, including term-based sunsets, dilution thresholds, and life cycle events. As companies that adopted dual-class stock structures with sunsets at the time of their IPOs age, some sunset mechanisms, particularly term-based sunsets, are beginning to take effect. As early-adopters consider whether to follow their initial sunset mechanisms, boards, investors, their advisors and courts need to assess when and how dual class stock should be extended.

In some cases, companies have allowed sunsets to take effect, resulting in the collapse of the company’s dual class structure. In other cases, companies have attempted to extend or revise the length of existing dual class structures. Alphabet, for example, succeeded in such an extension by issuing nonvoting Class C shares, but Facebook withdrew a similar proposal in order to settle litigation challenging its proposed adoption. Despite Facebook’s failure, courts have upheld such extensions even when they are litigated to a judgment. In the recent case of City Pension Fund for Firefighters and Police Officers in Miami v. The Trade Desk, Inc., No. CV 2021-0560-PAF, 2022 WL 3009959 (Del. Ch. July 29, 2022), the Delaware Chancery Court, applying the MFW standard, Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014), found that an arrangement to extend the life of dual class stock was appropriate.


Chancery Court Provides Roadmap for Retroactive Validation of Shareholder Votes

Perrie Weiner and Aaron Goodman are Partners and Paul Chander is an Associate at Baker McKenzie. This post is based on a Baker McKenzie memorandum by Mr. Weiner, Mr. Goodman, Mr. Chander, and Alexandra Stackhouse and is part of the Delaware law series; links to other posts in the series are available here.

In brief

In December 2022, the Delaware Chancery Court sent shockwaves throughout the SPAC world when it ruled that single class votes on charter amendments were invalid under Delaware law. This is the process utilized by many, if not most, SPACs seeking approval of their merger with the target company.

In Garfield v. Boxed, Inc., [1] the Delaware Court of Chancery held that a stockholder vote was invalid under Section 242 of Delaware General Corporation Law (“DGCL”) where a special purpose acquisition company (SPAC) had a multi-class stock structure and Class A and Class B stockholders voted together as a single class on charter amendments to increase the number of shares. Plaintiff, a Class A common stockholder, argued that the vote was invalid because holders of Class A shares had a right to vote on the amendments as a standalone class. The Chancery Court agreed. By invalidating these votes, the Boxed decision cast doubt on the capital structure for dozens of post de-SPAC companies with billions worth of securities. The Chancery Court explained that where the de-SPAC M & A transaction closed in reliance on the challenged amendments, the validity of the merger could be attacked.

Boxed resulted in the immediate creation of a new brand of securities claims and a potential tsunami of SPAC litigation. Recognizing the widespread harm this would cause, on February 20, 2023, searching for a way to reconcile belated challenges to the very reverse merger by which hundreds of SPAC targets were taken public and where such companies had long since been operating as public companies, the Chancery Court held that affected companies could retroactively validate these “pooled” stockholder votes under Section 205 of the DGCL. The Court’s first written decision regarding Lordstown Motors Corp. illustrates how affected companies may seek retroactive validation of stockholder votes taken in contravention of Section 242.

Accordingly, post-de-SPAC companies should follow the Court’s guidance to seek retroactive validation of pooled shareholder votes under Section 205 to resolve any concerns about their capital structure stemming from the Boxed decision and avoid related securities litigation.


Rodman Ward, Jr.

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School. Leo E. Strine, Jr. is the Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware.

On March 18, 2023, the corporate law and corporate governance communities lost a special person special.  Rodman Ward, Jr. graduated from Harvard Law School in 1959.  He was a distinguished partner in the Wilmington law firm of Prickett, Ward, Burt & Sanders for many years, during which he was one of Delaware’s leading corporate litigators and commercial lawyers.

During the 1970’s, Rod became the go-to Delaware litigator for a rising firm named Skadden, Arps, Slate, Meagher & Flom, and Joe Flom asked Rod to leave his successful practice and head the first office of Skadden outside of New York, which Rod did for many years.

During this formative period of Delaware takeover law, Rod and the Skadden Wilmington office were at the center of many of the era’s key takeover cases.   Among other matters, Rod argued and won the iconic case of Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261 (1988).  To Rod’s delight, his convincing advocacy in that case led his adversary to mutter Henry II’s lament, “will no one rid me of this meddlesome priest.”


To Exculpate, or Not to Exculpate: Is It Even a Question?

Ethan Klingsberg and Pamela Marcogliese are Partners, and Elizabeth Bieber is Counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Klingsberg, Ms. Marcogliese, Ms. Bieber and George Ter-Gevondian and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of Duty of Care? (discussed on the Forum here) by Holger Spamann. 

Toward the end of last summer, the Delaware General Corporation Law (DGCL) was amended to permit companies to exculpate officers for breaches of their duty of care. This amendment permits officers to benefit from Section 102(b)(7) of the DGCL, in most instances, in the same way that this valuable section has long insulated directors from liability for actions taken in good faith.  However, the catch is that this new right of officers to exculpation will take effect if, and only if, the charter of the company in question provides explicitly for this right.  This means a charter amendment and, therefore, a shareholder vote will be required.

Approximately six months following the amendment of Section 102(b)(7), we have not changed our view: we believe the benefits of exculpation are significant and, at most companies, worth the costs of pursuing shareholder approval of a charter amendment.  The market data from companies with off-cycle meetings within the last six months supports this view.

As a practical matter, extending exculpation to officers has the potential to reduce both the volume and scope of lawsuits alleging breaches of fiduciary duties by officers. This, in turn, reduces the indemnification burden on companies since such lawsuits are now more likely to be resolved earlier in the progression of the lawsuit (on a motion to dismiss, for example) or at lower cost of settlement. As a result, companies may see reduced D&O insurance premiums. Companies may also experience less quantifiable benefits, such as avoiding or truncating negative press cycles attendant to such lawsuits.  However, companies should be aware that extending exculpation to officers will not insulate these officers from derivative lawsuits (i.e., a lawsuit by the board, on behalf of the corporation) against officers.