Developments and Trends in Delaware Officer Exculpation Charter Amendments
In August 2022, the Delaware General Assembly amended the Delaware General Corporation Law (“DGCL”) to allow corporations to adopt charter provisions exculpating certain officers from personal liability for monetary damages for breaches of the duty of care. Since that time, corporate boards, stockholders, practitioners, and other observers have considered to what extent Delaware public company boards would propose officer exculpation amendments (also referred to here as “OEAs”) to their stockholders and whether stockholders would approve them. Now in the second proxy season since the DGCL was amended, we examine the latest data with respect to Delaware public companies proposing and adopting OEAs, recent judicial developments relating to OEAs, and the results of OEA proposals in light of proxy advisor recommendations.
Key Takeaways
- From August 2022 through the end of May 2024, 443 Delaware public companies included in major indices have proposed OEAs, and stockholders have approved 88% of them, with an average “for” vote of 89% of shares present at the meeting and 69% of the shares outstanding. Approximately 22% of Delaware S&P 500 companies have adopted OEA proposals. Low stockholder turnout and supermajority approval requirements appear to be significant factors in the failure of OEA proposals.
- The Delaware Supreme Court has held that the adoption of OEAs does not require a separate class vote. This holding removes uncertainty for corporations with multiple classes of stock that have adopted or seek to adopt OEAs.
- Among proxy advisors, Institutional Shareholder Services (“ISS”) has recommended voting “for” approximately 86% of OEAs proposed, while Glass Lewis has generally recommended voting “against” them. So far, it appears that negative recommendations have not had a meaningful impact on the passage of OEA proposals.
Background
The August 2022 amendments to Section 102(b)(7) of DGCL permit Delaware corporations to include an officer exculpation provision in their certificates of incorporation, granting officers protection similar to that previously only afforded to directors. Specifically, an officer exculpation provision allows corporations to eliminate or limit personal liability for monetary damages for breaches of the duty of care by certain senior officers of the corporation. Exculpation of officers is not permitted for breaches of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law, transactions from which the officer derived an improper personal benefit, or claims brought by or in the right of the corporation (derivative claims).
Stockholder Approval of Officer Exculpation Amendments
In order to provide for officer exculpation, a Delaware corporation must include an officer exculpation provision in its certificate of incorporation. For public companies, amending the certificate of incorporation to provide for officer exculpation requires board and stockholder approval.
Delaware public companies began seeking stockholder approval for OEAs soon after the DGCL was amended in August 2022. Tracking data available from Deal Point Data (“DPD”) indicates that, as of the end of May 2024, among Delaware public companies included in any of the NASDAQ 100, Fortune 500, S&P 1500, and Russell 3000 indices, 443 have held stockholder votes to approve OEAs, of which 88% were approved.1 Most of the proposals were made during proxy seasons, with 224 during the April-July 2023 season, and 169 during the first half of the 2024 proxy season. So far, 106 votes are scheduled for June and July 2024, with several more announced in preliminary proxy statements without meeting dates. The high passage rate of OEAs has been consistent across the 2023 and 2024 proxy seasons.
Of the 443 index companies, approximately 46% were small-cap companies (under $2 billion market cap), 32% were mid-cap companies ($2-10 billion market cap), and 22% were large-cap companies (over $10 billion market cap). Over 95% of the OEA proposals by mid- and large-cap companies passed, while 80% of proposals by small-cap companies passed.
The DPD data also indicated that, for OEA proposals that passed, an average of 81% of the outstanding voting shares were present at the stockholders meeting, while for the proposals that failed, the average was only 55%. Because a passing vote typically requires approval of a majority of the total voting shares outstanding (or a supermajority threshold, if required under a corporation’s certificate of incorporation), stockholder turnout at the meeting can be determinative.
According to the DPD data, for all OEA proposals (whether they passed or failed), an average of 89% of shares present at the meeting voted “for” the proposal. Even where the proposals failed, an average of 83% of the shares present at the meeting voted “for” the proposal; however, as noted, such support could still be insufficient for approval of the amendment if the corporation’s charter required a supermajority threshold for approval or stockholder turnout was low.
Per the DPD data, among the 325 Delaware corporations in the S&P 500 index, 74 have sought approval of OEAs, with 96% of them passing. For each of the three companies that did not pass the amendment, the vote was relatively close.2 Finally, among the 23 Delaware multi-class companies in the S&P 500 index, all six companies that have proposed OEAs have passed them.
Judicial Developments
In January 2024, the Delaware Supreme Court’s opinion in In re Fox Corporation/Snap Inc.3 affirmed that OEAs generally do not require a separate class vote of the stockholders. The case involved two multi-class corporations that had adopted OEAs without submitting the matter to the vote of the classes of non-voting shares. The Court held that the text of DGCL Section 242(b)(2) and related sections showed that, while the ability to sue directors and officers for breaches of the duty of care was an attribute of the stock, it was not a statutory “power, preference, or a special right of the common stock” that would warrant a separate class vote. For corporations with multiple classes of stock, the Court’s decision removes uncertainty about the validity of OEAs that already have been adopted and offers a clear path for such corporations that plan to propose such amendments.
Proxy Advisor Recommendations
With respect to voting on OEAs, ISS and Glass Lewis have left their 2023 proxy voting guidelines unchanged for 2024. Both firms state that they will continue to evaluate such proposals on a case-by-case basis. As explained below, it appears that ISS and Glass Lewis voting recommendations against OEA proposals have not resulted in a significant headwind to obtaining stockholder approval of such proposals.
Specifically, ISS will consider, among other factors, the stated rationale for the proposed change and whether the amendment would eliminate an officer’s liability for monetary damages for violating the duty of care.4 ISS has made recommendations with respect to approximately 97% of the 443 proposals referenced above, with ISS recommending that stockholders vote “for” the proposal in 86% of the cases.5 For the OEA proposals that ISS recommended voting “against,” 92% passed notwithstanding ISS’s recommendation. From anecdotal evidence, ISS is more likely to recommend voting against an OEA proposal when the corporation’s governance structure limits accountability to stockholders (such as through the presence of controlling stockholders, classified boards, lack of independent directors, a record of poor board attendance, and restrictions on proxy access). In such circumstances, ISS contends that stockholders should be allowed to hold officers accountable through litigation, including for breaches of the duty of care.
Glass Lewis will generally recommend voting against OEAs that eliminate monetary liability for breaches of the duty of care, unless the board provides a “compelling rationale” and the provisions are “reasonable.”6 Based on anecdotal information,7 Glass Lewis typically recommends voting against OEA proposals, but such recommendations do not appear to have had a meaningful effect given the overall high rate of passage of these proposals.
Conclusion
From the perspective of nearly two years of stockholder votes on OEAs, the outlook appears to be favorable for Delaware corporations seeking to adopt officer exculpation amendments. Delaware corporations that have proposed such amendments have generally experienced high passage rates and sufficient stockholder support to overcome negative recommendations from proxy advisors. While only a minority of S&P 500/large-cap Delaware companies have proposed officer exculpation charter amendments, we expect that the results obtained by companies thus far will continue to encourage more companies to seek such amendments.
1 All data in this section is taken or derived from Deal Point Data and is based on voting results announced as of May 31, 2024. Broker non-votes are excluded from calculations.
2 One received 69% (short of a required 75% supermajority), another received 64% (short of a required 2/3 supermajority), and the third received 49% (short of a required majority).
3 In re Fox Corporation/Snap Inc. Section 242 Litigation, 312 A.3d 636 (Del. January 17, 2024, as revised January 25, 2024).
4 ISS Proxy Voting Guidelines, effective February 1, 2024.
5 Based on tracking information provided by Georgeson and compiled as of May 24, 2024.
6 Glass Lewis 2024 Benchmark Policy Guidelines, effective January 1, 2024.
7 Data on Glass Lewis recommendations is not publicly available.
