On January 17, 2024, the Supreme Court of Delaware upheld the Delaware Chancery Court’s decision in In re Fox Corp./SNAP Inc. Section 242 Litigation, which held that corporations with a multi-class voting structure did not have to hold a separate class vote to amend their charters to provide for officer exculpation under Section 102(b)(7) of the Delaware General Corporation Law (DGCL). This decision removes the uncertainty surrounding the stockholder vote for Delaware multi-class corporations seeking to include DGCL 102(b)(7) officer exculpation provisions in their charter. More broadly, the opinion
provides further guidance on the sorts of “powers” or “rights” whose amendment requires approval in a separate class vote, and it highlights the importance Delaware places on reasoning in precedent cases and the predictability of Delaware corporate law.
Background on the DGCL officer exculpation provision
In August 2022, Delaware amended Section 102(b)(7), which provides corporations with the ability to include provisions in their corporate charters to limit officer liability. Prior to the amendment, such exculpation was permitted only for corporate directors. Specifically, the amendment permits Delaware corporations to exculpate their officers and directors for personal liability for the breach of the duty of care under certain circumstances. The exculpation provision does not protect officers from:
- liability for breach of the duty of loyalty,
- acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law,
- any transaction in which the officer derived an improper personal benefit, or
- claims brought by or in the right of the corporation, such as derivative claims.
The charter amendment requires Delaware corporations to affirmatively seek stockholder approval.
Overview of the Fox and Snap case history
In 2022, Fox Corporation and Snap Inc., both of which have multi-class voting structures, approved officer exculpation charter amendments through votes of only the holders of their voting classes of stock. In both cases, their respective boards of directors had recommended the exculpation charter amendments.
Following the votes, class A non-voting stockholders of both corporations brought separate class action suits, which were later consolidated, in the Delaware Court of Chancery seeking to invalidate the charter amendments because they violated Section 242(b)(2), which requires a separate class stockholder vote for amendments to a corporate charter that would “alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely.” The plaintiffs had argued that the ability to sue executive officers for damages for breach of the duty of care was a power or right of their class of stock under Section 242(b)(2), which was adversely affected by the adoption of the exculpation charter amendment. Accordingly, the votes held to approve the charter amendments were claimed to be invalid.
The Court of Chancery granted summary judgment to the defendant corporations, holding that the right to sue corporate officers for damages for breach of duty of care claims was not a power intrinsic to a class of stock under their respective charters, but a general power held by all stockholders under the DGCL regardless of class. The Chancery had cited two long-standing decisions, Hartford Accident & Indemnity Co. v. W.S. Dickey Clay Mfg. Co. and Orban v. Field, on which practitioners had relied, in reaching its decision.
Affirmation by the Delaware Supreme Court
In affirming the decision, the Supreme Court held that the ability to sue a director or officer for the breach of the duty of care was an attribute of the corporations’ stock and not a “power, preference or special right of the Class A common stock under Section 242(b)(2).” In its analysis, the court also focused on the interrelationship between various provisions of the DGCL, including Section 242(b)(2), which addresses charter amendments, Section 151, which authorizes class-based stock, and Section 102(a)(4), which addresses the contents of a corporation’s charter, and their use of “powers,” “preferences” and “special rights.”
Following the amendment of Section 102(b)(7), many companies sought approval to amend their charters at stockholder meetings during the 2023 proxy season. According to Proxy Analytics, over 200 proposals related to charter exculpation provisions were voted on during the 2023 proxy season (July 1, 2022 to June 30, 2023), and they received an average of 88.67% shares voting in favor of such proposals, despite generally negative recommendations from Glass Lewis, one of the leading proxy voting advisory firms.
Providing liability protection for officers may help Delaware corporations to attract and retain highly qualified senior leadership, by limiting concerns regarding personal risk in the legitimate exercise of their business judgment. Given the nature of the role of directors and officers, often requiring them to make decisions on crucial matters in time-sensitive situations, corporations should consider whether it is appropriate to adopt and seek stockholder approval of such exculpation provisions.
Given the uncertainty regarding the class approval requirements, many multi-class companies had refrained from bringing officer exculpation proposals to their stockholders. The Delaware Supreme Court’s decision should provide comfort to corporations with multi-class voting structures to now pursue such protections. Those now moving ahead with these officer exculpation charter amendment proposals should be mindful that this will necessitate a preliminary proxy statement filing at least 10 days prior to the filing of a definitive proxy statement.