Einde inhoudsopgave
Directors' liability (IVOR nr. 101) 2017/4.2.1
4.2.1 Section 102(b)(7) DGCL: framework
mr. drs. N.T. Pham, datum 09-01-2017
- Datum
09-01-2017
- Auteur
mr. drs. N.T. Pham
- JCDI
JCDI:ADS398531:1
- Vakgebied(en)
Ondernemingsrecht / Rechtspersonenrecht
Voetnoten
Voetnoten
I would like to emphasise here that, although monetary damage claims based on violations of duty of care may be barred pursuant to section 102(b)(7) DGCL, the exculpatory provision does not eliminate a director’s fiduciary duty of care. A court may still grant injunctive relief for violations of the duty of care. Section 102(b)(7) DGCL serves only to withdraw one remedy for a breach of that duty of care. Nonetheless, the bulk of litigation involves claims for monetary damages.
The Delaware Supreme Court has, on occasion, referred to directors’ fiduciary duties as a triad of duties involving care, loyalty and good faith (for instance Emerald Partners v. Berlin, 787 A. 2d 85 (Del. 2001), par. 90.
In re Walt Disney Company Derivative Litigation, 906 A. 2d 27 (Del. 2006); Stone v. Ritter, 911 A. 2d 362 (Del. 2006).
For illustration, see Guttman v. Huang 823 A.2d 492 (Del. Ch. 2003), par. 506 (‘The General Assembly could contribute usefully to ending the balkanization of the duty of loyalty by rewriting § 102(b)(7) to make clear that its subparts all illustrate conduct that is disloyal.’).
Stone v. Ritter, 911 A.2d 362 (Del. 2006), par. 370.
Section 102(b)(7) DGCL enables Delaware companies to include exculpatory provisions in their certificates of incorporation in order to potentially eliminate or limit the personal liability of a director to the company and/or its shareholders for monetary damages due to breach of fiduciary duty as a director (but not as an officer).1 Even if a company adopts the most protective charter provision possible, the law expressly prohibits exculpation for certain categories of impermissible conduct:
Liability for any breach of the director’s duty of loyalty to the corporation or its shareholders;
Liability for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law;
Liability under Section 174 DGCL (liability for the payment of unlawful dividends or unlawful share purchases or redemptions);
Liability for any transaction from which a director derived an improper personal benefit.
Under Delaware’s legal framework, directors owe the company fiduciary duties of care and loyalty.2 Existing case law determines that directors can only be exculpated from duty of care claims.3 The list of claims above may therefore be regarded as a list of duty of loyalty claims, which are non-exculpable claims under section 102(b)(7).4
There has been considerable litigation involving what constitutes non-exculpable claims. In particular, the disputed issues concern the ways in which ‘good faith’ is related to a director’s’ duty of loyalty. In the seminal case Stone v. Ritter, the Delaware Supreme Court decided that ‘good faith’ forms a condition of the duty of loyalty:
‘The failure to act in good faith may result in liability because the requirement to act in good faith “is a subsidiary element,” i.e. a condition, “of the fundamental duty of loyalty.” It follows that because a showing of bad faith conduct, in the sense described in Disney and Caremark, is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty. This view of a failure to act in good faith results in two additional doctrinal consequences. First, although good faith may be described colloquially as part of a ‘triad’ of fiduciary duties that includes the duties of care and loyalty, the obligation to act in good faith does not establish an independent fiduciary duty that stands on the same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result in liability, whereas a failure to act in good faith may do so, but indirectly. The second doctrinal consequence is that the fiduciary duty of loyalty is not limited to cases involving a financial or other recognizable fiduciary conflict of interest. It also encompasses cases where the fiduciary fails to act in good faith. As the Court of Chancery aptly put it in Guttman, “a director cannot act loyally towards the corporation unless she acts in the good faith belief that her actions are in the corporation’s best interest”.’5
Stone v. Ritter thus clarifies that violations of the duty of loyalty may not only arise in the context of conflicts of interests but may also arise from a failure to act in ‘good faith’. Moreover, as ‘good faith’ forms a prerequisite for directors’ loyalty, a failure to act in ‘good faith’ constitute a violation of the fiduciary duty of loyalty. Hence, any director whose actions lack ‘good faith’ breaches the fiduciary duty of loyalty and cannot rely on the protection of section 102(b)(7) DGCL. Accordingly, Stone v. Ritter leads me to understand ‘good faith’ as an important determinant of a director’s loyalty. If shareholders allege sufficient facts to allow the inference that a director’s action was ‘not in good faith’, the director concerned may not be protected under section 102(b)(7) DGCL.
The importance of a director’s ‘good faith’ is consequently best understood by referring to the Delaware’s exculpatory provision in section 102(b)(7). The provision was enacted in the late eighties against the background of changes in the liability environment. In the following paragraph, I will provide some empirical insights to contextualise the rationale and purpose of section 102(b)(7) DGCL.