Should Boards Eliminate Corporate Officer Liability for Fiduciary Duty Breaches? Boards will need to consider whether to provide officers with a new shield to liability.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

More than 35 years ago, in the case of Smith v. Van Gorkom, the Delaware Supreme Court surprised many when it held members of a board of directors financially liable for the breach of their fiduciary duty of care. This unexpected catalyst for director personal liability triggered dramatic increases in D&O insurance premiums and fears that qualified directors would resign en masse from their boards.

In response, Delaware and most other states quickly amended their corporate laws to allow corporations to eliminate the risk of personal liability for a director's breach of the duty of care, subject to narrow exceptions. With this, the markets calmed, and directors stayed in the boardroom. These protections recently were extended by the Delaware legislature to officers of Delaware corporations, who are subject to the same fiduciary duties of care, loyalty and good faith as the directors. However, this extension was made without the dramatic precedent that occasioned the initial adoption of the protections for directors. Delaware is therefore the most prominent jurisdiction that has taken this step, though such protections are also permissible in several other jurisdictions, including Pennsylvania.

Director protections

The protections for both directors and officers are not automatic but must be included by the corporation in its certificate of incorporation, either as initially filed with the Secretary of State of Delaware when the corporation is formed or by a subsequent amendment approved by the stockholders. In general, the statute permits the corporation to eliminate personal liability of directors and officers for financial damages resulting from a breach of their fiduciary duties, except in circumstances involving:

* A breach of a director's duty of loyalty.

* Acts or omissions made not in good faith, intentional misconduct or knowing violations of law.

* Illegal stock redemptions, stock repurchases or dividends.

* Transactions where a director derives an improper personal benefit.

As a result, if this provision is included in the certificate of incorporation, breach of fiduciary duty claims against the directors and officers will almost always be dismissed so long as the alleged actions do not fall into one of the four specified exceptions. For this reason, most corporations in Delaware and elsewhere (and virtually all public companies) have adopted this provision to at least protect the board, (it is important to remember that a court...