Corporate & Securities Blog

Power, Preference or Special Right? Will Delaware Courts Recognize Stockholder’s Right To Challenge Officer Exculpation Amendment

In August of this year, Section 102(b)(7) of the Delaware General Corporation Law (DGCL) was amended to permit Delaware corporations to amend their Certificates of Incorporation to include a provision providing for the exculpation of officers from monetary damages for breach of certain duties owed to the corporation.1 These amendments represented a significant step in providing greater protection for a corporation’s officers with respect to actions taken on behalf of the corporation. Historically, the exculpatory language permitted by the DGCL in a corporation’s Certificate of Incorporation would have shielded only a corporation’s directors rather than its officers. Perhaps unsurprisingly, at least two suits concerning the new law have already been filed in the Delaware Court of Chancery.

On Nov. 4, the Electrical Workers Pension Fund, Local 103, I.B.E.W. filed a class action complaint against Fox Corporation, who recently took advantage of the changes in the law to amend its Certificate of Incorporation to include a provision providing for the exculpation of its officers.2 Rather than challenging the amendment to the DGCL, the case hinges upon the procedure Fox Corporation used to amend its Certificate of Incorporation. Fox Corporation has a dual-class share structure – shares are either voting or non-voting. The amendment to the Certificate of Incorporation was approved by the voting class of shares but not by the non-voting class.

Plaintiffs allege that the amendment was inconsistent with Section 242(b)(2) of the DGCL, which provides that holders of a class of stock are “entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation if the amendment would alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely.”

The complaint alleges that the amendment to the Certificate of Incorporation required the vote of the non-voting stock because “[t]he right to seek judicial relief to hold officers accountable for reckless or grossly negligent behavior is a component of the ‘bundle of rights’ appurtenant to ownership of Fox Class A Common Stock.”3

Electrical Workers appears to be just the first of perhaps several cases that may challenge the expansion of the DGCL to allow for the exculpation of officers. In another case recently filed, a stockholder of Snap Inc. (the company behind Snapchat) sued the company, alleging that when the company amended its Articles of Incorporation, it implemented a measure that stripped the rights of non-voting stockholders. Similar to the argument presented in Electrical Workers, here plaintiff stockholder alleged that Section 242(b)(2) of the DGCL guaranteed the holders of any class of stock (including non-voting stock) the right to vote on any amendment that adversely affects any of the powers or rights appurtenant to that stock, regardless of whether the stock itself is considered voting or non-voting. Plaintiff argued that the “only reasonable reading [of Section 242(b)(2)] is that even if a class of stock is typically not entitled to vote on other matters, a charter amendment adversely affecting the ‘powers, preferences or special rights’ appurtenant to that class of stock still requires an approving vote.”4

This raises the question – is there such a power, preference or right attributable to non-voting shareholders that would allow them to challenge such an amendment? The complainants in Electrical Workers ground the basis of their argument in favor of such a right upon language the Delaware Chancery itself relied upon in the 2015 case of In re Activision Blizzard, Inc., S’holder Litig.5 Here, the court held that such “peculiar rights” held by stockholders included the right to assert direct claims for breach of fiduciary duty against a company officer.6 The court in Activision recognized that the right to sue for breach of fiduciary duty might – in limited circumstances – adhere to the stock itself and vest in the stockholder.

Regardless of when and whether the Delaware Chancery renders a decision in either the Electrical Workers case, or the Snap, Inc. case, as we discussed in our earlier article, should carefully weigh the pros and cons of amending their respective Certificates of Incorporation to include such protections for corporate officers. While such an amendment may provide protection from certain stockholder litigation, ultimately, both officers and directors owe a duty of care to stockholders to exercise business judgment in good faith and in a reasonably prudent manner when acting on behalf of the corporation, in a manner that the officers and directors believe is in the best interests of the corporation and its stockholders. While the statute now permits exculpation in certain cases, a board of directors should carefully consider the implications of proposing such an amendment and its impact on stockholder rights.

1 See 8 Del. C. § 102(b)(7).

2 Electrical Workers Pension Fund, Local 103, I.B.E.W. v Fox Corporation, Case No. 2022-1007-MTZ (filed Nov. 4, 2022).

3 Id. at ¶ 7.

4 Karen Sbroglio v Snap Inc., Case No. 2022-1032 (filed Nov. 16, 2022), at ¶ 2.

5 In re Activision Blizzard, Inc., S’holder Litig., 124 A.3d 1025, 1049 (Del. Ch. May 20, 2015).

6 Id. at 1049. See, e.g., In re Baker Hughes Incorporated Merger Litig., 2020 WL 6281427, at *15-16 (Del. Ch. Oct. 27, 2020) (declining to dismiss a direct claim for breach of the duty of care against an officer).

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