TheCorporateCounsel.net

A few weeks ago, I blogged about a number of statutory changes that went into effect in Delaware at the beginning of this month, including changes that will allow Delaware corporations to adopt charter provisions to exculpate officers from personal liability in certain contexts. Now the question is coming up, will Delaware corporations advance proposals at their next annual meeting to implement the exculpation provisions, and how will shareholders react to such proposals?

The short answer is that it is perhaps too early to tell. The concept of exculpation for officers in certain circumstances makes a great deal of sense and has been permitted for directors for some time, and implementing the new provision of the Delaware General Corporation Law should generally be a straightforward exercise of proposing a few tweaks to the Certificate of Incorporation. The need to seek shareholder approval of those amendments complicates matters, because institutional investors and the proxy advisory firms may not necessarily be completely sold on the idea of relieving officers of liability in certain circumstances, even though it is now permitted under Delaware law.

ISS, for its part, specifies in its proxy voting guidelines that it will take a case-by-case approach to proposals on director and officer indemnification and liability protection. More specifically, ISS indicates that it will vote against any proposal that would eliminate entirely directors’ and officers’ liability for monetary damages for violating the duty of care. Glass Lewis’s proxy guidelines are silent on the topic of exculpation, but note:

While Glass Lewis strongly believes that directors and officers should be held to the highest standard when carrying out their duties to shareholders, some protection from liability is reasonable to protect them against certain suits so that these officers feel comfortable taking measured risks that may benefit shareholders. As such, we find it appropriate for a company to provide indemnification and/or enroll in liability insurance to cover its directors and officers so long as the terms of such agreements are reasonable.

Institutional investors’ proxy voting guidelines vary in terms of whether they address liability protections, and in some cases are more focused on protections for directors rather than officers. We suspect that the proxy advisory firms and institutional investors may revisit their policies on exculpation proposals in the coming months, and the topic may therefore be a good one to float at shareholder engagement meetings coming up during the remainder of this year.

– Dave Lynn