Amendment to Certificate of Incorporation Adopting Provision to Exculpate Officers from Monetary Liability for Breaches of Fiduciary Duty under Section 102(b)(7) of the DGCL Does Not Trigger a Class Vote of Stockholders under Section 242(b)(2) of the DGCL
Electrical Workers Pension Fund, Local 103, I.B.E.W. v. Fox Corporation In re Snap Inc. Section 242 Litigation, C.A. No. 2022-1007-JTL (Del. Ch. March 29, 2023) (Transcript) (Laster, V.C.)
By Pamela Millard, Potter Anderson & Corroon LLP
In August 2022, Section 102(b)(7) of the Delaware General Corporation Law (DGCL) was amended to extend exculpation rights for breaches of the fiduciary duty of care to senior officers, as well as directors, of a Delaware corporation. The amendments permit a corporation to adopt exculpatory language in its certificate of incorporation limiting the personal liability of both directors and officers, including the president, CEO, COO, CFO, chief legal officer, controller, treasurer, chief accounting officers, and others “identified in the corporation’s public filings with the SEC” or who have consented through a written agreement to accept service of process on the corporation’s behalf.
A corporation may only limit officer liability for breaches of the fiduciary duty of care, and not for breaches of the duty of loyalty, self-dealing, or acts or omissions not in good faith or involving intentional misconduct or knowing violation of law. Officers may also only be exculpated for claims brought directly by stockholders and not for fiduciary duty claims brought by the corporation or derivatively by stockholders. Since the exculpation provision must be included in a corporation’s certificate of incorporation, existing corporations extending exculpatory protections to officers must amend the corporation’s certificate of incorporation in accordance with Section 242 of the DGCL.
Each of Fox Corporation (“Fox”) and Snap Inc. (“Snap”) had a multi-class capital structure, including one class of capital stock that was non-voting. Fox and Snap each adopted charter amendments exculpating officers from monetary liability in accordance with Section 102(b)(7) of the DGCL, as amended. In connection with the amendments, Fox and Snap each sought the approval of holders of a majority in voting power of the outstanding shares of capital stock entitled to vote thereon, voting together as a single class, under Section 242(b)(1) of the DGCL. Neither Fox nor Snap sought a separate class vote of the non-voting stock.
Plaintiff filed suit, arguing that the exculpation amendments violated Section 242(b)(2) of the DGCL by adversely affecting one of three basic rights of shares of stock in a Delaware corporation: (1) the right to vote; (2) the right to sell; and (3) the right to sue. As a result, plaintiff claimed that Fox and Snap should have secured a separate class vote of the non-voting stock in connection with the exculpation amendments.
In an eighty-minute bench ruling, Vice Chancellor Laster first noted in granting defendant’s motion to dismiss that the Court’s decision was guided by two precedent opinions: Hartford Accident & Indemnity Co. v. W.S. Dickey Clay Manufacturing Co., 24 A.2d 315 (Del. 1942) (“Dickey Clay”) and Orban v. Field, 1993 WL 547187 (Del. Ch. Apr. 1, 1997) (“Orban”). While “[f]ealty to those precedents dictates the outcome,” the Court nonetheless expressed sympathy for plaintiff’s arguments around the plain language of Section 242(b)(2).
The Court stated further that, prior to reviewing plaintiff’s briefs, the Court considered it a “no-brainer” that an exculpation amendment would not require a class vote under Section 242(b)(2). The Court concluded, however, that while plaintiff had a persuasive claim based on the plain language of the statute, the Court felt bound to adopt the express rights interpretation set forth in case law precedent: specifically, that the class voting requirements in Section 242(b)(2) only apply to rights expressed in the certificate of incorporation, which includes the rights set forth in the DGCL since the DGCL inures in every certificate of incorporation of a Delaware corporation. And while the power to sue is a fundamental power of stockholders, the Court noted that it was not an express power, preference, or special right set forth in either the certificate of incorporation or in the DGCL, and the exculpation amendments adopted by Fox and Snap therefore did not trigger a class vote under Section 242(b)(2).
The Court also gave deference to practitioner expectations based on Dickey Clay and Orban, while cautioning that the Court will not always defer if it determines that such expectations are “fundamentally wrong.” Describing defendant’s interpretation of Section 242 as “deeply settled,” however, the Court did not “feel at liberty to adopt a different interpretation of Section 242(b)(2).”
An appeal of the Court of Chancery decision is currently pending, with oral arguments to the Delaware Supreme Court anticipated in Fall 2023.
Full case information: Sbroglio v. Snap Inc., C.A. No. 2022-1032-JTL (Del. Ch.) and Dembrowski v. Snap Inc., C.A. No. 2022-1042-JTL (Del. Ch.) were consolidated into a single action captioned In re Snap Inc. Section 242 Litigation, 2022-1032-JTL (Del. Ch.). In re Snap Inc. Section 242 Litigation, 2022-1032-JTL (Del. Ch.) was then joined with Electrical Workers Pension Fund, Local 103, IBEW v. Fox Corp., C.A. No. 2022-1007-JTL (Del. Ch.) to resolve the parties’ cross-motions for summary judgment.