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An Introduction to the Law of Corporations: Cases and Materials, Fall 2017

Section 102(b)(7)

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The Delaware Supreme Court's decision in Van Gorkom was highly controversial at the time - even now.  The imposition of monetary liability for directors' lack of care while not unheard of was not a common occurence.  The court was divided 3-2 in the decision.  The Delaware Supreme Court has a norm of unanimity and it is highly unusual for the court - partcularly with respect to the corporate law - to issue divided opinions.  

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The decision has been variously derided by observerds as a "comedy of errors", a "serious mistake", "dumbfounding", and "surely one of the worst decisions in the history of corporate law." Nevertheless, Van Gorkom has endured over the years.   In part, that may be because a combination of statutory responses and subsequent developments in the common law have robbed Van Gorkom of much of its bite.  Almost in direct response to the Van Gorkom decision the legislature in Delaware (as well soon thereafter the legislatures in all 50 states, DC, and Puerto Rico) adopted exculpation provisions, which exculpate from liability for monetary damages violations by directors of their duty of care. 

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The text of 102(b)(7), which you've seen earlier in this course, is below.

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§ 102. Contents of certificate of incorporation.

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(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters:

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(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under § 174 of this title; or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a) of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.

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Question:  Given the elimination of monetary liability, what incentives are there for directors to do a good job?  Is potential monetary liability required in order to assure directors live up to the standard of care?

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