Officer Exculpation Under the Model Business Corporation Act

ABA-approved amendments to the Model Business Corporation Act (MBCA) permit a corporation to include in its articles of incorporation a provision that limits or eliminates the monetary liability of certain corporate officers. Before the amendments, the articles of incorporation could provide exculpatory protection only to directors. The officer’s exculpation is similar to the director’s exculpation already authorized by that section. 

Many states base their corporation law on the MBCA, so this new provision will begin appearing in state laws.

Regarding officers, the amendments reinforce freedom-of-contract principles by providing a default list of officers who may be exculpated, while also allowing corporations to expand or contract that definition as needed.

For over three decades, the MBCA has permitted corporations to include exculpatory provisions in their articles of incorporation, limiting directors' monetary liability, with some exceptions. This protection shields directors from personal liability for breaches of the duty of care. Currently, all states permit some form of director exculpation. 

These statutes follow three approaches—charter option statutes, self-executing statutes, and cap-on-money-damages statutes—or some combination thereof. The MBCA is a charter option statute that permits corporations to adopt a charter provision exculpating both directors and designated officers.

When director exculpation statutes were first adopted, limiting director liability was seen as essential to address a perceived shortage of directors caused by a D&O insurance crisis. Officers, however, were generally not granted similar protection, and their inclusion in exculpation laws was largely rejected. Until recently, officer exculpation remained largely unused, but recent developments in officer liability have renewed interest in protecting senior management, similar to directors. 

This changed because Delaware amended its long-arm statute in 2003 to include senior corporate officers. Also, the Delaware Supreme Court stated officers have the same fiduciary duties as directors. Additionally, courts clarified that shareholders can challenge mergers, leading to more officers being sued in M&A cases. Because of no exculpatory protection, disclosure claims against officers survive, unlike those against directors, which are dismissed due to exculpation provisions.

Delaware amended its corporate code in 2022 to permit exculpation of certain senior executive officers. Under the amendments, exculpated officers generally enjoy the same protection as directors, except that officers cannot be exculpated from derivative claims or claims brought by the corporation.

As amended, the MBCA authorizes a provision in the articles of incorporation that limits or eliminates monetary liability for specified officers. In general, the protection afforded to officers is similar to that already afforded to directors under the MBCA. Officers may not be relieved of personal liability for (i) financial benefits received to which the officer is not entitled; (ii) any act or omission that intentionally inflicts harm on the corporation or its shareholders; or (iii) any act or omission that is an intentional violation of criminal law. In addition, officers (but not directors) may not be exculpated for any claim by or in the right of the corporation. Under the amendments, a provision in the articles of incorporation may exculpate certain officers for breaches of the duty of care in direct claims brought by shareholders, but not for claims brought by the corporation or in a shareholder derivative proceeding.

In connection with the exculpation amendments, a new definition of officer was created for exculpation purposes. The definition has three components.

• First, there is a statutory list of executive officers who are covered by default in an exculpatory provision: chief executive officer, president, chief operating officer, chief financial officer, chief legal officer, secretary, controller, treasurer, and chief accounting officer.

  
  

• Second, it allows the articles of incorporation to expand or contract the default list of enumerated officers or specify a procedure for doing so.

  
  

• Third, unless otherwise provided in the articles of incorporation, the board of directors may exculpate other officers beyond those listed in the articles. The board may not, however, alter the exculpatory protection provided to the officers listed in the articles without amending that document.

This allows a board of directors to tailor the definition of officers for exculpatory purposes to the specific needs of the corporation as they may vary from time to time

The MBCA and Delaware’s General Corporation Law are the two principal blueprints for state corporate codes. Overall, Delaware and the MBCA provide similar exculpation protection to officers. One particular area of divergence, however, is the exact language used for the carve-outs for nonexculpable liability. Similar to the carve-outs for director exculpation, the MBCA’s language provides greater clarity than Delaware’s by using more concrete, narrower exclusions. The MBCA’s exclusions avoid references to the duty of loyalty and good faith as bases for excluding exculpation, instead excluding intentional infliction of harm on the corporation or its shareholders and intentional violations of criminal law. The MBCA also carves out a narrower set of financial benefits to which a director or officer is not entitled, instead of Delaware’s improper personal benefit.

Under both the MBCA and Delaware law, an exculpation provision for officers must be outlined in the corporation’s charter. For existing corporations, this means amending the charter through a statutorily required process that includes board and shareholder approval of the amendment.