Yesterday I was teaching my Rutgers Law School students about director exculpation and how §102(b)(7) of the Delaware General Corporation Law was recently amended to allow corporate officers to be exculpated in certain situations. The law already permitted exculpation for corporate directors. (For an excellent primer on director and officer exculpation under Delaware law, look no further than this memo by Steven Haas and Allen Goolsby of Hunton Andrews Kurth.)
Let Them Off The Hook
I asked my students, “What does it mean to ‘exculpate’ someone?” Dictionaries define the word “exculpate” as clearing someone from blame, guilt, fault, etc. For purposes of the law of corporate governance, it means eliminating or limiting personal liability for breaches of fiduciary duty, specifically the duty of care. So, it’s basically a lawyer’s fancy way of saying, “letting someone off the hook.”
Continuing class, I asked, “Why would or should we exculpate anyone? It doesn’t seem to make sense to let people off the hook for not doing the important things that they’re supposed to be doing, like fulfilling their fiduciary duties, does it? Do I ‘exculpate’ my kids when they do something really bad? ‘Son, you are exculpated.’” And that got me thinking about a real-life story from parenting, which may help explain corporate law.
My Three Sons
One weekend afternoon a few years ago, my three sons (I also have one daughter) burst through the mudroom door to tell me that they had broken a window on one of the garage doors. I rushed out to assess the damage. Yes, the whole thing had been shattered. Glass was all over the driveway and the inside the garage. A bright orange street hockey ball was sitting nearby.
I hate broken glass. It freaks me out.
The boys looked at me with guilty faces and worried eyes, waiting for a lecture and punishment. It was obvious that they felt very sorry about this. And I knew they hadn't done it intentionally. They’re pretty careful, but kids can get carried away in the heat of driveway competition.
I decided that yelling at them wasn’t necessary. They knew I wasn’t happy about having a window broken, and I knew they felt bad for breaking it. Nothing useful would be accomplished by getting red in the face and raising my voice. I huddled them close to me and told them very calmly, “Guys, it's OK. We have three boys in our family. This kind of stuff is going to happen. It's fine.”
They looked at me and were confused, as if they thought I must be joking and would blow my lid any second now. After all, breaking windows means getting in huge trouble, right? In this case, no. I exculpated them. “Guys, I know you didn't do this on purpose. Just try to be more careful next time.”
Directors can be exculpated under Delaware law on the theory that if we want good people to be directors, they need to be given some leeway on making business decisions that involve taking risk—something in addition to the business judgement rule. By allowing companies to build provisions into their certificates of incorporation saying that directors will be exculpated if they breach the duty of care (but never the duty of loyalty), we allow directors to be more comfortable with taking risks and approving management’s plans to place big bets on business opportunities. That's what we want companies to do. That's how innovation and progress happen.
Similarly, the reason I exculpated my boys was that I want my kids to be playing hockey on the driveway. I want them playing HORSE around the basketball hoop, coming up with creative bases and boundaries for whiffle ball, and hitting forehands and backhands off the side of the house. One day they will reminisce and recount stories of those times, still arguing over whether that ball was fair or foul. If they're constantly afraid that I’m going to lose it on them if they make a dent on the garage door or break a window, who's going want to risk ripping a slap shot to the high stick side or roping a line-drive over the Azalea bush to win whatever game they just invented? I want them to have fun. That's what kids are supposed to do. They shouldn't be panicked about getting in trouble for the inevitable accidents.
That doesn't mean the kids shouldn't be careful when playing on the driveway. They should be careful, exercise good judgment, and not act recklessly. They shouldn't intentionally break things. Kind of like directors and officers. But there is good reason for exculpating both kids and directors (and now officers, too, under certain circumstances).
The boys asked me if they could help clean up the glass. I said, “No. Go inside and find something else to do. Wash your hands first. I'll clean this up.” The last thing I wanted was for three pre-teens to be picking tiny bits of glass out of the crevices in the driveway. That's what I'm there for.
“Are you sure? We’re really sorry.”
“I know you are.”
And that's today's lesson on corporate law and parenting.
The garage door window was replaced with plexiglass. My kids are now of high school and college age. We have amended our family charter to dial back the child exculpation provision to apply only in certain situations.