An Understanding of Delaware's Law

In the Delaware Corporation Code, section 102 (b) (7) states that corporations are permitted to include provisions in their certificate of incorporation eliminating monetary damages for directors for any breach of fiduciary duties. These provisions are called exculpatory clauses. Exculpatory clause are provisions in a contract that entails that either, one party is relieved of any blame or liability arising from another party’s wrong doings or one party (usually the party drafting the contract) is freed from any blame or liabilities arising from the performance of that contract. However, these limitations on director’s personal liability is subject to specific conditions. Liabilities to directors may not be limited for:-

i. Any breach of director’s duty of loyalty to the corporation or its shareholders.

ii. Acts or omissions not in good faith or which involve intentional misconduct or a known violation of law.

iii. Any transaction in which the director derived an improper personal benefit.

As the owners of the corporation, shareholders may choose whether or not to provide the protections of an exculpatory clause. If shareholders believe they can attract quality directors without offering such protection, shareholders may not need to implement an exculpatory clause. For directors, an exculpatory clause is most valuable when the courts allowing directors and corporations to use the clause to terminate litigation by motion of dismissal. If a director-defendant can raise an exculpatory clause in a motion to dismiss, a law suit can be dismissed in mere weeks into the proceedings, before the beginning of costly discovery.

In this case study, i2 included this exculpatory provision in its certificate of incorporation and thus, i2 directors were protected against liabilities arising from performance. Even though the i2 board