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Washington Law Review

Abstract

Section 102(b)(7) of the Delaware Corporate Code allows a corporation to amend its certificate of incorporation to exculpate directors from all duty of due care violations. The Delaware General Assembly enacted this law in response to the shrinking pool of qualified directors, which was caused by the Delaware State Supreme Court's decision in Smith v. Van Gorkom that imposed personal liability on directors for gross negligence. Delaware courts have unequivocally stated that section 102(b)(7) protects directors against personal liability arising from gross negligence, but not against liability arising from a lack of good faith. However, Delaware courts have not provided clear guidance as to whether the statute protects directors from personal liability arising from recklessness. If Delaware courts classify reckless conduct as a breach of the duty of due care, then section 102(b)(7) protects directors from liability arising from recklessness. Conversely, if Delaware courts classify reckless conduct as a breach of the duty of good faith, then section 102(b)(7) offers reckless directors no protection. This Comment proposes that section 102(b)(7) protects directors from personal liability arising from reckless decisions for two reasons. First, recklessness is merely a subset of gross negligence in Delaware corporate law. Because section 102(b)(7) unambiguously protects directors from liability arising from gross negligence, it also protects them from liability arising from recklessness. Second, recklessness by definition is conduct that involves no intention to cause harm. Because the Delaware State Supreme Court requires an illicit motive or bad faith state of mind to establish bad faith conduct, a reckless director breaches only the duty of due care and is protected by section 102(b)(7).

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