Holger Spamann, Why Do Corporate Charters
Waive Liability for Breach of the Duty of Care?
Comment
Curtis J. Milhaupt
Columbia Law School
Question
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Pay incentives (information from stock price) could be complemented with
liability incentives (information from litigation)
But charters of large US corporations “routinely” waive liability for
breach of duty of care
Why don’t corporate governance arrangements take advantage of
information that could be produced in litigation over managers’ business
decisions?
“Why [is
it that] the same judges who decide whether engineers have designed the
compressors on jet engines properly … and whether the prison system adversely
affects the mental states of prisoners cannot decide whether a manager negligently
failed to sack a subordinate who made improvident loans[?]”
Easterbrook & Fischel (1991)
Holger’s Claim
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Concerns about judicial error and threat of ruinous liability affecting risk taking are
not convincing explanations
Cost-benefit analysis of liability: benefits of information from litigation depend on (1)
precision of stock price, (2) precision of litigation, and (3) extent of agency problem
(quality of other governance tools)
In many (but not all) cases, the benefits of information produced by litigation is
outweighed by the costs.
Implications:
 Public firms
 Nonpublic firms, “standardized” decisions, severe conflicts
Strengths of Paper
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Fresh perspective on an old question
Simple, intuitively appealing model
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Intriguing implications
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Comments
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Do waivers really matter, and if so, how?
Do implications of Holger’s cost-benefit perspective on board
liability track legal doctrine?
Complications (1)
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Waivers are not necessarily routine in large U.S. corporations
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46.8% of large, public firms as of 1998 (down from 72.3% in 1990) Gompers
et al. (2003)
Complications (2)
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Waivers cover directors, but not officers, of Delaware corporations
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DGCL §102(b)(7): permits “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 …”
“Under 8 DGCL§102(b)(7), a corporation may adopt a provision in its certificate
of incorporation exculpating its directors from monetary liability for an adjudicated
breach of their duty of care. Although legislatively possible, there currently is no
statutory provision authorizing comparable exculpation of corporate officers.”
Gantler v. Stephens (Del. 2009)
Complications (3)
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Are waivers trivial?
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Federal securities law may substitute for state law duty of care (Thompson
& Sale 2003)
D&O Insurance
Non-legal institutions may be more important than corporate law in
reducing agency costs that diminish firm value (Roe 2002)
Implications
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Holger’s exceptions: where liability’s benefits may outweigh
its costs
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“Standardized” decisions (e.g. monitoring)
Severe conflicts of interest (e.g. takeovers)
§102(b)(7)
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Waivers in Delaware
BJR: protects directors from liability for negligent decisions
102(b)(7) Waiver: protects directors from liability for breach of duty of
care (i.e. grossly negligent) decisions, …
but not for “acts or omissions not in good faith”
Bad faith defined by Del. courts in mid-2000s as “conscious disregard of
responsibilities” (breach of duty of loyalty)
Where does bad faith have most impact?
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Monitoring
Sale of the firm (Revlon)
Impact
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Monitoring
 Caremark: the “most difficult theory” of liability in corporate law
 Stone v. Ritter: Liability only for an “utter failure to attempt to establish
a reasonable reporting system.”
Revlon mode
 Lyondell: Liability only if directors “utterly failed to attempt to obtain the
best sale price.”
Consequence: transform plausible claim of liability (gross negligence) into
a virtually impossible claim absent egregious circumstances
Upshot: Delaware doctrine reduces threat of liability/information precisely
where Holger’s analysis suggests greater justification for judicial
intervention
Clarification
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“There is no qualitative difference between the situations that the
law calls ‘conflicted’ and all or most other board decisions … only
the strength of the conflict differs, and so the cost-benefit trade-off
changes. As the cost-benefit trade-off changes, so should the law,
but perhaps gradually rather than abruptly. Arguably, the law of
Delaware … already follows such a gradual approach.”