1. Holger Spamann, Why Do Corporate Charters Waive Liability for Breach of the Duty of Care? Comment Curtis J. Milhaupt Columbia Law School

2. Question 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?

3. “ 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)

4. Holger’s Claim 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

5. Strengths of Paper Fresh perspective on an old question Simple, intuitively appealing model Intriguing implications

6. Comments Do waivers really matter, and if so, how? Do implications of Holger’s cost-benefit perspective on board liability track legal doctrine?

7. Complications (1) Waivers are not necessarily routine in large U.S. corporations  46.8% of large, public firms as of 1998 (down from 72.3% in 1990) Gompers et al. (2003)

8. Complications (2) Waivers cover directors, but not officers, of Delaware corporations  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)

9. Complications (3) Are waivers trivial?  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)

10. Implications Holger’s exceptions: where liability’s benefits may outweigh its costs  “Standardized” decisions (e.g. monitoring)  Severe conflicts of interest (e.g. takeovers)

11. § 102(b)(7) 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?  Monitoring  Sale of the firm (Revlon)

12. Impact 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

13. Clarification “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.”