The Glom’s Junior Scholars Workshop, on Location, at TOTM.com:
For the Conglomerateâ€™s Annual Junior Scholars Workshop, I agreed to comment on a paper by Loyola University Professor Trey Drury that revisits director liability-limiting opt-in statutes such as DGCL Section 102(b)(7).Â The title of the paper is â€œWhat’s the Cost of a Free Pass?Â A Call for the Re-assessment of Statutes that Allow for the Elimination of Personal Liability for Directors.â€Â The paper is super â€“ the first draft of the review that I wrote actually began with the uber-articulate comment of â€œwow.â€Â (I have since refined my comments.)
I was all set to post myÂ review of Professor Drury’s paper on the Glom yesterday, but, unfortunately, the Glom review actually took place LAST Monday.Â (I continue to blame my visiting/moving/lateralling schedule for my inability to keep organized over the past few months.)Â So Professor Drury will have his own little TOTM Junior Scholarâ€™s Forum right here, right now.Â As background, please check out the comments on Drury’s paper on the Glom from last Monday.Â Â
Nowickiâ€™s review of Druryâ€™s â€œWhatâ€™s the Cost of a Free Pass?â€
As one might conclude from the prior reference to my original kick-off comment of â€œwow,â€ I really like Professor Drury’s paper revisiting director liability-limiting opt-in statutes such as DGCL Section 102(b)(7).Â I am a huge fan of reevaluating the corporate governance status quo, and Professor Drury’s thoughtful paper forces us to do so with respect to the aspect of director liability for fiduciary duty breaches.Professor Drury’s paper provides a much needed reexamination of statutes that allow for essentially the total elimination of personal liability for fiduciary duty breaches by directors.Â (Drury uses DGCL Section 102(b)(7) for reference purposes.)Â Among the several great things Professor Drury offers in his paper is a provocative, well-advised review of suggestions for changing the current scheme of liability-limiting legislation such as 102(b)(7).Â It is this practical aspect of his paper on which I want to focus.Â
Before focusing on this aspect, however, let me note that Professor Drury’s paper is very much worth reading as a general matter.Â As other commentators on this paper have accurately observed, Professor Drury covers a lot of ground in his paper, and, for that reason, I consider the paper valuable in keeping alive the “good faith,” “D&O insurance ‘crisis,'” “abdication of duties,” etc. discourse.Â While I might be inclined to consider agreeing with my fellow commentators that Drury re-hashes a bit much (by way of background) in too few pages, I am still overwhelmingly grateful on the whole that he revisits the basic hot topics surrounding director liability for fiduciary duty breaches.Â The more thoughtful the scholarly discourse that we have on these topics – even if a bit repetitive – the better.Â Professor Drury does himself justice, and his article is a super contribution to the exchange.
Professor Drury examines three solutions to address the fact that the current director liability limiting legislative regime “is in need of improvement.”Â He mentions “periodic re-approval by the shareholders of any [charter-based] exculpatory provision,” using “the current shareholder proposal system[under Exch. Rule 14] to adopt or repeal exculpatory provisions,” and repealing opt-in (or perhaps all?) exculpatory statutes. I favor most his suggestion of periodic re-approval by shareholders of corporate charter provisions limiting the personal liability exposure of directors, and I applaud Professor Drury for his novel and intuitively appealing (to a corporate governance wonk) suggestion.Â
In support of this suggestion, Professor Drury notes that giving shareholders the ratification choice is a sound contractarian option that is easy to administer within the existing mandatory annual meeting regime.Â Professor Drury observes that, while it might be unclear whether current “exculpatory clauses reflect the true wishes of the shareholder,” requiring periodic reaffirmation would address that concern by “overcom[ing] the collective action problems of shareholders who are unable to get the matter onto the ballot themselves.”Â I commend Professor Drury for making this point, and I urge him to do more with it.Â Recall the fairly recent debates regarding readopting poison pills.Â Poison pills that were adopted in the late 1980’s through mid-1990’s were expiring in the late 1990’s and early 2000’s (these pills were generally adopted with a 10-year lifespan), and this energized several activist investors to begin questioning the otherwise assumed economic value of these pills.Â The resulting dialogue and debate was important in the evolution of corporate governance, and I believe a similarly resultant exculpation provision exchange would be beneficial.Â Drury could and should pen a more specific exposition of these potential benefits.
Also to that end, I urge Drury to do more with his proposal of requiring periodic ratification in terms of justifying and defending it against likely attacks by naysaying director primacists.Â While it seems that Drury (accurately) anticipates the argument that requiring re-authorization is nothing but a formalistic exercise, he can and should say more to detail the benefits of having these sorts of provisions exposed to re-authorization discussion in the boardroom.Â For example, in most instances, an incumbent board will not be the board that initially adopted the liability-limiting provision, such that it is entirely possible that a corporation’s current board will never have had a candid, open boardroom exchange about what they are protected from (basically any liability if they have a 102(b)(7) charter provision)) and what they should be protected from (mere negligence liability).Â Even if the shareholders blindly re-approve a liability-limiting charter provision like a gaggle of lemmings, the reality is that hopefully the directors will have spent at least a few minutes discussing why, if it all, they think they should have basically total liability insulation.Â Even if all that Professor Drury’s proposal ultimately garners is a bit more boardroom introspection on a periodic basis, that is a good thing.
I thank www.theconglomerate.org (and Junior Scholars Workshop organizer Christine Hurt) for the opportunity to participate in their workshop (albeit belatedly and remotely), and I congratulate Professor Drury on a well-written paper.Â I look forward to reading more of his work in the future.
Thanks for the review and the good suggestions for improvement. I appreciate your taking the time, and my paper will end up better for it.