Perhaps nothing in the Business Associations course creates more student cynicism than Del. Code Ann. tit. 8, § 102(b)(7). This statutory subsection allows corporations to eliminate whatever personal liability their directors may have incurred for breaches of the duty of care. Of course, the discussion of § 102(b)(7) only comes after students have already seen the duty of care pretty much eviscerated by the business judgment rule, indemnification, and directors’ & officers’ liability insurance. After having wrapped their minds around these concepts, students may see § 102(b)(7) as a cruel joke, a form of legislative overkill. But there it is at the end of the "duty of care" chapter – the last nail in the coffin for the seemingly reasonable duty of care.

Lloyd Drury takes on § 102(b)(7) in his article, "What’s the Cost of a Free Pass? A Call for the Re-assessment of Statutes that Allow for the Elimination of Personal Liability for Directors." Drury argues that § 102(b)(7) and its companions in other states are "doing harm to shareholders and to the orderly function of corporate law." (p. 6) Instead of calling for their elimination, Drury argues that such provisions should be reapproved by shareholders every five years. In constructing this argument, Drury discusses Smith v. Van Gorkom and the history of § 102(b)(7); director liability under federal securities law; the budding development of the duty of good faith; and the contractarian theory of corporate law. Ultimately, I fear that Drury’s effort to be comprehensive renders his article too overextended in making its point.

Drury starts off his paper with an attack on the premise behind § 102(b)(7). He discusses the Van Gorkom case and the crisis on the D&O insurance market that led to § 102(b)(7)’s passage. Drury argues that § 102(b)(7) went too far in allowing companies to absolve their directors of all personal liability, because such absolution skews directors’ incentives away from good conduct. Drury is fairly balanced in making this claim: he presents the argument from scholars such as Hillary Sale, Lisa Fairfax, and Lynn Stout, as well as counterarguments to their concerns. But he is traveling over well-trod territory here, and he does not have an angle that sharpens his argument to a point. His claim about § 102(b)(7)’s inefficiency ultimately rests on general notions of incentives, anecdotal discussions of WorldCom and Enron directors, and a 1989 event study by Michael Bradley and Cindy Schipani. The Bradley & Schipani study found abnormal negative returns to the share prices of Delaware firms in the wake of § 102(b)(7)’s enactment. While this empirical data is powerful, Drury relies on it too much without placing it within the context of the overall literature. Have law and finance scholars reached consensus on the inefficiency of liability waiver statutes? Drury’s paper would be more powerful if he provided us with this context, particularly since the one empirical finding plays such an important role in his argument.

Drury also criticizes what he sees as the collateral consequences of liability waivers. Drury argues that due to § 102(b)(7), the Delaware courts have been forced to use the amorphous duty of good faith to handle director failings that were traditionally the province of the duty of care. He argues that this is a problem because good faith is too ill-defined, and because this use of good faith prevents shareholders from legitimately using § 102(b)(7) to get rid of gross negligence liability. Because good faith is such a small part of his paper, Drury can only provide a brief summary of the duty and its recent appearance in the Disney case. However, in the wake of Chancellor Chandler’s opinion in Disney, the Delaware courts have actually developed a definition of the duty of good faith that is much narrower than Drury’s article implies. Although it remains an issue for further development, the duty of good faith does not seem poised for significant expansion (the efforts of my co-commentator notwithstanding).

Drury’s suggested reform is a reasonable and intriguing one. Despite his concerns about its inefficiency, Drury does not argue for the elimination of § 102(b)(7). Instead, he uses the contractarian theory of the corporation to argue that shareholders should have to reapprove the liability waiver every five years. This solution seems sensible, and it seems to fit within the ongoing movement for greater shareholder empowerment. In fact, I would have liked to see Drury place his argument within this literature. The notion of reapproval as a meaningful reform requires (1) the possibility of changing circumstances that may lead to the waiver failing to get approval, and (2) an active shareholder base that would intelligently consider the decision in light of these circumstances. Many corporate law scholars would argue (Stephen Bainbridge, perhaps?) that these conditions do not hold, and thus the reapproval process would largely be a waste of time. Drury needs to establish that shareholders can be actively involved, and that they will make meaningful choices to reaffirm or to end their company’s director liability waiver. Without these, the reapproval process seems like an empty, formalistic exercise. The "shareholder empowerment" literature is the best place to go in establishing the effectiveness of shareholder reapproval. Indeed, much has been written recently about developing ways in which shareholders could have more access to the levers of corporate power. Drury could easily situate his article within this body of scholarship.

In sum, I was impressed with the variety of topics that the article endeavors to cover on its way to making a modest and thoughtful proposal for reform. But I would like to see the paper less concerned about covering these background issues and much more focused on the foreground. Drury needs to connect his notion of shareholder involvement (through the reapproval process) to his more general concerns about the inefficiency of liability waivers. If he does this, I believe his paper will be a real contribution to the literature on this subject.

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