Brown, Jr., J. Robert and Gopalan, Sandeep
Opting Only In:
Contractarians, Waiver of Liability Provisions, and the Race to the Bottom.
Indiana Law Review, 42 (2).
This paper will test the core claim of scholars in the nexus of
contracts tradition—that private ordering as a process of bargaining
creates optimal rules. We do this by analyzing empirical evidence in the
context of waiver of liability provisions. These provisions allow
companies to eliminate monetary damages for breach of the duty of care
through amendments to the articles of incorporation. With all states
allowing some form of these provisions, they represent a good laboratory
to examine the bargaining process between management and
shareholders. The contractarian approach would suggest that
shareholders negotiate with management to obtain agreements that are in
their best interests. If a process of bargaining is at work as they claim,
the opt-in process for waiver of liability provisions ought to generate a
variety of approaches. Shareholders wanting a high degree of
accountability would presumably not support a waiver of liability. In
other instances, shareholders might favor them in order to attract or retain
qualified managers. Still others would presumably want a mix, allowing
waiver but only in specified circumstances.
Our analysis reveals that the diversity predicted by a private ordering
model is not borne out by the evidence with waiver of liability provisions
for Fortune 100 companies. All states permit such provisions and in the
Fortune 100, all but one company has them. Moreover, they are
remarkably similar in effect, waiving liability to the fullest extent permitted by law. In other words, one categorical rule was merely
replaced by another, dealing a significant blow to the contractarian thesis.
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