Opting Only In: An Overview (Part 1)

We have posted a paper on SSRN titled Opting Only In:  Contractarians, Waiver of Liability, and the Race to the Bottom.  The paper does several things.  It examines waiver of liability provisions and examines the reasons why they came into existence.  The paper also challenges the central thesis of those who favor a system of regulation that is merely enabling in approach.  These theorists, often labeled contractarians, take the position that regulatory provisions should not be mandatory but that companies should have the right to "opt in" or "opt out" of the relevant regulatory regime.  This approach is supposed to lead to greater efficiency.  This is because companies can engage in "private ordering," that is shareholders and managers can negotiate over the most efficient arrangement. 

Some of the most vociferous opponents of SOX criticized the Act because it did not allow for opt in or opt out, but imposed a series of categorical rules.  Thus, the Act prohibited loans to executive officers and directors, with no right of companies to alter the regulatory regime.  The Act likewise required the Commission to adopt rules that would require the exchanges to delist a company that lacked an audit committee with certain specified jurisdiction over the outside auditors and with members that met a stricter definition of independence.  Again, the requirements were categorical.  They applied without providing any flexibility of companies to opt in or opt out. 

The views continue to surface.  Wachtell Lipton has been pushing a paper written by, among others, Roberta Romano, who labeled SOX "quack corporate governance"  (her views are discussedhere), concluding that "corporate governance is an area where a regulatory regime of ample flexible variation across firms that eschews governance mandates is particularly desirable."  In other words, no more categorical rules.  Every governance requirement should be flexible, allowing each company to develop the most appropriate arrangement.

Fair enough as a theoretical matter, the question becomes what will happen in practice?  That is the purpose of our paper.  To look at how boards actually use enabling provisions in the corporate governance area.  For that, we study the use of waiver of liability provisions.  We will therefore take a few days to explore this topic.  We will review the approach of contractarians (largely the most recent transmogrification of earlier adherents to the law and economics movement), examine the history of waiver of liability provisions (with a retrospective on the most famous of all corporate law cases, Van Gorkom), and examine how waiver of liability provisions have been used in practice among the Fortune 100.  Stay tuned.