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Source link: http://archive.mises.org/5679/sean-gabbs-thoughts-on-limited-liability/

Sean Gabb’s Thoughts on Limited Liability

September 26, 2006 by

A previous post, In Defense of the Corporation, discussed whether “limited liability” of modern corporations is compatible with libertarian principles. This topic was also discussed on Kevin Carson’s “mutualist” [socialist? neo-Marxist?] blog; see the excellent comments there by “iceberg.” Carson also recently promoted some anti-corporate comments by the eloquent libertarian Sean Gabb. I wrote Gabb about this, and he responded to some of my questions in Thoughts on Limited Liability. He quoted most of my substantive comments in his piece, so I won’t reprint them here. My response to his piece follows:Very reasonable and thoughtful comments, Sean, and a profitable way to pursue this. I do not disagree strongly with much of what you write. I will elaborate more on this later after your post becomes linkable or emailed.

The main differences here would probably be this–first, if you want to show a link between ownership of shares, and liability for acts done by any employee of the enterprise that uses property of the company, then I simply think more needs to be shown. You have provided a sketch of a possible theory that might show a sufficient connection, and I would not be hostile to seeing if it plays out. I am not so confident this can be done from one’s armchair. It seems to me the application of the general principles might need to be left open.

In other words, it seems to me the default libertarian position is that an individual is responsible for torts he commits. If you want to hold others liable for this too, you need to show some kind of causal connection between something done by the third person, and the tort committed by the direct tortfeasor. You seem to assume that this connection is present in the case of a shareholder because he is the “true” or “natural” owner of the company’s assets. This I think is what troubles me the most–it seems too much of an assertion to me. I do not see its basis. And as I alluded earlier, it seems to rest on the notion of respondeat superior. Maybe this legal principle could be justified but I have never been quite sure exactly how or why it is justified under libertarian principles. It seems to me the idea is that the principle of respondeat superior simply is the presumption or finding that the employment relationship necessarily is a sufficient causal connection to hold the employer responsible for torts of his agent-employee. I am not hostile to this conclusion but am not quite sure the case has been made. Maybe there is a presumption, maybe in many or most cases the employer is causally responsible, but I am not sure it is necessarily the case (I have always loved the idea that if the employee goes off on a “frolic” then there is no respondeat superior liability; so you have cases examining whether the employee who deviates from his assigned duties is on a “frolic” or not–ha!). But consider: the basis for respondeat superior (and I bring this up b/c it seems to me something along the lines of this principle must be employed to hold the shareholder liable for acts of employees) has to do with the employer’s practical right or ability to control or direct the actions of the employee (this principle probably underlies the “frolic” exception too). Can we assume that this control is present when we move further back the chain of causation? Say, to the directors, who appoint the managers? Or to the shareholders, who elect the directors? And if practical control is one of the main relevant features that determines whether there is liability, again, why couldn’t lenders, employees, suppliers, customers, etc. at least potentially be held liable? In some cases they exert more control and give more “aid and comfort” or “aid and abet” in more visible and substantial ways than a mere shareholder.

This highlights that you still seem to draw some kind of bright line between the position of a lender and a shareholder. Something about this troubles me–it seems too artificial; too reliant on the state’s own positive legal distinctions. In my view, the general question is one of causation. I cannot say from my armchair that lenders necessarily are radically less responsible for the actions of company employees than are shareholders. It seems to me one needs to say this, however, in order to draw the bright line distinctions you do. In economic or financial terms, for example, it is common to classify shareholders and lenders/creditors on a spectrum, based on who gets paid first: if a company is going bankrupt, say, then out of its remaining assets: first, you pay secured lenders; then unsecured lenders; then, say, preferred shareholders; then finally, common shareholders. Sure, for legal purposes you classify some as shareholders and some as lenders; but financially, in a sense, this is just a way of specifying priority of payout and relative risk of capital. And there is nothing inconceivable about a lender agreeing (for some reason) to be paid only after shareholders receive a certain liquidation preference amount… all kinds of mixtures are conceivable. This would muddy the waters about who is the “natural” owner, it seems to me. The point, to me, is that this shows the limitations of relying on “natural ownership” as a key principle here.

Also I would say that if you had your way, I could see creative commercial lawyers and businessmen thinking of different investment vehicles that are economically similar to the joint stock company (as you even intimate in your comments about bonds being another way to finance endeavors and the “naturally” limited liability of bondholders). You conceive of a shareholder as the “natural” owner of the enterprise. I am skeptical of relying on the conceptual classifications imposed by positive law. To me a shareholder’s nature or identify depends on what rights it has. What are the basic rights of a shareholder? What is he “buying” when he buys the “share”? Well, he has the right to vote–to elect directors, basically. He has the right to attend shareholder meetings. He has the right to a certain share of the net remaining assets of the company in the event it winds up or dissolves, after it pays off creditors etc. He has the right to receive a certain share of dividends paid IF the company decides to pay dividends–that is, he has a right to be treated on some kind of equal footing with other shareholders–he has no absolute right to get a dividend (even if the company has profits), but only a conditional, relative one. He has (usually) the right to sell his shares to someone else. Why assume this bundle of rights is tantamount to “natural ownership”–of what? Of the company’s assets? But he has no right to (directly) control the assets. He has no right to use the corporate jet or even enter the company’s facilities, without permission of the management. Surely the right to attend meetings is not all that relevant. Nor the right to receive part of the company’s assets upon winding up or upon payment of dividends–this could be characterized as the right a type of lender or creditor has.

The main shareholder right that could be latched on is the right to elect directors. This the only “real” factor I see of genuine relevance. That is why I say that the alleged causal connection between the shareholder and the employee has to rest on the shareholder’s control. Which really rests on his right to vote for and elect directors. That is all. So the question is: is this degree of or level of control (due to the right to vote for directors) sufficient to make the shareholder causally responsible for the actions of agents of the enterprise? Again, I do not see how one can maintain there is automatically or necessarily liability here, without opening up a huge can of worms: because, as I noted, it is not only shareholders who exert “control” over which directors are elected, or which managers are appointed, or which employees hired, or which policies or directives are issued by the managers. There are many others–employees, unions/coops, customers, vendors, creditors, landlords…. I am not in principle against holding any of these types of actors responsible for torts of the corporation–if the causal connection can be shown. It has to be demonstrated, in each case, based on the facts and context. I just see no reason why this is not also true of the case of shareholders.

[Incidentally: I am actually not sure whether modern corporate limited liabilty does prohibit a victim of a tort done by personnel of a company from suing shareholders--if he could somehow establish the shareholder played a role. Maybe there is some kind of presumption against this since the state has not provided adequate standards for causation; if this is so (I am not sure) then maybe your argument is really against the inadequate provision of causal responsibility in state legal systems--not the limited liability of corporations, which I believe has more to do with voluntarily acquired "debts" of the company than with tort liability anyway.]

Finally, it seems to me the chief aspect of limited liability that is objected to by the detractors of modern corporations is not the immunity from tort liability, but rather the contractual limited liability aspect (which you accept). It seems to me that a company that is sufficiently capitalized can simply purchase insurance that would effectively immunize shareholders for tort liability–then we’d be back to where we are now (except maybe there would be a greater incentive to have such “shareholder insurance”).

***

Incidentally, for a real-world example of a limited liability provision, see the recently enacted Texas Business Organizations Code, in particular § 21.223, as well as other provisions such as §§ 21.106, 21.107, 21.224, 21.225.

Update: Roger Pilon’s Corporations and Rights: On Treating Corporate People Justly also has some very good stuff on why limited liability does not give any special privilege to shareholders. See also my post Legitimizing the Corporation and Other Posts.

{ 49 comments }

Sean Gabb September 26, 2006 at 10:55 am

Groan – a great long response thrown right back at me.

I shall need to go away and think about these matters.

I shall also think about the best way of continuing the debate. I hate little more than interleaved replies. I much prefer the sort of deabte in which each response is complete in itself – rather like the three made so far.

quasibill September 26, 2006 at 11:17 am

I actually have a lengthy discussion of this issue in a word format that I’ve been unable to post in a decent way. Quick summary is that agency law is a major source of liability for sole proprietors, but is arbitrarily cut off in the case of shareholders merely by invoking the statutory grant of incorporation. One can argue that the corporate veil can be pierced, but the standards are not the same; in essence, so long as the shareholder is extremely negligent in how the business is run, he’s insulated from responsibility. In contrast, agency law places a burden on a sole proprietor to be responsible about his choice of agents.

I also agree that there is nothing wrong in theory about limited liability for contractual debts. The problem is that corporations, as they exist now, are statutorily created privileges, and not a creature of common law. The idea of a fictitious person is the source of much confusion and misapplication of fundamental principles. It would be far better to just call it what it should be – contractually limited liability, and move on.

quasibill September 26, 2006 at 11:43 am

Here:

“[Incidentally: I am actually not sure whether modern corporate limited liabilty does prohibit a victim of a tort done by personnel of a company from suing shareholders–if he could somehow establish the shareholder played a role.”

is the key. It does, so long as the shareholder can demonstrate that he “respected the corporate identity.” So, as long as he didn’t mix and mingle assets, or fail to hold corporate meetings, he’s protected from liability. In fact, so long as he colludes with his fellow shareholders, he can make it airtight by demonstrating that after all corporate formalities were followed, they all voted for the same result. In this case, they are all enforcing their own claim to having respected the corporate personality, thereby benefitting all of them equally.

In contrast, a sole proprietor who turned the day to day operation of his business over to a hired manager would be bound by the acts of his agent that were taken in the scope of the agency, period. The sole proprietor is responsible for choosing that person and imbuing him with authority. Especially if he didn’t supervise the manager very well and the manager uses the business to defraud customers. It doesn’t take much to see that a sole proprietor could be held liable for his negligence in such a situation. In contrast, the shareholders are actually encouraged to take LESS care in how the day to day manager is operating the business. The less care he takes, the more he can claim he respected the corporate personality.

It doesn’t mean that he will always be held liable when the agent acts negligently in the scope of the agency, but he can be. And that is more than can be said about shareholders, so long as they obey the rituals set forth in business incorporation statutes.

Lee September 26, 2006 at 12:30 pm

This reminds me of immigration debate: what would we do if the state didn’t exist. Corporations are creatures of the state and as such are imbued with as much potential for evil as any other creature of the state. As Van Eghan pointed out in his wonderful papers, the state creates this artificial being to which managers owe a duty of loyalty and from which shareholders are owed some undefined right. The ultimate arbiter of what is “good” for the corporation is….the State!
Having litigated corporate issues from small to large, from local to international, it amuses me still to depose managers who have no idea what a corporation is.
The corporation question is a prism through which we discern pressing issues of liability, contract law and business organizations. That said, there’d be no “secretary of state” office to file “incorporation” papers in Libertania, and the so there is no issue of whether corporations as we know it would exist. They couldn’t. Just like in Libertania there would be no “immigration question.”
That said, would corporations exist in Libertania? For sure, because certain humans desire to cheat, steal and lie, and there is no better mechanism to achieve this ends than a corporation. “Give me money and I will give you this piece of paper that allows you to vote for candidates for board of directors once a year.” Very similar to “Delegate to me your rights and I’ll let you vote once every two or four years.”
Great bargain! As Mencken said, no one has gone bust underestimating the intelligence of the American people.

Mark Brabson September 26, 2006 at 12:33 pm

Would or could a corporation exist sans the state? In a true free market, the answer would be no. Stockholders could not limit their liability and erect an alter ego, i.e. corporate personhood. Corporations, as we know them today, are creatures of the state and are part and parcel of the state. If the state ceased to exist, corporations would die with it.

Thus, I would have to say that libertarians would have to reject corporations on principle.

Certainly, that would radically alter business, but capitalization would still be possible for very large companies. People could form old fashioned joint stock companies, the stockholders being fully liable of course. For people who wished to avoid liablity, they could capitalize via debt instruments. Entrepreneurs will find a way, they don’t need our help and certainly don’t need governments hindrance.

Person September 26, 2006 at 12:42 pm

Stephan: You may be surprised to learn I agree with what you’ve posted here. I want to add a few things:

Along the lines of creative alternative financial instruments to get the benefits of stock ownership while cutting the responsibility for decisionmaking for minority shareholders would be something like this: The corporation could issue “variable bonds” that give payments (coupons) in exactly the amounts dividends would, but give no voting rights until you own a notable amount of them (say, 1% of the total outstanding). Then, at least minority shareholders can’t be said to have “control” over the corporation. Index fund buyers could keep the returns and you could takeover just the same.

A lot of the opposition to incorporation is grounded in the idea that, conceivably, the corporation could commit a tort, and someone “connected” to the corporation’ management could be insulated from liability after assets are liquidated. However, it’s unclear exactly what the limits on this are. Presumably, individual shareholders should be allowed to “insure this away”. But then what if the insurer can’t pay? Is it settled then?

Also, opponents of incorporation are remarkably inconsistent. Yes, it’s true a corporation could commit a tort it couldn’t compensate. But then, so could most poor people today. It’s unfair in my eyes to act like corporations are evil for this, while poor people still roam the earth without some huge liability insurance policy, putting others at risk of being victimized but not able to compensate them.

Person September 26, 2006 at 12:50 pm

Lee: I’d advise against referencing the Van Eghen paper. It was painful to read because of the twisted logic. If there’s a point you want to take it, I’d recommend remaking the argument in your own words so as to save us the time.

Mark_Brabson: You have to be careful about the problem of meaning vs. reference, i.e., “Oedipus wanted to marry Jocasta, not his mother!” I think it would be more precise to phrase your position as being that libertarians are against incorporation, not “corporations”. Your position is basically that corporations as managed today could accomplish the exact same things through different financial instruments. Therefore, your critique of current corporations is the far weaker claim of “You should structure your financial arragements with different names.”

By the way, the term is “without”. No one’s impressed by your ability to pepper your posts with French.

Mark Brabson September 26, 2006 at 12:53 pm

Person:

My opposition to corporations doesn’t spring from my views on torts. It springs from the simple fact that corporations are NOT of the marketplace, but are of the state. As a Libertarian, I must oppose distortions of the marketplace by the state, so by principle I must oppose corporations. No inconsistenties in my position. I can’t speak for others, of course, just myself.

Mark Brabson September 26, 2006 at 1:05 pm

I am not sure one French term constitutes peppering. :) Now mises.org, they are peppered with foreign words.

David Spellman September 26, 2006 at 1:37 pm

The nominal reason for the invention of the corporation was to limit the financial liability of investors to what they put into the corporation. It was an asset protection scheme at its conception.

Although it quickly became a device for shielding investors from criminal liability, that was not its theoretical foundation. The operation of modern corporations isolate owners from being responsible for all kinds of malfeasance, but there is no moral basis for granting such protections. The classic two-level arrangement of an LLC owning a corporation to shield a sole propietor or partners from any legal action is reprehensible since it is obvious that the purpose is to act in any manner desired with impunity.

Corporations can and do defraud lenders and investors. People should loan or invest money carefully when dealing with a non-entity since its purpose is to shield real people from being financially liable. Corporations can and do empower agents to commit all manner of criminality and malfeasance.

But corporations do not commit crimes; people commit crimes–using corporations! Anyone who can be shown to have authorized or perpetrated a crime should be liable and punished. That includes officers, employees, agents, shareholders, lenders, or anyone else no matter what their relationship.

quasibill September 26, 2006 at 2:07 pm

Person:

“Also, opponents of incorporation are remarkably inconsistent. Yes, it’s true a corporation could commit a tort it couldn’t compensate. But then, so could most poor people today”

Person, here are two more important foreign terms to wrap your mind around so you can see your analogy is less than meaningless: de facto and de jure.

Poor people can’t compensate, but are still held liable. Shareholders may or may not be factually able to compensate, they are just legally insulated from liability regardless of their ability to pay.

Your whole argument, as usual, is a red herring. The question is, are corporations, as they currently exist, the product of principled legal reasoning, or are they the product of privileges granted by the state. Step one: Read the statutes on every state’s books that create them. (hint, that actually answers the question).

Now, as noted above, contractually limited liability is nothing novel – it is explicitly a matter of contract law. No libertarian should be against it being legal (although there are certainly arguments against the wisdom of buying into certain business arrangements). Further, it does provide a bit of a shorthand to what would otherwise require up-front disclosure during every contract negotiation – however, that’s such a minor point that it really is no big deal.

On the other hand, it’s really clear to anyone who spends more than 2 minutes actually researching the concepts of agency law and piercing the corporate veil that corporations currently provide statutory privileges that go beyond any common law privilege against tort liability.

Do I think it’s a major impetus behind current incorporation? No – quite likely, the contractually limited liability is the driving force. But that doesn’t somehow magically change the fact that corporations do enjoy state granted privileges that are not fundamentally sound.

Stephan Kinsella September 26, 2006 at 2:33 pm

Lee–God help me, I have to agree w/ Person here, re Van Eeghen’s paper. May the gods forgive me!!
Mark et al.: “My opposition to corporations doesn’t spring from my views on torts. It springs from the simple fact that corporations are NOT of the marketplace, but are of the state.”

But this argument could be used to say that marriage is not libertarian. After all, who cares whether there “would” be marriage still, absent the state–? the fact is, that “now”, the status of marriage “is” a creation of the state now. So it must be opposed.

quasibill September 26, 2006 at 3:05 pm

“But this argument could be used to say that marriage is not libertarian. After all, who cares whether there “would” be marriage still, absent the state–? the fact is, that “now”, the status of marriage “is” a creation of the state now. So it must be opposed.”

Uh, okay. How about this – nothing about voluntarily choosing your intimate or business partners should be illegal in a libertarian society. However, the legal ramifications attached to your decisions may or may not be consistent with a libertarian society. Hence -

“marriage” and “shareholder common ownership agreement” are never objectionable. Granting certain legal privileges to either arrangement, on the other hand, can be debated thoughtfully.

You gotta be careful agreeing with Person – you pick up his sloppy habit of focusing on red herrings. Next you’ll be complaining that everyone else is out to get you because they don’t understand your sloppy reasoning…

Person September 26, 2006 at 3:27 pm

quasibill:

Poor people can’t compensate, but are still held liable. Shareholders may or may not be factually able to compensate, they are just legally insulated from liability regardless of their ability to pay.

Okay, maybe I wasn’t clear. There are two separate issues at play here: 1) whether corporations unfairly expose others to risk they can’t cover, and 2) whether a person should be held liable for a specific tort. In my original post, I was addressing the general sentiment that (with respect to 1) ) corporations expose others to risk they can’t cover by noting that if they do, they do it to a far less extent than poor people, whom these ardent opponents of incorporation on the left (not surprisingly) give a free pass. You don’t necessarily endorse this point, so it may not apply to you.

Then, regarding 2), you’re claiming that as a shareholder, liability for (a certain set of) corporate torts inheres in my position. But my point here (and I believe Stephan’s) is that if I can achieve the exact same relationship with the corporation as currently stands, with some kind of bond (that I described above) — a bond which you agree does not put me on the hook for the corporation’s wrongdoing — then your claim just reduces to “corporations are bad because they use the wrong names for financial instruments in their dealings”. Not exactly a biting indictment.

Stephan said:the fact is, that “now”, the status of marriage “is” a creation of the state now. So it must be opposed.”

quasibill responded: Uh, okay. How about this – nothing about voluntarily choosing your intimate or business partners should be illegal in a libertarian society.

Hold on — you’ve already missed Stephan’s point. We all understand that you can go through an dileneate which parts of marriage are compatible with libertarianism and which aren’t. That wasn’t in dispute. The point is, by singling out an objectionable part of corporations, and using that to attack “corporations” as such (when so many parts of them are not objectionable), you’re making a statement exactly as useful and true as Stephan’s hypothetical statement about marriage.

And I’d drop the little jabs against me, if I were you.

Kristian Joensen September 26, 2006 at 6:13 pm

“a bond which you agree does not put me on the hook for the corporation’s wrongdoing — then your claim just reduces to “corporations are bad because they use the wrong names for financial instruments in their dealings”. Not exactly a biting indictment.”

Person(and Stephan for that matter), this is exactly right.

Wouldn’t Quasibill also have to concede that CONVERTIBLE bonds do not “put me on the hook for the corporation’s wrongdoing.

You can even have bonds that can be converted to stock and back again.

Lee September 26, 2006 at 8:58 pm

To up the ante, can Stephan or any one (or any person ) explain why such a thing as a “corporation” would be necessary from a strictly commercial standpoint? I can’t see one and joke with clients all the time that sole proprietorship is the way to go — unless you want to defraud public, in which case a corporation is THE way to go.
Also, someone once referred me to a very interesting paper on how Amex was once a pass through liability corporation. (Don’t Leave Home Without It: Limited Liability and American Express by Mark I. Weinstein)
That’s right, it was publicly traded with the understanding that owners of shares could be hit with a big bill a la Lloyd’s in the 80′s. Amex was also monsterously profitable during this time and its shares were considered desireable. Interesting, eh?

Lee September 26, 2006 at 9:53 pm

A learned friend has suggested that I correct my spelling of monstrously and desirable. Done.

Paul Edwards September 26, 2006 at 11:09 pm

Lee,

The reason why such a thing as a “corporation” would be necessary from a strictly commercial standpoint (in anarchy) is that it would facilitate faster and more efficient formation and accumulation of capital while at the same time accommodating the need for contractual agreements between property owners.

The corporation is a shorthand for a limited liability towards creditors, employees, clients, customers and whatever. It says basically if we are a limited company, and you agree to do business with us, you agree not to go after more than the worth of the assets of the company if you sue as a creditor, or as an unsatisfied customer. This could be accomplished in other ways, such as individual contracts but such an approach would be unnecessarily cumbersome and expensive. Limited corporations relieve groups of capitalists from having to pay for that particular administrative/legal overhead.

Obviously, capitalists will be much less likely to take equity positions in any given venture if the liability they take on for such an undertaking is unlimited. Any attempt at restricting contract making between property owners can only be deemed unlibertarian and aggressive. There can be no justification for disallowing market participants from coming up with innovations in contractual arrangements such as this. All that is required is proper notification and clarity of what a limited corporation means, and buyer beware.

Araglin September 27, 2006 at 2:04 am

Quasibill,

  • I think that you’re on to something here about the way in which the law unevenly distributes vicarious liability across different forms of business organization. That is to say, the law holds the “owner” of a sole proprietorship vicariously liable for the tortious acts of his employees so long as they are committed in the scope of employment, whereas it does not hold corporate shareholders, who are thought to be the “owners” of corporations, liable for the same.
  • This poses a real problem – the extent to which this differential treatment distorts the structure of production is unclear, but would seem to lead to different patterns of organization than would otherwise obtain. However, the problem of inconsistency may be resolved in one of two ways: either by eliminating the vicarious liability of the sole proprietor or by extending vicarious liability to the corporate shareholder. Which of these alternatives is appropriate depends upon whether or not the doctrine of Respondeat Superior is itself justifiable (if it is, it has not as of yet been satisfactorily justified).
  • I am still trying to work through this and other issues pertaining to libertarian agency law (Randy Barnett’s piece on Agency Law got me started along the lines I am currently sketching out). I think, though, that Mr. Kinsella is absolutely correct that the default position has to be that an actor (and only that actor) is liable for the torts that he personally causes (i.e. there is neither immunity, nor collective guilt). Others (employers, parents, etc.) may be held jointly and severally liable for those same acts, but this “may” only becomes an “are” upon demonstration of the proper connection between the two persons (here, I would probably want to see some showing of complicity — this would perhaps extend from the clear case of ordering the tortious act to quietly condoning and profiting from an act which one has the power and right to control and thereby prevent).
  • I think that even under agency law as it currently exists in Ango-American law, for a principal-agent relationship to exist at all, three requirements must be met: consent, benefit, and right of control. If the putative master has neither the power nor the right to control the agent’s actions, then no agency relationship exists. The question is, does a non-controlling shareholder in a publicly-traded corporation meet this basic control requirement? I think that’s a doubtful proposition.
  • Also: Even if the requirements for a bare agency relationship are met, the doctrine of Respondeat Superior only applies in a certain type of agency relationship known as master-servant relationship. Beyond a mere right to control ends, the putative master must have the right to physically control and select the means employed by the putative servant to accomplish those ends. It seems quite obvious to me, that the limited voting rights that inhere in ownership of a share of common stock do not by a longshot empower a shareholder to wield such control (if one possessed a controlling interest, of course the situation might be very different).
  • As for your response to the doubt Mr. Kinsella expressed in the bottum portion of his original post, it is my understanding that you are quite right about how the corporate form shields the shareholder from vicarious liability for torts (unless the shareholder used the corporation as a mere instrumentality or as an alter ego, so allowing for veil piercing); however, insofar as the shareholder is not vicariously, but directly responsible for committing harm, the corporate form does not shield him from liability therefor.
  • Cheers,
    Araglin
  • lee September 27, 2006 at 11:22 am

    Briefly, my understanding is that corporations became somewhat popular when merchants would undertake one-shot ventures with a fixed terminus. Think of a ship sailing from London to India loaded with metals and expecting to return full of spices. At the conclusion of the venture, all investor/owners would receive a pro-rata share of the proceeds, minus costs. The corporation as such would end, and then another formed for yet another venture, etc.
    As a business enterprise this made perfect sense. Each investor/owner had a pro-rata ownership interest that would be liquidated at the conclusion of the venture. He would invest knowing that his potential downside was the amount of investment, and his potential upside was whatever profits could be brought about by the traveling merchant manager and the intrepid ship captain.
    It also neatly seperated liability according to the fairly commonsensical idea that if it’s captain and traveling merchant who will “act” while far far away, it shouldn’t be the shorebound investor/owners who pay for misdeeds of the traveling merchant or captain.
    Prior to the advent of the corporation one had choice of lending money (no liability but limited upside) or being partners (big liability and potential big upside). Corporations made perfect sense and, indeed, allowed for the accumulation of larger sums of money allowing for “longer structures of production” in the form of ever-bigger ships and longer voyages, etc. (More spice spice, baby.)
    The problem was that cunning conmen immediately saw the potential for making this otherwise harmless social fiction of a ‘corporation’ into a money-making machine. Let’s make the corporation immortal, they thought. It lives forever. Investor/owners give us money, we buy lots of assets, make the corporation look profitable, watch as ownership shares rise in value on the secondary market, and then rip everyone off! I can almost see the gleam in the eyes of our early railroad and shipping barons, et al.
    On a more serious note, there is no a priori reason why corporations should be a more efficient or effective means of raising large sums of money for capital-intensive ventures. I believe many of our glorious capitalists of the past were quite capable of raising capital by other means, such as limited-life partnerships, hybrid loans with partial promise of share of profits, traditional bank loans, internal financing through cashflow generated by other ventures, etc.
    It is, I think, a myth that the corporate form was necessary for anything, save making conmen rich. It’s like the myth of government — but if we don’t surrender our sovereign rights to the king/elected officials/fuhrer then anarchy will prevail. This is a lie. As is the claim that corporations ever were “necessary” for anything but fleecing the public.
    Finally, as to liability, of course Stephan is right (as usual). If it is the act that causes the effect, we should follow the chain of action back to the actor. The path can be a twisted one (eg, Stephan tells me to shoot patent office clerk who denied his patent for Cajun Martini Blender), but the concept seems clear. Afterall, there can be but two basic categories, action and thought. Punishing the latter is rather unfair (think of difference between spouse denying you meatloaf because you said he/she looked fat in that outfit versus the denying you meatloaf because he/she thinks you thought he/she looks fat…ponder that).

    quasibill September 27, 2006 at 12:42 pm

    Person:

    “And I’d drop the little jabs against me, if I were you.”

    Coming from the king of personal jabs (often pre-emptively), that’s rich.

    “then your claim just reduces to “corporations are bad because they use the wrong names for financial instruments in their dealings”.”

    No. I’m saying that if you hold an equity share, meaning you a) claim ownership of the res, and b) maintain a claim to profits from the res, essentially unlimited in an absolute sense by any contract term, you are not a mere creditor. Once again, we can play all sorts of games, calling a duck a frog, so long as we have an asterisk and all sorts of legalese afterwards, but if we want to ground this discussion in a meaningful way, we have to recognize there is a difference between claiming ownership and being a creditor. And if shareholders don’t own the assets of the corporation, who does?

    “The point is, by singling out an objectionable part of corporations, and using that to attack “corporations” as such (when so many parts of them are not objectionable), you’re making a statement exactly as useful and true as Stephan’s hypothetical statement about marriage.”

    And once again reading comprehension fails you. My point was merely that those who reflexively defend corporatins AS THEY CURRENTLY EXIST, are akin to those defending the entity that is state regulated marriage. I’ve noted that I agree with Stephan’s ultimate point – that causation is really the important question. My post was merely to point out that “fictitious personhood” as it currently exists, actually does not accomplish what Stephan thought it did.

    Araglin,

    good points. I agree that an argument can be made that liability for sole proprietors may be the area where there is a problem with current law from a libertarian standpoint. My default position, though, is that anything developed through hundreds of years of common law with respect to business practices is the default right answer, that must be shown to be wrong. In the same vein, I view any recent (100 years or so) statutory law in the same area very suspiciously, with an assumption that it is the result of some social engineer.

    “Even if the requirements for a bare agency relationship are met, the doctrine of Respondeat Superior only applies in a certain type of agency relationship known as master-servant relationship.”

    I tended to shy away from respondeat superior, because it’s actually somewhat different from the point I was trying to make, and I actually believe that RS isn’t entirely fundamentally sound. Under traditional agency law, an agent can have several types of authority, including “apparent”, and with that authority bind the principal by his acts. Now in terms of contracts, quite clearly those who understand corporations understand that agents are limited in their authority. But in the case of where the agent uses his apparent authority to commit a tort, traditionally the principal could be held liable for the tort.

    To me, the question is whether the principal has acted responsibly with respect to how his property is utilized. RS, corporations, and even to a small extent agency law, all add confusing legalese that detracts from, instead of clarifying, this basic issue.

    Note that this is different from being a creditor in that a creditor has a contractually defined absolute return. Any “loan” instrument that allows for an unlimited absolute return is not a loan, it’s a share in ownership. A loan is a temporary surrender of ownership of property, where as a share of a corporation is a surrender of the right of possession of property while retaining ultimate ownership.

    “The question is, does a non-controlling shareholder in a publicly-traded corporation meet this basic control requirement?”

    Where no shareholder has a controlling stake, who is the principal? Who owns the corporation? Not the managers, clearly – we refer to them as agents, of course to a fictitious person, but that’s the problem. A real person must actually be an owner somewhere along the chain. So the only logical place for ownership is shareholders.

    So you challenge control. Okay, minority shareholders can’t control anything directly, but then again, who put themselves in that position? Where they no claim of control over something they claim to own? Should we reward them for such careless behavior with a blanket immunity? Or should we just treat them like any other owner of property owned commonly (joint tenants and tenants by the entireties also)?

    In the end, as you note, the problem is that this differential legal treatment is not based on a reasoned foundation, and therefore distorts capital structure. I prefer levelling the playing field with the simple question, like Stephan in his original article, to “did D’s negligence cause the injury stated?” No need to drown in legalese about master/servant, corporate veils, etc. In the absence of that, I’ll take either shielding sole proprietors like shareholders, or exposing shareholders like sole proprietors. It’s more important in the big picture that the law treats owners equally.

    Stephan Kinsella September 27, 2006 at 2:46 pm

    Quasibill: God help me, I tend to agree w/ Person here (except you are right about his jabs in many cases).

    Person: “then your claim just reduces to “corporations are bad because they use the wrong names for financial instruments in their dealings”.”

    QB: No. I’m saying that if you hold an equity share, meaning you a) claim ownership of the res, and b) maintain a claim to profits from the res, essentially unlimited in an absolute sense by any contract term, you are not a mere creditor.

    The problem I have with this is that you are relying too heavily on terminology. What does it *mean* to “own the res”? Why is this relevant anyway? Because of what ownership itself means–which is the *right to control*. It makes perfect sense to focus on this, when trying to find causal responsibility for what someone else does directly. If I have some kind of signficant influence or control over the others’ actions, then yeah, maybe I’m implicated. But it’s because of the right to control–whatever you call it.

    Once this is realized, then you see there are many forms of “right to control” which the law does not classify as ownership (e.g., a significant customer or creditor can pressure a company or even have contractual covenants); and many things the law calls ownership that have little right to control (the “naked owner” (owner of the residue or estate in reversion) of a piece of land that someone else has a life usufruct (life estate-life tenant) over has very little control of it). It is putting form over substance to fixate on the legal terminology used to describe certain relationships–especially the legal terms flowing from state positive law.

    “I tended to shy away from respondeat superior, because it’s actually somewhat different from the point I was trying to make, and I actually believe that RS isn’t entirely fundamentally sound.”

    Right–that’s why I said (as Gabb quoted me) that you have to first show RS is libertarian to have liability in the first place. The responsibilyt of the employer or the owner of the company-employer for the actions of the employee rests on RS.

    “To me, the question is whether the principal has acted responsibly with respect to how his property is utilized.”

    Maybe. But without RS, in order to hold the owner of property liable for torts committed by a third party using that property, you would have to say that loaning to someone is itself negligent, which is ridiculous. If I rent a car from Hertz and use it to ram into a crowd, why should Hertz be liable?

    I believe many libertarians have some kind of bizarre, yet unstated and unjustified, assumption that Hertz should be. Why? Why? It needs to be shown, not just assumed.

    “Note that this is different from being a creditor in that a creditor has a contractually defined absolute return. Any “loan” instrument that allows for an unlimited absolute return is not a loan, it’s a share in ownership.”

    Nonsense. Or: it does not matter. You are trying to pigeonhole things as either being “officially” ownership, or “not” ownerhsip, and then making a decision based on this determination. Why not just focus on the underlying reality instead.

    “Okay, minority shareholders can’t control anything directly, but then again, who put themselves in that position?”

    But when you buy a share from another shareholder you don’t cause anyhting to happen. the company already exists; you don’t even give them money.

    Roger M September 27, 2006 at 3:02 pm

    Is there a form of libertarianism that allows for differences on issues like this? In other words, could one society allow corporations and another not and both be considered equally consistent under libertarianism?

    The reason I ask is that people have two ways of thinking about law: 1) One groups says that nothing is permitted except what is in the law. Europeans tend to lean this way. 2) Another group says everything is permitted except what the law forbids, which is more American.

    It seems to me that the discussion above tends toward #1. Does a libertarian group that follows #2 exist?

    quasibill September 27, 2006 at 3:24 pm

    “Because of what ownership itself means–which is the *right to control*. ”

    Yes, a form of property right. Hence, it describes a person as well. Who owns the property rights in corporate property? Who can assign the right to possess, or control? As I’ve noted, it can’t be the managers, as we automatically refer to them as agents. Agents of who? Well, the fictitious person, of course! So a fictitious person owns property? hello, State, welcome to my house…

    “right to control” which the law does not classify as ownership (e.g., a significant customer or creditor can pressure a company or even have contractual covenants”

    Are you seriously arguing that a customer has a property right in the property of a seller? It’s the difference between “right” and “influence”. Leftists make that mistake all the time – I expected more from you. The customer can influence the seller by offering enough money to encourage the seller to agree to a term. He has no property right until the seller transfers it.

    “If I rent a car from Hertz and use it to ram into a crowd, why should Hertz be liable? ”

    Funny you used this example, as I was thinking along similar lines when I made my argument. Here’s my re-statement:

    QB is locking his car door as W, the town drunk approaches. W, reeking of alcohol and somewhat twitchy with white powder around his nose, asks QB for the keys to his car so he can pick up his friend at the airport. If QB gives W the keys to the car, can QB be held liable for W’s act in driving through the line of schoolchildren at the next intersection?

    Does your answer change if QB first performs the magical incantations, calls himself QB taxicabs, Inc., grants equal shares to his next door neighbors, and then signs W to an employment agreement to be the director of QB taxicabs, with full management authority, before giving W the keys to the car (which of course, QB has assigned to the corporation)?

    “But when you buy a share from another shareholder you don’t cause anyhting to happen. the company already exists; you don’t even give them money. ”

    So? When I buy the dam on the river upstream, I don’t cause anything to happen – it already exists, and I don’t add any capital to the dam. However, I AM now owner of it, and CAN be held liable for a subsequent breach that causes damage down stream.

    It’s really quite amazing to see you make Marxist arguments about property ownership. That it’s just some metaphorical construct, that abstractions can have rights, etc. Property rights are held by someone or someones in common to any owned property. Until you define who owns the property, it must be unowned. Who, by your tortured definitions, owns the corporate property, if not shareholders?

    Stephan Kinsella September 27, 2006 at 3:42 pm

    Somewhat bill:

    “right to control” which the law does not classify as ownership (e.g., a significant customer or creditor can pressure a company or even have contractual covenants”

    Are you seriously arguing that a customer has a property right in the property of a seller?

    Depends. They can–they can have contractual guarantees that force the seller to do certain things or not, w/ their own property. Is this not a form of co-ownership? It’s divided right to control. Same w/ creditors.

    It’s the difference between “right” and “influence”. Leftists make that mistake all the time – I expected more from you.

    But if I were exploring a theory of ownership, maybe so. The issue is *causation*. For that, we look at relevant factors. One of them is influence or control. Owenrship is relevant *only* because and to the extent it means control. In my view.

    The customer can influence the seller by offering enough money to encourage the seller to agree to a term. He has no property right until the seller transfers it.

    First, why does there have to be an ownership-based influence for it to matter for responsibility? If a wife pays a hit-man to kill her husband, she is responsible not b/c she owns the gun used or the hit-man. But beause of her role–her influence, her causal role. I discuss the importance of causation here: http://mises.org/journals/qjae/pdf/qjae7_4_7.pdf

    Or what if she seduces her boyfriend or otherwise persuades him to kill her husband? She’s still liable (IMO).

    Second–the customer can have property rights–there might be a contract having many obligations on waht the seller does with his property.

    QB is locking his car door as W, the town drunk approaches. W, reeking of alcohol and somewhat twitchy with white powder around his nose, asks QB for the keys to his car so he can pick up his friend at the airport. If QB gives W the keys to the car, can QB be held liable for W’s act in driving through the line of schoolchildren at the next intersection?

    Maybe–but you changed the context. Here QB is more involved. It’s like handing a gun to someone who is obviously likely to immediatley use it to go on a shooting rampage, and selling one to a hunter.

    It’s really quite amazing to see you make Marxist arguments about property ownership. That it’s just some metaphorical construct, that abstractions can have rights, etc.

    It’s not Marxist to say property means the right to control. It’s not Marxist to believe responsibility for others’ actions requires a coherent theory of causation; and that in order to prove such causation, “ownership” might be relevant primarily if and to the extent the ownerhsip implies some kind of relevant control; and that if so, other types of control or influence might also be relevant for a causal analysis.

    Property rights are held by someone or someones in common to any owned property. Until you define who owns the property, it must be unowned. Who, by your tortured definitions, owns the corporate property, if not shareholders?

    Why do you keep assuming A is liable for any tort commited by a third party who is using A’s property? This is an assertion that needs a justification.

    araglin September 27, 2006 at 4:13 pm

    The problem here is in assuming that ownership of any particular asset must be unitary. It’s not. When a potential share-holder pays in capital to the corporation, he receives in return certain contractual rights: (1) to receive a pro rata share of any declared dividends; (2) to receive a pro rata share of assets minus liabilities upon liquidiation; and (3) the right to vote in certain situations. These contract rights (to the extent that they are enforceable) rest upon the parceling out of the various constituent parts of ownership among the parties of the corporate assets. If one has an enforceable right to insist that certain actions be/not be taken with certain property, under libertarian theory, that has to be because one or more of the “sticks” in the property “bundle” has passed into his hands. An asset isn’t unowned merely because no one possesses each and every one of the ownership rights.

    Hope this finds all of you well,
    Araglin

    quasibill September 27, 2006 at 7:04 pm

    “They can–they can have contractual guarantees that force the seller to do certain things or not, w/ their own property.”

    At which point, the seller has sold that property right to the customer. But he did, in fact sell it. That right existed before he entered into the contract.

    “he issue is *causation*. For that, we look at relevant factors. One of them is influence or control. Owenrship is relevant *only* because and to the extent it means control.”

    I actually agree. The problem is you are arbitrarily ending the chain at a given point. Noone forced the shareholder to enter into the agreement he did. He did, in fact, have absolute control of the property he exchanged for the share, and in fact, had every right in the world to demand more control in return. The fact that he intentionally tries to shirk responsibility for how his newly acquired property is then used doesn’t exactly make him automatically blameless for how it is used, in my view. He can be seen as contributing to the action by supplying the necessary means. Again, you and your newfound soulmate are fighting a bit of a strawman – I am not arguing for automatice liability. I’m merely arguing against automatic immunity.

    “Or what if she seduces her boyfriend or otherwise persuades him to kill her husband? She’s still liable (IMO).”

    Exactly. Or how about the situation where the teacher seduces a student, provides him a gun, and then blithely mentions that she can’t continue the relationship as long as her husband is alive? She has no control over what the student then does, and she hasn’t exercised any direct control over him, but she can still be found liable (IMO). Of course, if she incorporated herself and merely hired the student as a director and gave the equivalent information (here’s a nuclear plant, but unless we can find a cheap way to dispose of the waste so I can make a profit, I’ll have to fire you), current law saws – immunity! Wonderful, ain’t it?

    “Here QB is more involved. It’s like handing a gun to someone who is obviously likely to immediatley use it to go on a shooting rampage, and selling one to a hunter.”

    I see no change of context. You were claiming that there could never be liability for merely lending property to another. I showed that quite clearly there is an argument that there can be such liability. Shareholders voting in a CEO with a record of putting profits ahead of any concern for third parties are perfectly analogous – if the director then proceeds to violate 3rd party rights in pursuit of higher profits, can you honestly say that the shareholders had no causal connection?

    What was the referrent to my “marxist” comment was your intimation that there is no real owner of corporate property – that an abstraction (such as “the proletariat” or a fictitious person) had property rights. I say, some real, living, individual has the property rights, individually or common with other real, living individuals. They do, in fact, delegate these rights when they make contracts. And, in fact, they can arguable be held liable for delegating those rights in a non-responsible manner.

    “Why do you keep assuming A is liable for any tort commited by a third party who is using A’s property? This is an assertion that needs a justification.”

    See above comment regarding the Ray Bolger you keep bringing to the table.

    Araglin,

    “The problem here is in assuming that ownership of any particular asset must be unitary.”

    I think the only people assuming this are Kinsella et al. I’m merely saying that each right exists, and that in most pertinent situations, it originated as unitary ownership rights, either in an individual or in a group. The original unitary owner then delegated or sold some rights to others. These are, in fact, actions. It doesn’t just happen magically. Humans actually act to accomplish the transfer. The manner in which this transfer occurs *may* give rise to liability on the part of the transferor. NOthing more, nothing less.

    Stephan Kinsella September 27, 2006 at 10:18 pm

    pseudo-bill:

    “he issue is *causation*. For that, we look at relevant factors. One of them is influence or control. Owenrship is relevant *only* because and to the extent it means control.”

    I actually agree. The problem is you are arbitrarily ending the chain at a given point. Noone forced the shareholder to enter into the agreement he did. He did, in fact, have absolute control of the property he exchanged for the share, and in fact, had every right in the world to demand more control in return. The fact that he intentionally tries to shirk responsibility for how his newly acquired property is then used doesn’t exactly make him automatically blameless for how it is used, in my view. He can be seen as contributing to the action by supplying the necessary means. Again, you and your newfound soulmate are fighting a bit of a strawman – I am not arguing for automatice liability. I’m merely arguing against automatic immunity.

    No, I’m saying it could be either way too. Some shareholders could clearly be liable. For their particualr actions or role.

    I simply say taht as a general matter, someone is responsible for another’s direct actions only if you can establish a sufficient causal link. Now, if you think *merely owning shares* in the company that pays money to someone to do something (an “employee”) is necessarily liable for any tort committed by that employee, I simply think it needs to be established. The burden is on you; and if you think it’s “obvious” or “obviously followS” from the fact that he’s a shareholder–it doesn’t. You have the burden. I don’t see how you can satisfy it but you are welcome to try.

    That brings up another issue: “employee” is also an artifical concept; economically, waht’s teh difference between paying an independent contractor, or an “employee,” to do a task for you? Or even outsourcing something to another company?

    I think the problem is some people have a general hostility to corporatism either b/c they have a left-libertarian aspect, or a paleo-agrarian one, or b/c they dislike the intertwining of global capitalism with government. So they come up with the limited liability complaint. But it’s not set in any carefully articulated, coherent theory of responsibilty.

    I mean, let’s hear it: in a private joint stock company in your version of libertopia, what *exactly* is your theory of what liability shareholders should have? Are you saying they should have unlimited liability, for … what? any actions performed… by whom? By “employees’ of the company? or only by employees, performed in the couse of their employment? What about outsourced tasks done by “other” companies? what about the actions of “independent” contractors? Does the action have to be done “with” “property” owned by the shareholders/company? Or does merely being paid by the company implicate the company?

    SEe, not only do you guys fail to set forth a careful theory of resonsibility and causation, you fail to even specify *what* you are trying to justify. I believe you need to carefully show what liability you think shareholders *should* have (that the law is currently somehow immunizing them from), and also what is the *justification* for this theory.

    Or how about the situation where the teacher seduces a student, provides him a gun, and then blithely mentions that she can’t continue the relationship as long as her husband is alive? She has no control over what the student then does, and she hasn’t exercised any direct control over him, but she can still be found liable (IMO). Of course, if she incorporated herself and merely hired the student as a director and gave the equivalent information (here’s a nuclear plant, but unless we can find a cheap way to dispose of the waste so I can make a profit, I’ll have to fire you), current law saws -immunity!

    I am not so sure you are right. But if so, that part is not justifiable. I have pointed out repeatedly that if someone is causally responsible, fine. In this case, it’s easy to make the case.

    But notice: she is not responsible *merely because she is a shareholder*, but because, as yo uset up the hypo, she was orchestrating the whole thing.

    This example does NOT show that a *mere* shareholder of a company is necessarily responsible for all torts committed by individuals the company pays to do things.

    I see no change of context. You were claiming that there could never be liability for merely lending property to another.

    Did I? I believe I was pointing out that if you say a shareholder is necessarily liable, it must be based on *something*. It has to be because he gave money to, or has control over, the company. In the former case, if you base it on this–then you would implicate all lenders too. Surely we don’t want this.

    This dos not imply no lender could be liable. I can conceive of situations where they would. Where they pressure the company into committing a crime, etc.

    Shareholders voting in a CEO with a record of putting profits ahead of any concern for third parties are perfectly analogous

    Perhaps–but that is not merely because they are sharehodlers–it’s b/c of particualrthings they did in this case–and how would this theory implicate those who voted against the CEO, or who didn’t vote (anyway shareholders elect the directors, who hire the CEO).

    - if the director then proceeds to violate 3rd party rights in pursuit of higher profits, can you honestly say that the shareholders had no causal connection?

    Of course in some cases this can be shown. Sure, why not? I just say it’s not automatic.

    What was the referrent to my “marxist” comment was your intimation that there is no real owner of corporate property

    Of course it has an owner. Or owners. It’s divided; it does not rest all in the hands of shareholders (or not necessarily). As I pointed out: can the shareholders use the corporate jet? No. CAn the company sell all its assets? No, not if the bank has covenants or liens preventing it. Etc. Ownership–the right to control–is spread among many entities. Deal with it.

    See above comment regarding the Ray Bolger you keep bringing to the table.

    What?

    “The problem here is in assuming that ownership of any particular asset must be unitary.”

    I think the only people assuming this are Kinsella et al.

    Im not assuming this. The opposite, if anything.

    Person September 28, 2006 at 12:17 am

    quasibill: are you going to address the issue of convertible bonds that Kristian brought up or the variable bonds that I brought up?

    quasibill September 28, 2006 at 7:43 am

    Stephan,

    Let’s step back and see if you agree with my summary so far, and see what you disagree with:

    uncontested:

    1. sole proprietorships and corporations are treated differently with respect to liability for employee actions. Sole proprietors have respondeat superior, while shareholders have limited liability.

    2. Limited liability has no connection to the concept of causation. Piercing the corporate veil is not based on determining whether there was control or causation, rather it merely attempts to determine if the shareholder didn’t respect the corporate identity.

    3. Respondeat superior may or may not be justified as to sole proprietors (and therefore corporations as well) – but if you believe it isn’t, RS should be changed, instead of granting artificial privileges to shareholders in corporations. There is no valid reason to distinguish between the two forms of ownership in this respect. What holds for one as a general rule should hold for the other.

    Any problems with that?

    (Ray Bolger had an important role in the Wizard of Oz)

    All of which leads us to:

    “I believe I was pointing out that if you say a shareholder is necessarily liable”

    Strawman – I never, not once, claimed automatic liability. In fact, I have, from the beginning, only argued AGAINST automatic immunity, which is what current corporate law provides. You keep trying to rotate the positions, but it doesn’t work. YOU are defending an absolute position. I’m merely arguing that corporations, as they exist, posess privileges that they wouldn’t absent the state.

    “Perhaps–but that is not merely because they are sharehodlers–it’s b/c of particualrthings they did in this case–and how would this theory implicate those who voted against the CEO, or who didn’t vote (anyway shareholders elect the directors, who hire the CEO).”

    Exactly. And under current law, none of this is considered. You can only get this far if you first jump through the hoops of “piercing the corporate veil.”

    “Of course it has an owner. Or owners. It’s divided; it does not rest all in the hands of shareholders (or not necessarily). As I pointed out: can the shareholders use the corporate jet? No. CAn the company sell all its assets? No, not if the bank has covenants or liens preventing it. Etc. Ownership–the right to control–is spread among many entities. Deal with it.”

    I have dealt with it. You can’t seem to get past the point that you are defending an entity, as it currently exists, that doesn’t. As in this statement:

    “I am not so sure you are right.”

    After you spent your first several paragraphs excoriating leftist and agrarians for their supposed inability to present a coherent defense of their vision, you come up with that? You’re going to the mat to defend corporations as they exist based on that? Okay…

    Let’s put out there again, nice and slowly -

    Shareholders currently have no liability for how they use their share rights, unless they fail to respect the corporate identity. You consistently claim that this is just peachy in your world, while out the other side of your mouth claiming that the only issue should be causation (“Of course in some cases this can be shown. Sure, why not? I just say it’s not automatic.”) Surprise! – I agree with the second statement (“I am not arguing for automatice liability. I’m merely arguing against automatic immunity.”) (nice spelling on my part, BTW). Just not the first. In that vein, as I’ve already clearly stated above, both RS and limited liability serve only to confuse the question.

    Person -

    Answered several times. In fact, just re-read the exchange between NSK and myself, and it is addressed at least 3 times over. In fact, I have clearly stated several times what my standard would be (hint, that helps other people actually determine what you mean when you argue – I know someone who fails to do this repeatedly in the IP context…)

    Person September 28, 2006 at 8:34 am

    quasibill: No, you did not address convertible or variable bonds. You may have given a standard, but you never applied it to those cases. And considering how hard your position is to follow, no, you can’t count that as an explanation. Earlier in the thread you said, essentially, “managers ‘are considered’ agents, so obviously they can’t be owners” — that’s right, because of how economists describe the principle-agent problem, that determines the relationships between the actors. So, no, it’s a bit hard to get answers out of you. Try to explain how convertible bonds and variable bonds fit into your narrow framework.

    Stephan Kinsella September 28, 2006 at 11:01 am

    Not-quite-bill:

    1. sole proprietorships and corporations are treated differently with respect to liability for employee actions. Sole proprietors have respondeat superior, while shareholders have limited liability.

    I think I see what you’re trying to get at here. You see a sole proprietor as responsible for employees’ torts; yet you think there is an artificial exemption for “joint owners”. If they just “stand in the shoes” of a sole proprietor, why aren’t they collectively liable?

    But a sole proprietor is liable because he directs the actions of the negligent employee, and actually runs the company–sets policies, controls is, manages it. In a joint stock company, the shareholders don’t do any of this. They elect the board, which appoints managers. In my view, the managers are more analogous to the sole proprietor than the shareholders are.

    Let me also ask you: have you read Robert Hessen’s by-now classic work on this, In Defense of the Corporation? It’s a very thorough, learned defense, based on libertarian principles. I really think anyone wanting to weigh in on this needs to be familiar with this pioneering work. He handles tons of these kinds of objections.

    Before proceeding further, let me list here some good resources on this that really should be studied by anyone seriously interested in this issue:

    Richman notes:

    What about torts, or actions that harm people who are not parties to any contract? (We’re primarily concerned with unintentional torts here.) Partners in an unincorporated firm can personally be sued by someone, say injured by a company vehicle, but not so a shareholder. This seems to confirm that corporate status is a privilege.

    Hessen explains that in England long ago the “principle of vicarious liability” was established, holding that a master was liable for the torts of his servant. This was reasonable because the master hired, trained, and supervised the servant. Later the same principle, reasonably, was “extended to sole proprietorships and general partners.” However, he says, it doesn’t follow that it should be applied to all holders of corporate stock. Hessen writes,

    Vicarious liability should only apply to those shareholders who play an active role in managing an enterprise or in selecting and supervising its employees and agents. The tort liability of inactive shareholders should be the same as that of limited partners — that is, limited to the amount invested — and for the same reason; namely, inactive shareholders and limited partners contribute capital but do not participate actively in management and control.

    I had forgotten this but must have absorbed it when I read Hessen long ago. Hessen here is making the same basic causation point I have made here: that vicarious liability must be relied on to hold someone liable for the servant’s actions–and in the case of a sole proprietorship, it is reasonable to do so because the proprietor/master is hiring, training, supervising the servant/employee. But in the case of a joint stock company, the same idea applies only to those sharehlolders who “play an active role in managing an enterprise or in selecting and supervising its employees and agents”.

    This makes sense to me. Merely being a shareholder is not sufficient. It’s having control. I believe most of the corporation opponents have some view that inherently connects liability to property. I think this is confused and wrong. Liability flows from one’s actions–from control–from causing the harm to occur.

    2. Limited liability has no connection to the concept of causation. Piercing the corporate veil is not based on determining whether there was control or causation, rather it merely attempts to determine if the shareholder didn’t respect the corporate identity.

    Look. The point is this. Le’ts not stray. Libertarian critics of the corporation base this criticism on certain features, namely limited liability. The question is: in a private society, with no state privilege, could private actors form the basically same type of arrangement that had the features you guys complain about. We have shown that contractual limited liability is no problem. What about torts? See above.

    3. Respondeat superior may or may not be justified as to sole proprietors (and therefore corporations as well) – but if you believe it isn’t, RS should be changed, instead of granting artificial privileges to shareholders in corporations. There is no valid reason to distinguish between the two forms of ownership in this respect. What holds for one as a general rule should hold for the other.

    See Hessen’s comments above re vicarious liability. I think this is a sound analysis.

    Bottom line: Hessen solved all this back in the 1970s. Critics usually ignorant of what has gone before keep reinventing the same critiques, that have already been addressed.

    “I believe I was pointing out that if you say a shareholder is necessarily liable”

    Strawman – I never, not once, claimed automatic liability. In fact, I have, from the beginning, only argued AGAINST automatic immunity, which is what current corporate law provides.

    Does it? If an employee–say a truck driver of FedEx–is also a shareholder, and negligently runs over someone, does his status as a shareholder immunize him? Nope.

    You keep trying to rotate the positions, but it doesn’t work. YOU are defending an absolute position. I’m merely arguing that corporations, as they exist, posess privileges that they wouldn’t absent the state.

    Shareholders *per se* do not seem to exert enough control to be liable vicariously. The shareholders that do exert enough control, ought to be liable.

    “Perhaps–but that is not merely because they are sharehodlers–it’s b/c of particualrthings they did in this case–and how would this theory implicate those who voted against the CEO, or who didn’t vote (anyway shareholders elect the directors, who hire the CEO).”

    Exactly. And under current law, none of this is considered. You can only get this far if you first jump through the hoops of “piercing the corporate veil.”

    But I am not defending this aspect of corporations. So long as people would be free in private society to (a) limit shareholder’s contractual liability for debts of the corporation; and (b) not be held to be automatically responsible vicariously for actions of the company’s employees merely becuase they are shareholders, then we have the seed of a simalcrum of a corporation.

    You can’t seem to get past the point that you are defending an entity, as it currently exists, that doesn’t.

    You seem to not be able to get past the convenient use of legal fictions. It’s just a way of conceptually dealing wtih something. It’s not like it hast o have a platonic essence.

    Shareholders currently have no liability for how they use their share rights, unless they fail to respect the corporate identity. You consistently claim that this is just peachy in your world,

    No. What i claim is that in a free society I see no problem with shareholders having a form of limited liability, even for torts, becuase being a shareholder does not in and of itself mean you are necessarily actively controlling what the tortfeasors do. I also see no problem holding a particular shareolders–or director, or manager, or lender, or customer, or vendor, or employee, or wife of the CEO–liable vicariously for the acts of a particular employee, if it can be shown that there is sufficient causal connection. I only maintain that merely being a shareholder is not sufficient. The libertarian critics of the corporation implicitly rest their critique on the idea that *merely* being an “owner” is sufficient. that is what i deny. ARe you now retracting this? Note that Gabb, above, does imply this.

    In any event–as Hessen also points out:

    Regardless of one’s view about limited liability for torts, the whole issue is irrelevant to giant corporations, which either carry substantial liability insurance or possess sizeable net assets from which claims can be paid.

    Lee September 28, 2006 at 11:31 am

    Let’s be clear, certain “libertarian critics” of the corporation don’t focus on limited liability as much as they focus on how useless and meaningless the corporate form is. The mistake made by many (I have yet to digest 126 pages of Pilon’s thinking on this), is that they assume the corporate form serves a legitimate purpose. It doesn’t, it can’t and it never has (contrary to popular myth — similar to the myths of “rights granted to us by constitution” and “government is necessary to secure our rights, build roads, provide justice, secure patent rights,” bla bla). That’s the illusion we need to dispense with, and then we can lollgag around on issues of liability in a world of disjointed actions and perfect freedom.

    quasibill September 28, 2006 at 11:35 am

    Person -

    forgive me if I fail to respond to your posts – its clear we have a communication problem. You have, in the past, claimed to have clearly refuted certain arguments. I see your alleged refutations, and they are as clear as mud to me. The opposite appears to be true as well. What to me is a clear answer to your point, you don’t understand. We seem to speak different languages. I gain nothing from our exchanges, and its clear my posts aren’t useful to you. In the end, we degenerate to name calling, which is not beneficial to either of our positions.

    Stephan,

    “But a sole proprietor is liable because he directs the actions of the negligent employee, and actually runs the company–sets policies, controls is, manages it.”

    But that is not all. He is also the ultimate owner, who has the right to decide that someone else will run the company. For example, the common practice of franchisees to hire a location manager, who in actuality is responsible for all day to day operation. But the manager ultimately derives his authority from the owner, who has non-permanently delegated it to him. This delegation is, in itself, an act that has consequences in the world. For this act, the sole proprietor can be held responsible, including a situation where the sole proprietor hired a dangerous manager because that manager was likely to yield higher profits.

    As I’ve noted, the shareholder’s decision to hire a director is, in fact, absolutely immune as long as they follow some statutorily defined rituals. They ARE the ultimate owner involved, and they ARE the one(s) that delegate the right to control to the managers. This delegation IS an action for which liability can possibly accrue, under a libertarian theory. Under current law, it can’t, unless the shareholder disregards a fictitious concept.

    I have at some time or another, read all of those sources, although, like you, I don’t have handy recall to all of the points contained therein.

    As for Hessen, I don’t agree entirely with his analysis of vicarious liability with respect to inactive shareholders. To the extent that they are inactive by legal inability, his analysis is fine. To the extent they have the right to be inactive, but fail to exercise that right, they can be held liable for their failure to use their right in a responsible manner. Other than that, his analysis seems to agree with everything else we seem to have agreed upon.

    “Does it? If an employee–say a truck driver of FedEx–is also a shareholder, and negligently runs over someone, does his status as a shareholder immunize him? Nope.”

    Strawman. He is not liable in his identity as a shareholder, he is liable in his identity as an employee. Again, the point is that to the extent he has exercised a right that can be linked in the causal chain to the harm caused, there is an argument that he should be liable. Current corporate law arbitrarily protects shareholders from the possible consequences of their actions.

    “So long as people would be free in private society to (a) limit shareholder’s contractual liability for debts of the corporation; and (b) not be held to be automatically responsible vicariously for actions of the company’s employees merely becuase they are shareholders, then we have the seed of a simalcrum of a corporation.”

    Well, I’d limit (a) to “contractual debts” in the sense that at least one *real* person would have to be responsible for its tortious debts – that would be a matter of contract (indemnity, etc.) between the shareholders, but they could not extinguish the rights of non-parties to their contract.

    And 2nd, “simalcum” is a good description. It is not, in fact, what we currently have. The extent of the difference in practice is impossible to predict with certainty.

    “You seem to not be able to get past the convenient use of legal fictions”

    Maybe because legal fictions are a front for defrauding the less sophisticated. Look, I have no problem (legally) with hucksters swindling the unsophisticated out of their money, but I prefer that they are actually forced to spell it out up front, during dickering. Can you honestly argue that a person who doesn’t understand the meaning of “inc.” consented to limited contractual liability? To me, you only can by using arguments akin to you consenting to the current Constitution.

    “The libertarian critics of the corporation implicitly rest their critique on the idea that *merely* being an “owner” is sufficient. that is what i deny. ARe you now retracting this?”

    Not totally. I think you are too glib as to the concept of who delegates the rights of control, but beyond that, I think we agree.

    As far as Gabb’s critique, I agree with much of his criticism of the cultural effects, but I don’t trace the problem to corporations per se, but to the “public” markets as established by states as well as the central banks. “Close” corporations absent Fed currency manipulations, would, in fact, probably not have created so many cultural negatives.

    Stephan Kinsella September 28, 2006 at 11:55 am

    Lee:

    Let’s be clear, certain “libertarian critics” of the corporation don’t focus on limited liability as much as they focus on how useless and meaningless the corporate form is. The mistake made by many (I have yet to digest 126 pages of Pilon’s thinking on this), is that they assume the corporate form serves a legitimate purpose. It doesn’t, it can’t and it never has (contrary to popular myth — similar to the myths of “rights granted to us by constitution” and “government is necessary to secure our rights, build roads, provide justice, secure patent rights,” bla bla). That’s the illusion we need to dispense with, and then we can lollgag around on issues of liability in a world of disjointed actions and perfect freedom.

    What is the purpose of arguing that a corporation has no purpose? What is the relevance? Even if this were right, it has nothing to do with libertarianism.

    Bit-of-Bill:

    “But a sole proprietor is liable because he directs the actions of the negligent employee, and actually runs the company–sets policies, controls is, manages it.”

    But that is not all. He is also the ultimate owner, who has the right to decide that someone else will run the company.

    for some reason you guys see some relevance in being able to Name that sommeone is the Ultimate Owner. I think you’re putting the cart befor the horse; you are failing to provide an *argument* for why mere ownerhsip interests give rise to *vicarious liability*.

    For example, the common practice of franchisees to hire a location manager, who in actuality is responsible for all day to day operation. But the manager ultimately derives his authority from the owner, who has non-permanently delegated it to him. This delegation is, in itself, an act that has consequences in the world. For this act, the sole proprietor can be held responsible, including a situation where the sole proprietor hired a dangerous manager because that manager was likely to yield higher profits.

    I believe the world has nuances. Context and facts matter. Not all cases are alike. I think there is a difference between what a sole proprietor does and what a shareholder does. Apparently you do not. I think the manager is more analogous to a sole proprietor. They have similar control in making policy, hiring and directing employees. You think the shareholder and proprietor have more in common–becuase they are both “owners”. I focus on control and causation as elements of what determins “vicarious” responsibility. I have given reasons why (in my paper on Causation). You by contrast seem to focus on the Officail Deeming that someone is an Ultimate Owner. I have yet to see a reason given for connecting Ownership with vicarious liability.

    As I’ve noted, the shareholder’s decision to hire a director is, in fact, absolutely immune as long as they follow some statutorily defined rituals.

    I don’t agree that they should be. I can conceive of some cases where there might be liability. Perhaps.

    They ARE the ultimate owner involved,

    So??

    and they ARE the one(s) that delegate the right to control to the managers.

    No, they select the Board of Directors. The Board hires managers. Managers then supervise employees or contractors.

    This delegation IS an action for which liability can possibly accrue, under a libertarian theory. Under current law, it can’t, unless the shareholder disregards a fictitious concept.

    to the extent this is true, I would agree, that would not be teh case under libertarian law. But this is minor.

    “Does it? If an employee–say a truck driver of FedEx–is also a shareholder, and negligently runs over someone, does his status as a shareholder immunize him? Nope.”

    Strawman. He is not liable in his identity as a shareholder, he is liable in his identity as an employee.

    It’s not a strawman; I’m trying to make sure the description you are resting your critique upon is accurate.

    Again, the point is that to the extent he has exercised a right that can be linked in the causal chain to the harm caused, there is an argument that he should be liable.

    Yes. I just say mere ownership is not enough to show this. Do. You. Agree?

    “So long as people would be free in private society to (a) limit shareholder’s contractual liability for debts of the corporation; and (b) not be held to be automatically responsible vicariously for actions of the company’s employees merely becuase they are shareholders, then we have the seed of a simalcrum of a corporation.”

    Well, I’d limit (a) to “contractual debts” in the sense that at least one *real* person would have to be responsible for its tortious debts – that would be a matter of contract (indemnity, etc.) between the shareholders, but they could not extinguish the rights of non-parties to their contract.

    sure, by (a) I am refering to contractually acuiqred obligtions wtih third parties. They are on notice they can only pursue the assets of the company, not the shareholders individually.

    And 2nd, “simalcum” is a good description. It is not, in fact, what we currently have. The extent of the difference in practice is impossible to predict with certainty.

    Yes but you people are critiquing features we say are not problematic about corporations. I find in fact the whole obsession w/ corporations to be crankish and kind of leftist or something.

    Maybe because legal fictions are a front for defrauding the less sophisticated.

    Oh. Now it’s an argument for fraud. Sheesh.

    Can you honestly argue that a person who doesn’t understand the meaning of “inc.” consented to limited contractual liability?

    ? I don’t frankly care. If people parties to an agreement don’t take the time to specify it carefully enough, they are to blame. If enough people are harmed by the wrong legal presumption, then practices will change.

    As far as Gabb’s critique, I agree with much of his criticism of the cultural effects,

    Sure. But I find that a-libertarian. Interesting, but irrelevant.

    quasibill September 28, 2006 at 12:44 pm

    “I think you’re putting the cart befor the horse; you are failing to provide an *argument* for why mere ownerhsip interests give rise to *vicarious liability*.”

    No, you put the cart before the horse, as you must determine who is delegating a power before you can determine whether there can be vicarious liability. No person who does not have superior rights to the property can be found to be vicariously liable. Quite simple, no? Then, you move on to whether the delegation was a responsible use of that property right. Apparently it’s okay to just assume someone might have a property right and then begin the vicarious liability analysis. I say it flows the other direction.

    And that’s important, because you need to know where the corporate manager’s authority comes from. It’s not an inherent right – in most cases, his powers are revokable at will by someone else. Who might that someone else be? Were they responsible in their delegation to that manager in the first place? Were they responsible in not revoking the delegation earlier?

    You seem to be arguing that these questions aren’t relevant, because you don’t like identifying who actually owns the property rights at stake. I say that that is the first question that must be answered.

    “I believe the world has nuances. Context and facts matter. Not all cases are alike”

    I agree. Which is why blanket immunities (and for that matter, blanket liabilities) given to distinct classes are *always* problematic.

    “I think the manager is more analogous to a sole proprietor. They have similar control in making policy, hiring and directing employees. You think the shareholder and proprietor have more in common–becuase they are both “owners”. I focus on control and causation as elements of what determins “vicarious” responsibility. I have given reasons why (in my paper on Causation). You by contrast seem to focus on the Officail Deeming that someone is an Ultimate Owner. I have yet to see a reason given for connecting Ownership with vicarious liability.”

    You’re skipping right over it. By what right does the corporate manager have control? By what right does the sole proprietor have control? Hint – corporate managers don’t have a “right” at all, but a “power under authority”, just like the day to day manager under a sole proprietor does. This is where you are constantly returning to a Marxist conception of property rights being held by some abstract entity. The entity does not exist. It is in fact composed of individuals who must act for it to have any ability to actually act.

    “But this is minor.”

    Ah, well there it is. You value it to be minor, whereas I see it as non-trivial. Can we resolve this conflict? Well, you, as a Randroid type, probably think so. We’ll just have to agree to disagree on your valuation. But it’s nice to finally have the concession.

    “Yes. I just say mere ownership is not enough to show this. Do. You. Agree?”

    I. am. saying. that. mere. ownership. is. enough. to. ask. the. question. whether. the. owner. delegated. his. property. rights. in. a. responsible. manner. The rest of the analysis flows from there. If the owner wasn’t negligent (or worse) in this decision to delegate, and that is the only link in the causal chain to the owner – no.liability.

    “Yes but you people ”

    Can I pick up anything written by Rand and state that “you people” argue [x]? Please, stop with the collectivism. I’ve made my individual argument. Don’t ask me to defend positions I have not taken, and I’ll do the same for you.

    “Oh. Now it’s an argument for fraud. Sheesh”

    Read carefully, and you’ll note that I’ve declined to call it legal fraud. I’m not using the term in the technical sense in that sentence, and again, I’m not claiming that it should be illegal.

    “I don’t frankly care. If people parties to an agreement don’t take the time to specify it carefully enough, they are to blame. If enough people are harmed by the wrong legal presumption, then practices will change. ”

    I agree. I just find it funny that some libertarians (not you, but IIRC it was PE in this thread) claim the need to create legal privileges to make it easier for a given class to accomplish its objectives. I merely suggest that if you want contractually limited liability, it is fairly easy to include a standard clause in every contract you make. Then there can be no argument that the parties weren’t aware of some convenient legal fiction. It would revert back to standard contract analysis. However, I will agree to the extent that this is, in general, not a very big deal. But it is important to note that it isn’t fundamentally sound.

    “Sure. But I find that a-libertarian. Interesting, but irrelevant.”

    Fine – but you were the one to post his article. And further, as noted above, I’m clarifying my position contra the “you people” that you seem to confuse me with.

    Lee September 28, 2006 at 1:09 pm

    As an aside, if we argue liability in situations involving corporations, we shouldn’t forget that corporations are persons at law. As legal creatures it must act through physical beings, ie, corporate managers and employees. As such, imputing liability from managers and employees to corporation is very easy and commonly accepted today.

    Further, pass-through liability to a corporation by necessity implies direct liability of employee and manager. So if I am hurt by employee of corporation, I get my compensation from employee and corporation, jointly and severally.

    Directors can also be liable. (If employees and managers are arms and legs, then directors are brains — as hard as it may be to swallow while witnessing the Hewlett Packard fiasco involving the ladies who ran board, ran in-house counsel and used to run corporation…). Directors usually have something in their contract that says corporation will pay all bills unless director intentionally and knowingly acted in an illegal manner, etc.

    Shareholders can only be liable to extent of their capital contribution to enterprise or money paid for shares.

    That said, in libertania, if corporations existed (which I maintain would not be the case any more than cow pie pizza would exist in libertania), attributing liability to shareholders would be be difficult even without grant of immunity by ___________. This is because shareholders are not technically on site for the wrongdoing. But beware, if you are a shareholder of a corporation and, while in the course and scope of your duty as an employee of the corporation, you commit a tort, you are on the hook for the whole kit and kabooble notwithstanding your shareholder status.

    But if you only own shares and are kicking back in Houston eating cow pies when the tort is committed by the corporate employee in Oklahoma, of course there is no liability to you. (Some may argue that giving the employee instructions to commit the tort somehow imposes liability on our cow pie loving shareholder, but I doubt that for many reasons, beginning with the concept that shareholders don’t give order to corporate employees, managers do, and managers get their instructions from directors, and directors almost NEVER ask for shareholder approval first.)

    Oh, and corporations serve no purpose in real life. At all.

    Stephan Kinsella September 28, 2006 at 1:53 pm

    Oh, and corporations serve no purpose in real life. At all.

    Dude, I have trouble believing you are serious here. This is just bizarre.

    As an aside, if we argue liability in situations involving corporations, we shouldn’t forget that corporations are persons at law.

    I assume you have actually read Hessen and are familiar w/ his extended discussion of this issue?

    As legal creatures it must act through physical beings, ie, corporate managers and employees. As such, imputing liability from managers and employees to corporation is very easy and commonly accepted today.

    This does not imply that it’s justified to automatically hold a shareholder vicariously liable for the actions performed by other people (which actions? which people?).

    Further, pass-through liability to a corporation by necessity implies direct liability of employee and manager.

    liability for what, exactly? For what actios? For those of some monk in timbuktu?

    Directors can also be liable.

    Sure, why not–if and to the extent it is establihsed they are vicariously responsible for the tort in question?

    That said, in libertania, if corporations existed (which I maintain would not be the case any more than cow pie pizza would exist in libertania), attributing liability to shareholders would be be difficult even without grant of immunity by ___________. This is because shareholders are not technically on site for the wrongdoing. But beware, if you are a shareholder of a corporation and, while in the course and scope of your duty as an employee of the corporation, you commit a tort, you are on the hook for the whole kit and kabooble notwithstanding your shareholder status.

    Lee, what in the world are you talking about?

    But if you only own shares and are kicking back in Houston eating cow pies when the tort is committed by the corporate employee in Oklahoma, of course there is no liability to you.

    Uhhh…. so you are disagreeing w/ us how?

    All we are maintaining is this. First, by contrat people can become limited liability “shareholders” liable only to the extent of their initial investment, to third parties who contract with the company. Second, *merely holding shares* does not appear to involve the shareholder in enough active control of what employees of the company do to make them vicariously liable for whatever the company is vicariously liable for in tort. That is all. I think you people are all very confused about what it is you are arguing against.

    Lee September 28, 2006 at 2:24 pm

    Stephan,

    Okay, I am having some fun here, but I don’t mean to be obtuse.

    You say:

    “All we are maintaining is this. First, by contract people can become limited liability “shareholders” liable only to the extent of their initial investment, to third parties who contract with the company. Second, *merely holding shares* does not appear to involve the shareholder in enough active control of what employees of the company do to make them vicariously liable for whatever the company is vicariously liable for in tort. That is all. I think you people are all very confused about what it is you are arguing against.”

    Assuming contract law in libertania allows for this, I agree with this statement. I only ask whether corporations as we now undertand them to be would exist in libertania. And the answer has to be nay. There may be some creature similar to corporation, but not corporation.

    As for my example of shareholder who is also employee, surely you agree that if I create “Cow Pie, Inc.” and then hop in the cowpie-mobile and run Person over on the highway, my shareholder status would not reduce my liability to Person in the slightest. I just mentioned this point in passing because some people think the corporate shield shields actual acts by individuals. Not so. Person would be entitled to judgement against me and my corporation.

    Stephan Kinsella September 28, 2006 at 2:27 pm

    Lee: “Assuming contract law in libertania allows for this, I agree with this statement. I only ask whether corporations as we now undertand them to be would exist in libertania. And the answer has to be nay. There may be some creature similar to corporation, but not corporation.”

    But this is ridiculous. marriage as we now konw it would not exist in libertania, since it would not be a creature of the state. Does that mean there would be no marriage in a free society?

    “As for my example of shareholder who is also employee, surely you agree that if I create “Cow Pie, Inc.” and then hop in the cowpie-mobile and run Person over on the highway, my shareholder status would not reduce my liability to Person in the slightest.”

    Uh— of course not. It does not NOW.

    Lee September 28, 2006 at 3:16 pm

    Ridiculous? You jest.

    Alternative forms of marriage will exist. It will likely be Christian in nature, but maybe it will be Muslim or something else. In modern civil law marriage has a different meaning and effect than in, say, classical Christian communities. Today, I can get a marriage certificate from the state that has a fixed set of rights/obligations (if you are male, it’s mostly obligations, but I digress…as eddie murphy joked “eddie, I want half!”). In libertania things will be different. So, too, with business entities.

    What’s so ridiculous about that?

    Greg September 28, 2006 at 4:05 pm

    Score so far:

    QB: 10
    NSK: 1

    It would be closer but QB scores multiples for making the same logical point over and over but NSK simply can’t comprehend. NSK scores one big point (the first point) for saying that “corporations” could exist without a state and no libertarian rule could prevent it.

    araglin September 28, 2006 at 6:51 pm

    Mr. Kinsella and Quasibill,

    I’ve been quite pleased to see something approaching a consensus emerging on these issues, but have one technical point to make about terminology, which I think is important:
    The drunken truck driver employee who runs over the child is “directly liable.”

    The employer who knowingly sends the drunk employee out after smelling the stench of moonshine on him may be held liable on one of two theories:

    -He is “indirectly liable” if he was negligent or somehow causally responsible in the sense that Mr. Kinsella (rightly) insists upon.

    -He is “vicariously liable” if he is held liable automatically simply by virtue of the fact that he bears a certain relation to the employee. To the extent that we’re defending the possible responsible of those who did not physically cause the harm, we ought not to call that liability “vicarious” unless, perhaps it can be justifiably said, that a certain class of person’s always would in fact be causally responsible in situations where they did in deed bear a certain sort of relationship to the direct tortfeasor.

    That’s all for now,

    Araglin

    Paul Marks October 13, 2006 at 3:10 pm

    It is true that modern limited liability statutes only go back to the 19th century – but the concept itself is ancient (the idea of the corporation can be found, for example, in the idea of a church or a university college)

    Regardless of the age of the concept (I accept that many evil things are old) there is the point of freedom of contract.

    If a group of people (or even one person) say IN ADVANCE “if this business venture goes wrong, we will not sell all we own to pay your loss, we will only give you want we have put into the business” then a customer or supplyer has a choice.

    They can refuse to do business with the business these people have set up (i.e. only do business with non limited liabilty concerns where the people who own the business are open to losing all their private wealth – their homes and so on), or they can accept this condition.

    It is wrong to do business with something that clearly called itself “Limited” (in Britain) or “Incorporated” (in the United States) and then say “the business has gone bankrupt, but the shareholders still have homes and cars (etc) I demand they pay me!”

    Only someone who did not know in advance that they were dealing with a limited liability organization (due to some deception) has a possible case against the shareholders.

    Although I am disturbed by the quiet dropping of the term “Limited” (in Britian) and “Incorporated” (in the United States).

    A corportaion should not just call itself “I.B.M.” (or whatever) it should be careful to call itself …… INCORPORATED (in the United States) or …….. Limited (in Britain).

    After all some organizations are not limited liability (such as Lloyds insurance in Britian) and (on moral if not legal grounds) the practice of just giving their name (without having to state that they are limited liability) should be reserved for them.

    No one should have to do business with a limited liability concern without knowing what it is – and be open about what it is should be the responsibility of the limited liability concern.

    I am not asking that there should be a great sign outside every building of such an organization saying “If this place goes bust you do not get paid for you have sold us, and you get to watch the shareholders drive off in big cars to their nice houses”, but surely asking for the words “Limited” or “Incorporated” after the name is not asking for too much.

    Joan October 14, 2006 at 3:42 am

    Texas is one of the few regions which have greatly benefited from the tort reforms. Armed with billions of dollars from settlements in the tobacco lawsuits and other big money cases, trial lawyers are seeking to discredit and take away many of the benefits of tort reforms adopted around the country in recent years. Fortunately, a new Texas study is providing facts to combat their campaign of disinformation.
    The study looked at inflation, personal income, job creation and other economic factors to determine the success of Tort Reforms, championed by George w. Bush and administration. The overall impact of tort reforms on the Texas economy is estimated to include $ 23.207 billion annual total expenditure for the year 2000. The benefits represent 5.64% of the total income growth, 5.32% of output expansion and 11.4% of the net job creation during 1995-2000. In addition to these specific effects, legal reforms also helped in creating a better environment for economic development within Texas.

    Tort Reforms were responsible for creating almost 295,151 permanent jobs in Texas during the past few years. This shows that the tax reforms have had a direct and positive impact on the lives of the consumers. The savings to the typical Texas household in terms of lower prices and increased total personal income amount to $1078 annually, and those savings are projected to grow over time. Many of the cases lying unsolved in the courts have now been cleared, giving the citizens greater access to the courts. So the study confirms that tort reforms have benefited the consumers and businesses and also the courts with civil justice reforms.

    Mr. http://www.pacificresearch.org/press/clip/2006/clip-05-24-06tlr.html

    Jeremy October 14, 2006 at 1:16 pm

    Quasibill makes precisely the argument I would make against corporations, and I would go further: the corporation – as it currently exists – is a mechanism by which this “minor” delegatory power is dehumanized by disinvesting responsibility from human actors. It allows the profit motive to attain a rational, dispassionate role disconnected from authentic, personal human agency – in much the same way that the State systematizes the exercise of power to hide what is otherwise naked coercion. Both corporations and the State reflect similar bureaucracies, and this is the product of more than coincidence – although I suppose that is also an “a-libertarian” viewpoint (much as senseless disparagement of “the Left” is, true?).

    I also concur with Quasibill that if a business practice such as limited liability is so useful, it doesn’t make sense why it should be institutionalized by State fiat. I happen to think that the State rationalization of business by legal means in favor of certain parties IS a big deal. Simply dismissing unwitting consumers as unsophisticated is insufficiently libertarian. It ignores a massive and complicated corporate legal code that nobody fully understands – another way in which a “system” is substituted for authentic human conscience and masks otherwise unsavory activities.

    R. Richard Schweitzer October 27, 2008 at 1:48 pm

    Liability:

    How does a form of enforcable liability arise other than via a “legal system” having coercive powers, usually derived through the political (and occasionally social) structure.

    Thus to say how far and when that power shall be used is really a limit on powers.

    On Torts: ever hear of absolute liability without fault?

    R. Richard Schweitzer

    Marshall August 22, 2009 at 12:51 am

    I’m amazed that the concept of strict liability was completely ignored in this conversation until one person mentioned it two years later.

    The overriding concern with tort is to see that the damaged parties are made whole again, as they never entered into a contract or otherwise took any willful risk.

    This is why it is important to attach ultimate liability to the property owner, who happens to be responsible for the initial delegation of power.

    For obvious reasons, liability should be applied first to the individuals (if any) found to be negligent or worse (although the corporation may be contractually obligated to cover its agents’ liability in certain predetermined circumstances), followed by, if necessary, the assets of the corporation itself. However, it remains imperative to recompense the injured party to the full extent of his damages, should the negligent individuals and the assets of the corporation be insufficient to recompense the damage done.

    As was given in example in the related discussion on Kevin Carson’s blog, a corporation operating heavy, potentially dangerous machinery, inherently incurs elevated risk as a cost of doing business, outside the realm of actual negligence (or worse). Nearly everything in society entails a certain amount of risk, and that is generally OK, until someone is hurt. Such injury may be impossible to attribute to a specific act or acts of negligence, even though there remains an injured party in need of recompense and as well a party responsible for the property which incurred the liability. In this case it remains only proper that the injured party be “made whole” once again, at the expense of the owner of the property which bears the casual relationship to the tort.

    Why the owner, in cases where their delegatory authority isn’t quite relevant, as there isn’t a specific act of negligence (or worse) to specify blame? Simple, it remains their property which caused the harm. They maintain the existence (and thus actions, if any) of their property, at their sole (presumable) benefit. Thus, they should bear ultimate liability if their property happens to damage someone in an unpredictable fashion outside the scope of negligence or aggression.

    This, of course, assumes that you recognize the practical reality that a tortfeasor may be neither an aggressor nor substantively negligent, and yet still incur liability from the small but still real, societally accepted risk that so many actions (especially profitable ones) entail. We take these risks and are not (nor considered) negligent for doing so, yet we ought still to be responsible if we hurt others when those small risks pan out to be real.

    I suppose the obvious example is the hypothetical case of a dog on a leash, with no demonstrated or suspected temperament or aggression issues, who, without provocation or forewarning, “snaps” and lashes out at a child passing by on the sidewalk, biting him in the process. Nobody would say such a dog owner is negligent merely for walking his apparently well-tempered dog. Yet, he should still be liable for the damages incurred by the attack. The child, who did not maintain a potentially dangerous chattel, accepted no willful risk, and has no resources to pay for his injuries, should certainly not have to bear damages sustained from an impossibly unpredictable attack while walking peacefully down the sidewalk.

    Extrapolating from the example of “heavy machinery”, we see that the resources of a corporation may allow much greater potential harm at what remains an acceptable (read: non-demonstrative of negligence) miniscule risk than what may be redeemable by the assets of the corporation. This is when shareholders should bear ultimate distributive liability for the remainder of the damages, regardless of specific fault, and beyond the value of their initial investment, if necessary. This would simply be one of the risks of owning shares in a company. In reality, the risk would not be immense — proportionally no worse than the risk to random individuals incurred from the cumulative danger of all these societally acceptable miniscule risks which do not imply negligence — only the damages would fall on parties with some relationship to the property at fault.

    mikeikon September 28, 2009 at 7:30 pm

    All that matters in my mind is this:

    It is not possible (under natural law) for multiple individuals to get together and write a contract that absolves ALL parties from liability. Liability may be divided equally, among several parties, or placed on one individual, but it /cannot/ be contracted away entirely. They cannot form a ‘collective person’ and place liability on it.

    It doesn’t matter to me how many people are liable, as long as /someone/ is liable. That person will then have the incentive to make sure his business operates morally and responsibly (both socially and financially). If he does not, he will lose everything.

    Naturally, contracts will be written so as to give those with greater liability greater ownership, as no one who is liable will want to forfeit his control (and his fate) to an individual who is not held liable.

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