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Source link: http://archive.mises.org/9084/corporations-and-limited-liability-for-torts/

Corporations and Limited Liability for Torts

December 10, 2008 by

There’s been a good deal of discussion lately of the legitimacy of corporations: see my posts Left-Libertarians on Corporations “Expropriating the Efforts of Stakeholders” and In Defense of the Corporation. Various types–anti-industrialists, socialists, left-libertarians–make a variety of criticisms of the corporation. Some oppose it because they oppose “capitalism”; or because it is invariably in bed with the state; or because it exploits workers; or because they dislike “bigness”. Most of these are wrongheaded or off point.

Another very common criticism is that corporations receive special privileges from the state–”limited liability”. This concerns two basic issues: the limited liability of shareholders for contractual liability of the corporation; and for torts committed by employees of the corporation. The former is easily dealt with–see Hessen (more on this below).The most controversial issue is the tort issue. This is bizarre for a number of reasons. In the typical case, the victim injured by the tort of an employee of the corporation can of course sue the employee who committed the tort; but he usually just sues the company because it has deep pockets. He is not usually affected by the inability to sue the shareholders, since he would not anyway. The corporate assets, or its insurance, would cover it. But it bugs anti-corporate types that shareholders can’t be sued for torts of employees of a company they own shares in.

Lately I’ve begun to emphasize that the anti-corporatists, in characterizing limited liability as a privilege, have to assume that on the free market shareholders should have liability. But this is a dubious assumption. First, it rests on the idea of respondeat superior (master is liable for torts of his servant), which itself dubious. Second, it rests on an undeveloped notion of strict liability which assumes that you are liable for torts committed “with [or by?] your property.” But property does not commit crimes or torts–people do. Property serves as means. If you borrow my car and run over someone, it is not obvious to me that I am responsible for your negligent action–just because I owned the car. Second, as I discussed in The Over-reliance on State Classifications: “Employee” and “Shareholder”, this rests too much on state definitions of ownership. Marriage, shareholder, owner, adult, citizen, money, bank, employer, employee, hobby, …. — so many things are keyed off their classifications. It irks me when libertarians build up their arguments and concepts based on these, as if they are objective and valid distinctions.

Looking at reality: ownership is the right to control a resource–in a company it’s distributed, since shareholders can’t just walk in and use the assets of the company (drives its cars; use its HQ to throw a party). As a practical matter, people with control over property are distributed in complex ways.

Second, it’s often assumed that shareholders are “investors”–people who gave money to the company. This seems to implicitly assume that you are responsible for aiding and abetting the company. Several problems here. (a) shareholders are not necessarily investors (if you buy Exxon stock from another shareholder, you give him money, but not Exxon); (b) other people give Exxon much more money, like customers; (c) the control exerted by shareholders is minimal–they can vote for board members, who in turn appoint officers, who hire managers and employees. Others–creditors, vendors, contractors, employees, unions, “stakeholders”–often exert more influence over what the company does than any given shareholder or even the whole class of shareholders.

I believe the only way to sort this out is to apply a carefully developed and libertarian-compatible theory of causation. Whenever you want to attribute responsibility to A for actions of B, you have to have a good reason. This area is underdeveloped but my approach is laid out in Causation and Aggression. I am not even sure if respondeat superior is justified; much less stretching it to cover shareholders–stretching it so far would make so many other parties potentially responsible for the actions of one tortfeasor. Libertarians want to just point to the rules developed in the common law and take this for granted, as if it’s unquestionably legitimate. It’s not. We are libertarians, not positivists.

I just recalled, in correspondence with Brad Spangler, that there is a great pithy excerpt from Hessen, pp. 18-21 of his classic book In Defense of the Corporation. He grants (a bit too generously, perhaps) the application of respondeat superior to the company itself, but argues very concisely–and without a carefully developed theory of causation but with sound insight and good intuition–why shareholders should not be liable for torts of employees. I highly recommend you read pp. 18-21. (N.b. left-libertarians: at pp. 20-21, Hessen explains that if anything, the state takeover of corporate law benefits not large companies, but small, one-man and “close” corporations since they would normally be liable for their actions, unlike shareholders of a large company.)

Bottom line: libertarians who claim that limited liability for torts is a state privilege have the burden of proving that shareholders should be liable for torts committed by employees of a company the shareholder owns a share in–and to show why creditors, suppliers, employees, and other “aiders and abetters” are not liable. And don’t just point to the common law rules and respondeat superior–we are libertarians. Show why this rule is libertarian.

I went over this in a 2004 LRC post, Legitimizing the Corporation, which I excerpt below:

***

… most people don’t even realize that if a FedEx truck runs you over negligently you can sue the driver. They think he is immune from suit or something. But it is the other way around; if a FedEx truck negligently hits you, it is of course the driver that is responsible. His employer is responsible for its employee’s own negligence and liability only because of the doctrine of respondeat superior; but if the employee is found to be non-negligent, the employer-corporation is off the hook too. This is in fact why corporations usually defend their employee and themselves when sued for the employee’s actions.

But opposition does not always stem from ignorance of the law or leftism: for example, one critique comes from two libertarian-Austrian attorneys: “De-legitimizing the Corporation: An Austrian analysis of the firm”, Jeffrey F. Barr & Lee Iglody, Austrian Scholars Conference 7, March 30-31, 2001, Auburn, Alabama.

Robert Hessen’s (a Randian) In Defense of the Corporation is a good defense of corporations. He shows that they don’t require privilege from the state to exist; they can be constructed from private contracts. One of Hessen’s articles nicely summarizes some of his views. Some excerpts are pasted below. My view is that corporations are essentially compatible with libertarianism. As for voluntary debts being limited to the corporation’s assets; this is no problem since the creditor knows these limitations when he loans money. What about limited liability for torts or crimes? As mentioned, the person direclty responsible for a tort or crime is always liable; sometimes the employer (which is often a corporation) is also liable for the employee’s actions, via respondeat superior. Who else should be responsible? In my view, those who cause the damage are responsible. Shareholders don’t cause it any more than a bank who loans money to a company causes its employees to commit torts. The shareholders give money; and elect directors. The directors appoint officers/executives. The officers hire employees and direct what goes on. Now to the extent a given manager orders or otherwise causes a given action that damages someone, a case can be made that the manager is causally responsible, jointly liable with the employee who directly caused the damage. It’s harder to argue the directors are so directly responsible, but depending on the facts, it could be argued in some cases. But it’s very fact specific. Perhaps the rules on causation should be relaxed or modified, but this has nothing to do with there being a corporation or not–for the laws of causation should apply to any manager or person of sufficient influence in the organization hierarchy, regardless of legal form of the organization (that is, whether it’s a corporation, partnership, sole proprietorship, or what have you).

Excerpts from the Hessen article

The actual procedure for creating a corporation consists of filing a registration document with a state official (like recording the use of a fictitious business name), and the state’s role is purely formal and automatic. Moreover, to call incorporation a “privilege” implies that individuals have no right to create a corporation. But why is governmental permission needed? Who would be wronged if businesses adopted corporate features by contract? Whose rights would be violated if a firm declared itself to be a unit for the purposes of suing and being sued, holding and conveying title to property, or that it would continue in existence despite the death or withdrawal of its officers or investors, that its shares are freely transferable, or if it asserted limited liability for its debt obligations? (Liability for torts is a separate issue; see Hessen, pp. 18-21.) If potential creditors find any of these features objectionable, they can negotiate to exclude or modify them.

Economists invariably declare limited liability to be the crucial corporate feature. According to this view the corporation, as an entity, contracts debts in “its” own name, not “theirs” (the shareholders), so they are not responsible for its debts. But there is no need for such mental gymnastics because limited liability actually involves an implied contract between shareholders and outside creditors. By incorporating (that is, complying with the registration procedure prescribed by state law) and then by using the symbols “Inc.” or “Corp.,” shareholders are warning potential creditors that they do not accept unlimited personal liability, that creditors must look only to the corporation’s assets (if any) for satisfaction of their claims. This process, known as “constructive notice,” offers an easy means of economizing on transactions costs. It is an alternative to negotiating explicit limited-liability contracts with each creditor.

Creditors, however, are not obligated to accept limited liability. As Professor Bayless Manning observes; “As a part of the bargain negotiated when the corporation incurs the indebtedness, the creditor may, of course, succeed in extracting from a shareholder (or someone else who wants to see the loan go through) an outside pledge agreement, guaranty, endorsement, or the like that will have the effect of subjecting non-corporate assets to the creditor’s claim against the corporation.” This familiar pattern explains why limited liability is likely to be a mirage or delusion for a new, untested business, and thus also explains why some enterprises are not incorporated despite the ease of creating a corporation.

Another textbook myth is that limited liability explains why corporations were able to attract vast amounts of capital from nineteenth-century investors to carry out America’s industrialization. In fact, the industrial revolution was carried out chiefly by partnerships and unincorporated joint stock companies, rarely by corporations. The chief sources of capital for the early New England textile corporations were the founders’ personal savings, money borrowed from banks, the proceeds from state-approved lotteries, and the sale of bonds and debentures.

Even in the late nineteenth century, none of the giant industrial corporations drew equity capital from the general investment public. They were privately held and drew primarily on retained earnings for expansion. (The largest enterprise, Carnegie Brothers, was organized as a Limited Partnership Association in the Commonwealth of Pennsylvania, a status that did not inhibit its ability to own properties and sell steel in other states.)

External financing, through the sale of common stock, was nearly impossible in the nineteenth century because of asymmetrical information–that is, the inability of outside investors to gauge which firms were likely to earn a profit, and thus to calculate what would be a reasonable price to pay for shares. Instead, founders of corporations often gave away shares as a bonus to those who bought bonds, which were less risky because they carried underlying collateral, a fixed date of redemption, and a fixed rate of return. Occasionally, wealthy local residents bought shares, not primarily as investments for profit, but rather as a public-spirited gesture to foster economic growth in a town or region. The idea that limited liability would have been sufficient to entice outside investors to buy common stock is counterintuitive. The assurance that you could lose only your total investment is hardly a persuasive sales pitch.

No logical or moral necessity links partnerships with unlimited liability or corporations with limited liability. Legal rules do not suddenly spring into existence full grown; instead, they arise in a particular historical context. Unlimited liability for partners dates back to medieval Italy, when partnerships were family based, when personal and business funds were intermingled, and when family honor required payment of debts owed to creditors, even if it meant that the whole debt would be paid by one or two partners instead of being shared proportionally among them all.

Well into the twentieth century, American judges ignored the historical circumstances in which unlimited liability became the custom and later the legal rule. Hence they repeatedly rejected contractual attempts by partners to limit their liability. Only near midcentury did state legislatures grudgingly begin enacting “close corporation” statutes for businesses that would be organized as partnerships if courts were willing to recognize the contractual nature of limited liability. These quasi-corporations have nearly nothing in common with corporations financed by outside investors and run by professional managers.

Any firm, regardless of size, can be structured as a corporation, a partnership, a limited partnership, or even one of the rarely used forms, a business trust or an unincorporated joint stock company. Despite textbook claims to the contrary, partnerships are not necessarily small scale or short-lived; they need not cease to exist when a general partner dies or withdraws. Features that are automatic or inherent in a corporation–continuity of existence, hierarchy of authority, freely transferable shares–are optional for a partnership or any other organizational form. The only exceptions arise if government restricts or forbids freedom of contract (such as the rule that forbids limited liability for general partners).

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.

{ 73 comments }

Mike December 11, 2008 at 7:54 pm

Or should I refrain from asking questions like this since, after all, I’ve never built a house?

Chad Rushing December 11, 2008 at 8:43 pm

Mike: “Okey dokey. I’m trying to engage in a discussion, you resort to insults and name calling. I’m being immature. I get it.”

As long as someone is trying to engage in honest discussion and is open to correcting any weaknesses his viewpoints may have if given sufficiently clear reasons for doing so, I think that person should be given the benefit of the doubt and be engaged in instructive debate rather than be subjected to derision.

After all, all of us started out as totally ignorant babies, and we largely have the knowledge we do because of the passive input (literature) or the active input (instruction or debate) of our intellectual betters who were patient enough to try to teach others what they had learned themselves, something for which we should all be immensely grateful.

MJP December 11, 2008 at 9:16 pm

“Really! So you are an owner of America, since you can vote for Prsident! Congrats! You are now responsible for what his military does, since you are the owner.”

False analogy. The “right” to vote for President was foisted upon me without my consent. The shareholder, on the other hand, actively purchased the right to vote in the corporation. The only case in which he might have a credible claim to have had that right foisted upon him is in the unfree market!

TokyoTom December 11, 2008 at 9:26 pm

Stephan, since you haven’t responded on the other thread I am copying here my last post from there:

http://blog.mises.org/archives/009070.asp#comment-483223

Stephan, allow me to clarify further:

TT: “Is there any libertarian argument that the state OUGHT to step in and allow investors to unilaterally shift a portion of the risks of their business venture to others who might be damaged by the activities of the business?”

SK: No, and the state should not exist. But people criticize corporations as being *mere* creatures of the state on the grounds that the state gives them privileges that would not exist in the free market.

TT: My point is simply that there is no libertarian argument that the state OUGHT to step in and allow investors to unilaterally shift a portion of the risks of their business venture to others who might be damaged by the activities of the business. I’m glad that you agree, and am puzzled that you do not acknowledge that the state grant of limited liability to investors (and to transferees of such investors) in corporations constitutes an uncontracted-for shifting of risks to investors from victims of corporate torts.

TT: “Without the act of state in creating limited liability for shareholders, such limited liability would not exist – except perhaps vis-a-vis creditors and business counterparties who might otherwise agree to limited their claims to the assets of the company, in exchange for agreed methods of risk control or higher prices. However, such limited liability could not otherwise exist as to Involuntary (or “tort”) creditors who without their consent are injured by the corporation, who have not agreed to assume the risk of corporate insolvency and shareholders’ limited liability, and who have neither received ex ante compensation for doing so nor had the opportunity to bargain for contractual safeguards.”

SK: Again: the question is, absent the state, should shareholders be vicariously liable for torts committed by employees, or not? The presumption is they should not, since they did not commit the acts–unless you can come up with a sound argument for why they should (and pointing to the way it’s been done before doesn’t cut it).

TT: Stephan, again you refuse to actually advance a justification for the government grant of limited liability to shareholders (indeed, you concede that, there is no libertarian argument for such a state grant), but simply argue for the status quo, on the grounds that shareholders don’t typically themselves do not commit the torts.
If there is no libertarian grounds for the use of government fiat to limit the liability that shareholders bear for the risks that the activities of the business might injure others, then surely the “presumption” you offer should be reversed, and you should advance a case that whether those who are injured by business enterprises should justly be forced to assume the risk that their ability to make claims against the assets of the business owners depends upon whether the business happens to be a sole proprietorship, a partnership or limited liability corporation.

You state that “the question is, absent the state, should shareholders be vicariously liable for torts committed by employees, or not?”, presume that shareholders should have no liability as principals for acts of the corporation “because they did not commit the acts”, and then ask me to advance arguments that shareholders should be held responsible for the acts of corporations. I disagree, note that your formulations dodge a number of issues, and note further that you have completely ignored the arguments that I and others have advanced for unlimited shareholder liability (prominently, the two Yale LJ articles and the Vanderbilt L Rev article).

Time for you to start doing some of the work.

TT: “My point is that limited liability lets investors entirely off the hook for damages that the wrongful acts of the corporation and its employees. While a few employees might individually be held responsible for their actions, this still may leave many injured persons uncompensated for injuries cause by a corporation’s business activities”

SK: You are assuming the “business activities” are “the cause”. This is question begging.

TT: Well said, Artful Dodger, but it’s not me who’s begging the questions. Putting aside (i) the question of the scope of vicarious liability WITHIN the firm and (ii) cases where there is a only one a single injured party and a single employee committing an unauthorized tort, it is undeniable that small, medium and large corporations have in the past and continue from time to time to commit large-scale torts – in the form of pollution, dumping of waste, defective products, other personal injuries, slander and the like – that arise directly from their business activities. In most such cases, no single individual tortfeasor within the corporation can be identified. Clearly, in some such cases a few employees might individually be held responsible for their actions, this still may leave many injured persons incompletely uncompensated for injuries caused by a corporation’s business activities.

TT: “Before limited liability corporations were established, the common law doctrine of respondeat superior required investors to bear responsibility for the acts of a business, just as individual proprietors and partnerships remain so liable today.”

SK: Why should they be? Because the common law says so?

TT: No; sole proprietors and partnerships have been and remain liable for the acts of a business because it is unjust to allow them to externalize a significant portion of the risks of their activities, while capturing the benefits of those risks. The state, by providing the corporate form, allows the externalization of such risks on a vast scale, and continues to do so by further making limited liability available for those who prefer to be taxed as partners. But to reverse the question, perhaps you care to point to libertarian principles or a common law doctrines (which libertarians frequently point to as a valid basis for determining the scope of ownership rights and who should be responsible for injuries caused to others) that would justify a position that those who own and operate businesses ought NOT to be responsible for the damages those business activities cause, beyond the assets of the business?

TT: “Again, you simply …. presume that the state action that leaves shareholders free to shift business risks to others is valid and justifiable. Even as you remain unwilling to make your case, I am happy to expand my argument that limited shareholder liability is an unlibertarian grant by the state to shareholders.”

SK: You need to explain why shareholders should be liable. You keep calling them investors–shareholders are usually not investors.

TT: Again, you are nonresponsive. Perhaps you should pick fewer nits and acknowledge the bigger picture. For small corporations, start-ups, and corporations raising capital, the shareholders typically are investors. Moreover, for small firms, closely-held firms (including large LBOs) and even for many large firms, there are major shareholders that are also clearly “owners”. You have advanced no libertarian or other argument that justifies limiting the liability of investors and owners at all for the torts of corporations; much less for your implied position that investors and owners should be able to freely slough-off any vicarious responsibility for damages to victims of corporate acts by the simple expedient of selling their shares to others (who, while they do not directly fund the company, are certainly investing in ownership of the same set of assets and liabilities as the initial investors).

TT: “The chief point, of course, is that the creation by the state of corporations limits tort liability to individual tortfeasors”

SK: It limits state-imposed vicarious tort liability. If the state stops taxing you, this is good, because it should not be taxing you in the first place. If the state stops imposing vicarious tort liability on shareholders, this is also good, if it should not be doing this in the first place. You seem to assume they should. why?

TT: Where does “the state” impose vicarious tort liability? Respondeat superior is largely an old and evolving part of the common law. I don’t agree with all cases, but individual judgments are hardly the same as the state acting by law to free shareholders from liability above the amount they paid for the shares for the risks generated by corporate activities.

TT: “This reduces the likelihood that victims will receive full compensation for corporate acts.”

SK: If a FedEx driver negligently crashes into you, why arey ou calling it a “corporate act”? He was not directed to do this by FedEx, was he? Why is his negligence theirs?

In any event–this whole critique is ridiculous. Whenever a corporation’s employee commits a tort, the victim is compensated by the corporation or its insurer. IT’s almost always irrelevant that he can’t sue shareholders individually. Even if they could, shareholders could simply purchase shareholder-liability-insurance, no biggie.

TT: “Ridiculous”? Nonsense! There, are we even now?

The grant of limited liability [against] involuntary creditors cannot be justified on libertarian grounds, and arguments I have noted regarding efficiency, moral hazards, equity, the disincentives for shareholders to closely monitor firms, the relative freedom of managers and executives to loot, and the related rise of citizen pressure groups to seek to have governments provide checks are all substantial and important.

While there are many cases where injured persons are compensated, there are many cases where corporations have generated widespread risks and failed, leaving countless others holding the bag, while investors (and managers) may have profited and then exited without substantial loss. The limited liability grant actually encourages such behavior.

You say that, if victims could “sue shareholders individually”, in which case “shareholders could simply purchase shareholder-liability-insurance, no biggie”. I heartily agree – a system of pro rata shareholder unlimited liability would work (as one of the law journal articles argues), as well as being more just. I appreciate the concession – so have you stopped fighting this point?

Stephan Kinsella December 11, 2008 at 10:22 pm

TT: “Is there any libertarian argument that the state OUGHT to step in and allow investors to unilaterally shift a portion of the risks of their business venture to others who might be damaged by the activities of the business?”

SK: No, and the state should not exist. But people criticize corporations as being *mere* creatures of the state on the grounds that the state gives them privileges that would not exist in the free market.

TT: My point is simply that there is no libertarian argument that the state OUGHT to step in and allow investors to unilaterally shift a portion of the risks of their business venture to others who might be damaged by the activities of the business.

Of course the state should not do anything. Who said they should? But you say “shift” here, which smuggles in your presumption that shareholders have a natural or default liability. If they don’t, there’s no “shift.” Nice try, though.

I’m glad that you agree, and am puzzled that you do not acknowledge that the state grant of limited liability to investors (and to transferees of such investors) in corporations constitutes an uncontracted-for shifting of risks to investors from victims of corporate torts.

To me, what is wrong with it is that the state steps in and monopolizes a field, as it has done with transportation, power, education, defense, justice, money. Yet, the criticism of the anti-industrialists is not this; it is a criticism of limited liability per se–a criticism which would apply against the private form too.

TT: “Without the act of state in creating limited liability for shareholders, such limited liability would not exist – except perhaps vis-a-vis creditors and business counterparties who might otherwise agree to limited their claims to the assets of the company, in exchange for agreed methods of risk control or higher prices. However, such limited liability could not otherwise exist as to Involuntary (or “tort”) creditors who without their consent are injured by the corporation, who have not agreed to assume the risk of corporate insolvency and shareholders’ limited liability, and who have neither received ex ante compensation for doing so nor had the opportunity to bargain for contractual safeguards.”

SK: Again: the question is, absent the state, should shareholders be vicariously liable for torts committed by employees, or not? The presumption is they should not, since they did not commit the acts–unless you can come up with a sound argument for why they should (and pointing to the way it’s been done before doesn’t cut it).

TT: Stephan, again you refuse to actually advance a justification for the government grant of limited liability to shareholders (indeed, you concede that, there is no libertarian argument for such a state grant), but simply argue for the status quo, on the grounds that shareholders don’t typically themselves do not commit the torts.

As someone who opposes the state and favors for its abolution and destruction, it’s rich to say I am arguing for the status quo. All I am doing is pointing out flaws in your criticisms of limited liability. Your criticisms do not rest on the *state* doing it–they rest on your assumption that shareholders normally would or should have liability.

If there is no libertarian grounds for the use of government fiat to limit the liability that shareholders bear for the risks that the activities of the business might injure others, then surely the “presumption” you offer should be reversed,

No; because my presumption applies in a free market as well, even when there is no state involved.

I disagree, note that your formulations dodge a number of issues, and note further that you have completely ignored the arguments that I and others have advanced for unlimited shareholder liability (prominently, the two Yale LJ articles and the Vanderbilt L Rev article).

As a libertarian, I don’t think the positivist arguments of some mainstream law profs are going to be that mind-blowing.

it is undeniable that small, medium and large corporations have in the past and continue from time to time to commit large-scale torts – in the form of pollution, dumping of waste, defective products, other personal injuries, slander and the like

All these actions are done by individuals–and if done as decisions of the managers, then they and the corporate assets probably ought to be liable. But why the shareholders, if they didnt make this decision?

– that arise directly from their business activities. In most such cases, no single individual tortfeasor within the corporation can be identified.

Sure they can. If it’s a tort, then someone decided to do it–the directors, CEO, whatever.

Clearly, in some such cases a few employees might individually be held responsible for their actions, this still may leave many injured persons incompletely uncompensated for injuries caused by a corporation’s business activities.

If you’re going to just posit that the corporation “caused” it I will posit right back that per assumption we can identify the culpable individuals. But it will almost never be the shareholders.

SK: You need to explain why shareholders should be liable. You keep calling them investors–shareholders are usually not investors.

TT: Again, you are nonresponsive. Perhaps you should pick fewer nits and acknowledge the bigger picture.

I dont tink it’s a nit. I assume you call them investors since you think giving money to the company is some kind of aiding and abetting that helps make them responsible. I’m pointing out they are not necessaril investors in the corporation.

For small corporations, start-ups, and corporations raising capital, the shareholders typically are investors.

True. AS Hessen notes, the entity theory helps to insulate liabiltiy most egregiously in the close corporation case. Another strike against the fervor agains bigness.

Moreover, for small firms, closely-held firms (including large LBOs) and even for many large firms, there are major shareholders that are also clearly “owners”.

I don’t konw what proving ownership status does. So waht? I will grant you that in some cases some shareholder wields such influence and direction over the firm that he ought to be as culpable as management for actions he helps direct. So what? My point is that *merely being a shareholder* is not by itself sufficient to attribute liability.

You have advanced no libertarian or other argument that justifies limiting the liability of investors and owners at all for the torts of corporations;

I do not want to. I am in favor of a nuanced and fact-specific approach, as I laid out in my Causation piece w/ Tinsley. If you can show in a given case that a shareholder is causally responsible for torts of the corporation, get ‘im. I’m just saying you have not shown that merely being a shareholder makes this case. It takes something more.

much less for your implied position that investors and owners should be able to freely slough-off any vicarious responsibility for damages to victims of corporate acts by the simple expedient of selling their shares to others (who, while they do not directly fund the company, are certainly investing in ownership of the same set of assets and liabilities as the initial investors).

Saying they invest in liabilities is a bit of question-begging. The question is: does the status of a person as a shareholder–having certain dividend and liquidation and director-voting rights–make you liable for what the corporation does? I don’t rest my own conlcusions on whether the state “officially” classifies the shareholder “as an owner.” I’m looking at the functional reality of what they are and do.

TT: Where does “the state” impose vicarious tort liability? Respondeat superior is largely an old and evolving part of the common law.

Yes, and we are a new and modern creature called “libertarian,” not tradition- or state-law-worshipping positivists.

You say that, if victims could “sue shareholders individually”, in which case “shareholders could simply purchase shareholder-liability-insurance, no biggie”. I heartily agree – a system of pro rata shareholder unlimited liability would work (as one of the law journal articles argues), as well as being more just. I appreciate the concession – so have you stopped fighting this point?

It’s not a concession. It’s pointing out that this is just a red herring on your part. You guys throw up limited tort liability as if it’s some huge advantage given to corps that allows them to survive. It’s not a huge advantage b/c removing it really doesn’t affect victims;a nd imposing it can easily be handled with a slight change of the already-existing insurance coverage. If we did this, not much would change, but I’m sure the anti-industrialist types would find something else to yap about. You are not *really* concerned with this–it’s just one of an arsenal of arguments you whip out to attack industry and busienss and “bigness” and capitalism and whatnot.

stephan Kinsella December 11, 2008 at 10:30 pm

MJP:

“Really! So you are an owner of America, since you can vote for Prsident! Congrats! You are now responsible for what his military does, since you are the owner.”

False analogy. The “right” to vote for President was foisted upon me without my consent. The shareholder, on the other hand, actively purchased the right to vote in the corporation. The only case in which he might have a credible claim to have had that right foisted upon him is in the unfree market!

So if my aunt dies and leaves me Exxon stock and I don’t know I own it, now I’m walking around carrying some spooky “liability”? Freaky!

Mike December 11, 2008 at 10:31 pm

“I don’t konw what proving ownership status does. So waht? I will grant you that in some cases some shareholder wields such influence and direction over the firm that he ought to be as culpable as management for actions he helps direct. So what? My point is that *merely being a shareholder* is not by itself sufficient to attribute liability.”

Doesn’t sound so naive when you say it, huh?

Mike December 11, 2008 at 10:42 pm

Oh, please, Stephan. You’re a lawyer, you know how estate inheritance works.

Nathan Shepperd (scumble) December 12, 2008 at 4:12 am

Stephan: “Hessen and I are against the entity theory”

Well hang on a minute – If P.M. Lawrence has brought this up as more significant than limited liability in inflating the size of a corporation, saying that you don’t support this doesn’t really answer the point he made.

P.M.Lawrence December 13, 2008 at 12:29 am

JA asks of my “Without those limits, they gain the sort of advantage that an animal without size and lifespan limits would achieve in an ecology – they crowd out other entities, including natural persons”, “Maybe because incorporation is a superior form of organization, even in a free market?

That is begging the question of whether they can exist, in a free market. The only sort that can, without state aid, is the sort that has its own internal dynamic, e.g. monasteries, sports clubs, etc. (that also answers his later claim that “[t]he corporate form, like families and marriages, pre-exists prior to the state as a nexus of voluntary relationships”.)

Then he goes on to do some unjustified blanket categorising of people as Libertarians and Socialists according to their positions on the matter.

Fundamentalist asks “My point is where do you draw the line of responsibility for the actions of coroporate employees? Stopping with the stockholders is an arbitrary judgement. You need some principle that can delineate who is responsible for the actions of another. Traditionally, that line is drawn where control of the actions of the other party ends. If I don’t control the actions of another then I’m not responsible for his actions.”

I just answered this in a comment at the last Kinsella thread. If you were responsible and let go without passing responsibility to another who accepted it, responsibility stays with you. That also answers J Cortez and Inquisitor.

Stephan Kinsella says of my “Those [the limited liability of shareholders for contractual liability of the corporation; and for torts committed by employees of the corporation] are the two main special privileges in ordinary circumstances, deplorable to the extent that they are sustained by such intervention”, ‘I don’t see why they’re “deplorable”. That’s question-begging.

No, it isn’t question-begging, and if he had even bothered to read what he quoted he would have seen what was deplorable about it: “…to the extent that they are sustained by such [state] intervention”. Unless he thinks state privileges are OK?

Stephan Kinsella writes “Well, my view is that a master is responsible for actions of his servant *that he directs him to do*. I think a case can be made that in some cases he is liable for negligence of the servant committed during the course of his employ, but this would be a limited doctrine (and in any event needs to be justified by a careful treatment of this issue–using the type of causal analysis Tinsley and I laid out in our Causation and Aggression paper). But this would not ensnare the shareholders, as far as I can tell…. The anti-corporatists jump up and down about shareholder limited liability. If it’s for contracts, this concern is misguided. If it’s about torts, then the criticism groundlessly assumes shareholders should be liable for torts in the first place.” See my reply to Fundamentalist for some grounds that certainly do apply to original investors, and arguably may pass to subsequent acquirers of their shares. ‘So if my aunt dies and leaves me Exxon stock and I don’t know I own it, now I’m walking around carrying some spooky “liability”?’ might be a case where responsibility did not pass – at any rate, until it did through some later action or inaction (nobody has to accept a bequest, say of a piece of land with a covenant requiring the owner to keep the lawn mowed, but he can’t take the bequest without the strings attached).

Stephan Kinsella then ignores my further objections to artificial corporations, making observations that in fact apply to other less artificial structures as well – or even more closely.

Anyhow, that means Stephan Kinsella is plain wrong when he asserts that “The problem is the anticorpos have no clear theory of causation or responsibility, so they cannot clearly explain exactly what it is about being shareholder that makes them vicariously responsible for the actions of employees.”, and what follows that passage. Did he bother asking for that, or did he just assume away any answer in advance?

That’s also why there’s no “presumption” in the comment of TokyoTom’s of which Stephan Kinsella says ‘But you say “shift” here, which smuggles in your presumption that shareholders have a natural or default liability’. Stephan Kinsella is just assuming that there is a presumption TokyoTom is making, when he could simply have asked what grounds there were for that claim.

fundamentalist December 13, 2008 at 7:25 am

P.M.Lawrence : “If you were responsible and let go without passing responsibility to another who accepted it, responsibility stays with you.”

I agree completely. But stockholders never had the responsibility in the first place. Their first contact with the corporation was to buy stock and the contract in the purchase of that stock limited their responsibility from day one. Without responsibility there is no liability.

The idea that liability falls on a person only to the degree that they control the situation and are therefore responsible is just plain common sense. I doubt that you could find a time in history where it wasn’t applied. It’s implied in the concept of justice. So for stockholders to be liable for the actions of executives, you would have to show that at some time the stockholders exercised control over the actions of employees, gave it up and failed to pass it on to someone else. But clearly stockholders never had any control whatsoever over employees at any time. Nevertheless, they did pass control over actions of employees to someone, the board of directors and management.

stephan Kinsella December 13, 2008 at 9:24 am

Fundamentalist: “I agree completely. But stockholders never had the responsibility in the first place. Their first contact with the corporation was to buy stock and the contract in the purchase of that stock limited their responsibility from day one. Without responsibility there is no liability.

The idea that liability falls on a person only to the degree that they control the situation and are therefore responsible is just plain common sense. I doubt that you could find a time in history where it wasn’t applied. It’s implied in the concept of justice. So for stockholders to be liable for the actions of executives, you would have to show that at some time the stockholders exercised control over the actions of employees, gave it up and failed to pass it on to someone else. But clearly stockholders never had any control whatsoever over employees at any time. Nevertheless, they did pass control over actions of employees to someone, the board of directors and management.”

Good point. The doctrine of “piercing the corporate veil” actually gets to this somewhat (though it is muddled and confused due to the entity theory), e.g., this factor which can pierce the veil: “Was the corporation being used as a “façade” for dominant shareholder(s) personal dealings; Alter Ego Theory;”

post December 14, 2008 at 4:04 pm

“The idea that liability falls on a person only to the degree that they control the situation and are therefore responsible is just plain common sense.”

No, thats not common sense but wishful thinking.
You don’t have to be able to directly control someones actions to be responsible for his crimes. It’s enough if you are willingly and knowingly financing his crimes for you to be guilty of this crimes, too.

Now come on, it’s plain simple:

Everyone who is knowingly supporting a crime is responsible for that crime. In different ‘weight’ but he is responsible.

Imagine yourself being in the second world war: If someone was financing the Nazi system knowing what they did how could someone say that that person was not also (partially) responsible for their crimes?

Other example: If you sell someone a weapon in the knowledge, that he is executing innocent people and you are continuing this support you ARE supporting his crimes. Therefore you as a contractor are responsible for these crimes and therefor guilty.

The same goes for investors in corporations: If corporations are known to be criminal organizations than every investor is becoming part of that organization, if he has knowledge of that crimes and continues to finance this organization.

How to determine the guilt and appropriate punishment? Just have a look on Walter Blocks essay “Radical Libertarianism: Applying Libertarian Principles to Dealing with the Unjust Government”
The same applies to “unjust corporations”.

For the definition of guilt in such involvements and the appropriate measures it is very important that the accused person has knowledge of the criminal actions of his supported organizations.

And no: Guilt by association does not apply. That would be unjust.
Guilt by knowingly supporting (in whatever way) criminals and therefor become part of criminal organization applies.

post December 14, 2008 at 4:15 pm

@fundamentalist:

Imagine there exists an executing device as a property of a corporation, which itself is financed by stockholders. This device is used as a means of executing regime opponents.

The stockholders of that corporation in your opinion are not responsible if innocent people are getting killed by that device and they know of that fact? Because what?
Because each one of them does not have the “power” to control the situation?
So you mean it’s possible to justify crimes if only there are enough participants of said crime?

And you call THAT common sense?

Oh my…

What difference is there between an employee of said corporation and a stockholder? None I say. Organizations cannot be defined by laws but by the actions of the persons that constitute them, So everyone who is acting in the name of a group and is accepted by the others (by their actions) is part of that group too and responsible for all their actions if he is knowing of them and supporting them.

The same goes for the state.

If one is not willing to apply the same critique to corporations as to the state one seems to be very much biased…

P.M.Lawrence December 14, 2008 at 7:49 pm

Fundamentalist agrees with my “If you were responsible and let go without passing responsibility to another who accepted it, responsibility stays with you”, but believes “But stockholders never had the responsibility in the first place. Their first contact with the corporation was to buy stock and the contract in the purchase of that stock limited their responsibility from day one.”

Only, it didn’t, morally speaking (of course, that is just precisely what the legal structure does for them – which is the state assistance). If A sells B a dangerous dog and either doesn’t tell B or tells B “it’s dangerous, but it’s not your problem”, A is claiming a certain authority to waive responsibility. But A never had that authority, so either the responsibility stays with A (if, say, A didn’t tell B) or it passes to B.

As for “…But clearly stockholders never had any control whatsoever over employees at any time. Nevertheless, they did pass control over actions of employees to someone, the board of directors and management.”

Only, they kept back a degree of control over those, and – to the extent they surrendered it – they have the moral responsibility for turning those others loose without keeping more control.

Post gets it (Kinsella probably does too, but hides it).

TokyoTom December 15, 2008 at 5:02 am

Roger:

Kinsella has already established that the master is responsible for the actions of his servant, so corporations are responsible for employees. Anti-corps want the responbibility to go even further to the stockholders. But why stop there? Why not make the customers responsible too? And let’s throw in the bond holders. Then let’s add the suppliers. How about the relatives of stock and bond holders?

The corporation is a legal fiction. Are there any persons within it where the buck stops? Created in order to free investors from downside risks, the limited liability has removed incentives for investors to keep executives and managers under control and to monitor business risks. Although small corporations remain under investor control, the result has been the growth of large public companies that are owned but not controlled by shareholders, leaving discretion but limited downside risk to employees, managers and executives.

Of course I’m being ridiculous. My point is where do you draw the line of responsibility for the actions of coroporate employees? Stopping with the stockholders is an arbitrary judgement. You need some principle that can delineate who is responsible for the actions of another. Traditionally, that line is drawn where control of the actions of the other party ends.

As for line drawing, voluntary creditors are all able to investigate whom they deal with, and to negotiate risks and prices. Victims of torts are seldomly so situated. But the problem of corporations leaving real victims behind is precisely why governments have started to seek further pockets, such as lenders and suppliers (via Superfund laws, for example), to require firms to post bonds and maintain certain capital levels, and why governments have fallen to the temptation to heavily regulate “public” firms.

As for what “tradition” was and where lines used to be drawn, surely you recognize that before limited liability corporations were established, investors had unlimited liability for losses – and risks for widespread torts were much lower? Unlimited shareholder liability was once more common than limited liability, and large markets like Lloyds until recently required that all Names bear unlimited liability for losses. It used to be that most small businesses and partnerships were structured with unlimited liability; now with LLCs and LLPs, there is a rush into structuring as limited members, precisely to limit liabilities.

fundamentalist December 15, 2008 at 8:18 am

Post: “Post: “It’s enough if you are willingly and knowingly financing his crimes for you to be guilty of this crimes, too.”

I agree completely. Any stockholder who knew of crimes that the corporations was committing is liable. But that would include very few stockholders.

TokyoTom December 15, 2008 at 8:50 am

Stephan, I’ve responded on the initial post as well, but here’s a bit more on what you’ve written above.

1. You: “But you say “shift” here, which smuggles in your presumption that shareholders have a natural or default liability. If they don’t, there’s no “shift.”"

I thinks it’s a fair and natural presumption that investors (as opposed to lenders, who have a claim only for interest and no residual claim for profits) have a natural default liability. This is still the case for sole proprietors and partnerships. “Shareholders” exist only because states created corporations as legal entities. Without such action, there would be at least one natural person to whom employees would have to answer and who would be responsible for risks posed by his business activities (loans and involuntary torts), up to the full amount of his personal assets.

Yes, there is still the question of the range of vicarious liablity, but clearly even today business owners and partners are deliberately incorporating (using corporation, LLC and LLP forms) for the chief purpose of limiting personal liability for the acts of employees. And courts continue to pierce the corporate veil from time to time to reach shareholders as well.

2. Me: “the state grant of limited liability to investors (and to transferees of such investors) in corporations constitutes an uncontracted-for shifting of risks to investors from victims of corporate torts.”

You: “To me, what is wrong with it is that the state steps in and monopolizes a field, as it has done with transportation, power, education, defense, justice, money.”

Me: I agree with what you think is wrong with state action, but in the case of granting the corporate form and granting limited liability, there have been a a number of pernicious consequences, one of which involves an externalization of risk of the kind I mention.

This and other consequences all tend to encourage the further growth of the state, such as the pressures on the state to regulate corporations (with a vicous cycle of battles over control over government), and the use corporations as money and jobs banks.

3. You: “As a libertarian, I don’t think the positivist arguments of some mainstream law profs are going to be that mind-blowing.”

To each his own; they’re certainly relevant and provide useful background information.

4. You: “All these actions are done by individuals–and if done as decisions of the managers, then they and the corporate assets probably ought to be liable. But why the shareholders, if they didnt make this decision?”

In many cases the shareholders ARE in a position of control; should they be able to escape liability merely because they use the corporate form, as is the rule today? I think not.

I agree that it is difficult to argue that minority and non-controlling shareholders in public firms bear any responsibility for acts of the corporation, since that was not a part of the bargain they understood that they were making when they acquired their shares and they largely have no actual ability to affect decisions that end up causing injury to others.

5. Me: “In most such cases, no single individual tortfeasor within the corporation can be identified. Clearly, in some such cases a few employees might individually be held responsible for their actions, this still may leave many injured persons incompletely uncompensated for injuries caused by a corporation’s business activities.”

You: “Sure they can. If it’s a tort, then someone decided to do it–the directors, CEO, whatever.

“If you’re going to just posit that the corporation “caused” it I will posit right back that per assumption we can identify the culpable individuals. But it will almost never be the shareholders.”

6: You: “I dont tink it’s a nit. I assume you call them investors since you think giving money to the company is some kind of aiding and abetting that helps make them responsible. I’m pointing out they are not necessaril investors in the corporation.”
Me: Stephan, I’m only discussing the difference a shareholder and an investor because you seem to think it’s importance. Anyone who acquires a newly issued share is an investor; anyone who buys one on a market is stepping into his shoes.

7. Me: “For small corporations, start-ups, and corporations raising capital, the shareholders typically are investors.”

You: “True. AS Hessen notes, the entity theory helps to insulate liabiltiy most egregiously in the close corporation case. Another strike against the fervor agains bigness.”

Sorry, but I have no “fervor”. The insulation from liability is most obvious in the close corporation case, but some close corporations are huge (LBOs). But it’s the larger public co.s that are really shifting the greatest amount of risk to others, in the form of toxic torts and dangerous products.

8. Me: “Moreover, for small firms, closely-held firms (including large LBOs) and even for many large firms, there are major shareholders that are also clearly “owners”.”

You: I don’t konw what proving ownership status does. So waht? I will grant you that in some cases some shareholder wields such influence and direction over the firm that he ought to be as culpable as management for actions he helps direct. So what? My point is that *merely being a shareholder* is not by itself sufficient to attribute liability.”

Thanks for the acknowledgment. The point’s obvious – “*merely being a shareholder* is not by itself sufficient basis to exclude a shareholder from liability. In addition there’s a larger point – without limited liability, shareholders would have had potentially unlimited liablility, and consequently would have been much more cautious about whom they invested in, and making sure that downside risk was closely managed.

9. You: “I am in favor of a nuanced and fact-specific approach, as I laid out in my Causation piece w/ Tinsley. If you can show in a given case that a shareholder is causally responsible for torts of the corporation, get ‘im. I’m just saying you have not shown that merely being a shareholder makes this case. It takes something more.”

I’m not opposed to a nuanced and fact-specific approach, but the fact is that the grant of limited liability has essentially eviscerated it.

10. Me: “your implied position that investors and owners should be able to freely slough-off any vicarious responsibility for damages to victims of corporate acts by the simple expedient of selling their shares to others (who, while they do not directly fund the company, are certainly investing in ownership of the same set of assets and liabilities as the initial investors).”

You: “Saying they invest in liabilities is a bit of question-begging. The question is: does the status of a person as a shareholder–having certain dividend and liquidation and director-voting rights–make you liable for what the corporation does? I don’t rest my own conlcusions on whether the state “officially” classifies the shareholder “as an owner.” I’m looking at the functional reality of what they are and do.

I’m not begging any question; a shareholder who buys shares that aren’t fully paid up purchases may be required to contribute the rest of the capital, and a whole host of obligations may accompany shares in a close corporation. And I’m looking at the effect of the state grant of entity status and limited liability on what a shareholder’s bundle of rights and obligations is.

11: Me: “Where does “the state” impose vicarious tort liability? Respondeat superior is largely an old and evolving part of the common law.”

You: “Yes, and we are a new and modern creature called “libertarian,” not tradition- or state-law-worshipping positivists.”

How about actually answering my question? Where does “the state” impose vicarious tort liability? The common law is not state-imposed. And surely you haven’t failed to notice that libertarians routinely refer to the common law as the reason why regulation isn’t needed (other than those like Rothbard who recognize that regulation is needed because corporations persuade judges to subvert it).

12. Me: “You say that, if victims could “sue shareholders individually”, in which case “shareholders could simply purchase shareholder-liability-insurance, no biggie”. I heartily agree – a system of pro rata shareholder unlimited liability would work (as one of the law journal articles argues), as well as being more just. I appreciate the concession – so have you stopped fighting this point?”

You: “It’s not a concession. It’s pointing out that this is just a red herring on your part. You guys throw up limited tort liability as if it’s some huge advantage given to corps that allows them to survive. It’s not a huge advantage b/c removing it really doesn’t affect victims;a nd imposing it can easily be handled with a slight change of the already-existing insurance coverage. If we did this, not much would change, but I’m sure the anti-industrialist types would find something else to yap about. You are not *really* concerned with this–it’s just one of an arsenal of arguments you whip out to attack industry and busienss and “bigness” and capitalism and whatnot.”

Stephan, first, I’m disappointed by your dismissive and somewhat offensive talk of “you guys” and what you presume my motives to be. I’m not an “anti-industrialist type”, and I’m here on my own and making my own points (which must mean I’m “yapping,” in your book). Second, raising the issue of limited tort liability is not a red herring, at least for me, and it’s not something I think corporations need to survive. I do think it’s very important because I think that real shifting or risk, moral hazard, corporate governance and other issues are intertwined and that underlies the whole politicized struggle over corporate regulation.

Courts rarely find individuals responsible, other than for very deliberate torts, in part because negligence is attributed to the firm (and managers and executives are generally excused from liability for the negligent acts of employees) but chiefly because those injured – particularly where the damges affect many people – don’t bother chasing those without substantial assets.

That it will seldom be the shareholders is a result of the state grant of limited liability – given such a grant, shareholders have no interest in monitoring, and no ability control, corporate/employee acts. Without such a grant, it would be a different story – which is why business partners are still running to limited liability forms, and leaving unlimited liability partnerships and sole proprietorships behind.

Regards,

Tom

Stephan Kinsella December 15, 2008 at 2:35 pm

TokyoTom:

1. You: “But you say “shift” here, which smuggles in your presumption that shareholders have a natural or default liability. If they don’t, there’s no “shift.”"

I thinks it’s a fair and natural presumption that investors (as opposed to lenders, who have a claim only for interest and no residual claim for profits) have a natural default liability.

Again: shareholders are not investors necessarily. In any case, you are question-begging. It’s not a fair presumption for the libertarian–that’s the issue here.

This is still the case for sole proprietors and partnerships. “Shareholders” exist only because states created corporations as legal entities. Without such action, there would be at least one natural person to whom employees would have to answer

Yeah, like you mean, the President or CEO, or manager or boss? Sure. These guys run the company. Not shareholders.

and who would be responsible for risks posed by his business activities (loans and involuntary torts), up to the full amount of his personal assets.

Why do you say it’s “his” business activities? Why this presumption?

Yes, there is still the question of the range of vicarious liablity, but clearly even today business owners and partners are deliberately incorporating (using corporation, LLC and LLP forms) for the chief purpose of limiting personal liability for the acts of employees.

I don’t think so. It’s primarily for contractual liability limitation, which would continue to exist in a free society. Tort liability could easily be handled by insurance.

And courts continue to pierce the corporate veil from time to time to reach shareholders as well.

Yep, when formalities are not followed or a shareholder is too dominant and really acts as a manager.

Me: I agree with what you think is wrong with state action, but in the case of granting the corporate form and granting limited liability, there have been a a number of pernicious consequences, one of which involves an externalization of risk of the kind I mention.

Well, if the state is abolished as we want, any “externalities” would go away.

4. You: “All these actions are done by individuals–and if done as decisions of the managers, then they and the corporate assets probably ought to be liable. But why the shareholders, if they didnt make this decision?”

In many cases the shareholders ARE in a position of control; should they be able to escape liability merely because they use the corporate form, as is the rule today? I think not.

Right, I agree. Thoguh even in today’s law, if a shareholder is in a position of control, it’s either (a) because he’s also a manager or director; or (b) he goes beyond his passive shareholder role and pushes the company to do his bidding. In case (a), he’s not protected by limited liability. In case (b), well,l of ten in such cases the corporate veil would be pierced, again reaching his personal assets.

I agree that it is difficult to argue that minority and non-controlling shareholders in public firms bear any responsibility for acts of the corporation, since that was not a part of the bargain they understood that they were making when they acquired their shares and they largely have no actual ability to affect decisions that end up causing injury to others.

I actually think it’s got nothing to do w/ the bargain they thought they were entering, since A and B cannot contractually limit C’s tort-recover rights. However, I do agree w/ you that their ability to control is key. Now you appear to have swung in my direction on this.

Me: Stephan, I’m only discussing the difference a shareholder and an investor because you seem to think it’s importance.

I think they are *different*. The investor *gives money to* the company. The shareholder *votes for directors*. Both are different ways of having an affect on the company. The advocate of vicarious liability could make a separate argument based on each action for liability. Both are flawed, but in different ways.

Anyone who acquires a newly issued share is an investor; anyone who buys one on a market is stepping into his shoes.

“stepping into his shoes”–the idea of subrogation is just a positive law doctrine that begs the question here.

it’s the larger public co.s that are really shifting the greatest amount of risk to others, in the form of toxic torts and dangerous products.

Small companies cut all kinds of corners–tons of illegal dumpting etc. It’s decnetralized and harder to track. And of course the biggest polluter is the state–e.g., w/ its wars.

In any event, I don’t see that teh danger of toxic torts implies that shareholders have vicarious liabiltiy for torts of others.

You: I don’t konw what proving ownership status does. So waht? I will grant you that in some cases some shareholder wields such influence and direction over the firm that he ought to be as culpable as management for actions he helps direct. So what? My point is that *merely being a shareholder* is not by itself sufficient to attribute liability.”

Thanks for the acknowledgment. The point’s obvious – “*merely being a shareholder* is not by itself sufficient basis to exclude a shareholder from liability.

it’s not obvious to the anticorpo crusaders, who think it’s a Holy Crime to NOT impute liability to them! They “are” “owers,” after all!

In addition there’s a larger point – without limited liability, shareholders would have had potentially unlimited liablility,

Auugh! No, they wouldn’t. Not if they were merely passive shareholders.

and consequently would have been much more cautious about whom they invested in, and making sure that downside risk was closely managed.

I of course agree there ought to be no statutory rule insulating them from liability. And if there is any risk at all, a market for insurance would develop, and maybe hte insurers would hav higher premiums for riskier corps. Sure.

I’m not opposed to a nuanced and fact-specific approach,

Progress!

but the fact is that the grant of limited liability has essentially eviscerated it.

Probably; but none of us are in favor of a state grant of limited liability. We just think that the left’s focusing on this as the Root of All Evil is confused and misplaced.

You: “Saying they invest in liabilities is a bit of question-begging. The question is: does the status of a person as a shareholder–having certain dividend and liquidation and director-voting rights–make you liable for what the corporation does? I don’t rest my own conlcusions on whether the state “officially” classifies the shareholder “as an owner.” I’m looking at the functional reality of what they are and do.

I’m not begging any question; a shareholder who buys shares that aren’t fully paid up purchases may be required to contribute the rest of the capital, and a whole host of obligations may accompany shares in a close corporation.

I don’t think you can just assert that they buy liabilities. tha’ts question-begging.

You: “Yes, and we are a new and modern creature called “libertarian,” not tradition- or state-law-worshipping positivists.”

How about actually answering my question? Where does “the state” impose vicarious tort liability? The common law is not state-imposed.

sure it is; and in any event, it is not necessarily libertarian.

And surely you haven’t failed to notice that libertarians routinely refer to the common law as the reason why regulation isn’t needed (other than those like Rothbard who recognize that regulation is needed because corporations persuade judges to subvert it).

for two reasons: first, the common law is usually more libertarain than modern legislated law (see my 1995 JLS piece, Legislation and the Discovery of Law in a Free Society,” for my thoughts on this).

Me: “You say that, if victims could “sue shareholders individually”, in which case “shareholders could simply purchase shareholder-liability-insurance, no biggie”. I heartily agree – a system of pro rata shareholder unlimited liability would work (as one of the law journal articles argues), as well as being more just. I appreciate the concession – so have you stopped fighting this point?”

No. I still think it’s unjust for them to have liability where it’s not warranted–it’s just that it would make little difference, which shows that this is just a straw man for the left–it masques their real issue which is hostility to modern business and capitalism.

Stephan, first, I’m disappointed by your dismissive and somewhat offensive talk of “you guys” and what you presume my motives to be. I’m not an “anti-industrialist type”

Hey, you gets what you pays for :)

, and I’m here on my own and making my own points (which must mean I’m “yapping,” in your book).

I do have a way with words, don’t I?

Second, raising the issue of limited tort liability is not a red herring, at least for me, and it’s not something I think corporations need to survive.

Right. The main thing is limited liabiltiy for contractual debts–and this is perfectly legitimate–see Hessen.

I do think it’s very important because I think that real shifting or risk, moral hazard, corporate governance and other issues are intertwined and that underlies the whole politicized struggle over corporate regulation.

But the anticorpos act as if limited liabiilty is what lets corporations survive, and grow larger than they could on a free market. The problem wtih this reasoning is (a) limited *contractual* liability would exist on the free market; and (b) limited tort liability is trivial and no big deal. So neither can help boost the size of the corporation artificially.

P.M.Lawrence December 15, 2008 at 5:01 pm

Where on earth does “But the anticorpos act as if limited liabiilty is what lets corporations survive, and grow larger than they could on a free market” come from, when entity status has been brought up over and over? We can see quite clearly from history that that is all it takes to do it, from examples like the mediaeval church. Not that limited liability isn’t involved; but it just pushes in the same direction. With just that by itself, firms would have internal limits that would eventually slow their growth to a halt or split them.

TokyoTom December 16, 2008 at 5:10 am

Stephan, thanks for the dialogue.

You: Again: shareholders are not investors necessarily. In any case, you are question-begging. It’s not a fair presumption for the libertarian–that’s the issue here.
While I would agree with you that there should be no presumption that shareholders SHOULD have tort liability – after all, that should be a decision that depends on the facts of particular cases – I think it’s pretty clear that the blanket grant of limited liability has in fact acted to shield shareholders (and initial investors) from tort liability.

You: Yeah, like you mean, the President or CEO, or manager or boss? Sure. These guys run the company. Not shareholders.
Yes, the guys who run the company ought to be liable, but in some cases, controlling shareholders as well. Most individuals simply don’t have the assets to cover all of the risks, so a blanket rule that stops tortfeasor liability with the firm is clearly wrong.. Note that there are no rules that require managers, executives or even firms to acquire insurance sufficient to cover all risks created by corporate activity.

You: I don’t think so. It’s primarily for contractual liability limitation, which would continue to exist in a free society. Tort liability could easily be handled by insurance.
Stephan, come on. The partnerships could contract for liability limitations without a limited liability form; they have been moving rapidly into LLCs and LLPs solely to slough off risk to their personal assets for torts; for the same reasons, big firms that are already corporations separately incorporate subs for dangerous activities in order to limit potential liability for damages (both for torts and to creditors).

You: Yep, when formalities are not followed or a shareholder is too dominant and really acts as a manager.
My point about veil-piercing is that such cases show that no general state grant of limited liability is justified. The doctrine itself is extremely inconsistently used, in part because given the legal grant of limited liability courts are reluctant to use their equity power.

You: Well, if the state is abolished as we want, any “externalities” would go away.
Yeah, “IF”. Until then, there is certainly a lot of externalization that takes place, which seems to excite a few people.

You: Right, I agree. Thoguh even in today’s law, if a shareholder is in a position of control, it’s either (a) because he’s also a manager or director; or (b) he goes beyond his passive shareholder role and pushes the company to do his bidding. In case (a), he’s not protected by limited liability. In case (b), well,l of ten in such cases the corporate veil would be pierced, again reaching his personal assets.
I am happy that you agree that shareholders in a position of control should not be able to escape liability merely because they use the corporate form.

You: I actually think it’s got nothing to do w/ the bargain they thought they were entering, since A and B cannot contractually limit C’s tort-recover rights. However, I do agree w/ you that their ability to control is key. Now you appear to have swung in my direction on this.
In any particular case, I agree with you that actual ability to control is key. But generally, the state grant of limited liability is wrong and should be repealed.

Me: Stephan, I’m only discussing the difference a shareholder and an investor because you seem to think it’s importance.
You: I think they are *different*. The investor *gives money to* the company. The shareholder *votes for directors*. Both are different ways of having an affect on the company. The advocate of vicarious liability could make a separate argument based on each action for liability. Both are flawed, but in different ways.
I’m not sure that there’s a relevant distinction. If an investor provides money to a firm, he does so in exchange for a bargain of certain rights and liabilities; any purchaser simply steps into his shoes. Granted, if an investor or shareholder has separately taken actions that make him liable for a tort, that liability is not conveyed by a sale. I do not otherwise presume that a shareholder, by virtue of owning shares and having rights (and maybe an obligation to fully pay up shares), should become liable for the torts of others.

You: Small companies cut all kinds of corners–tons of illegal dumpting etc. It’s decnetralized and harder to track. And of course the biggest polluter is the state–e.g., w/ its wars. In any event, I don’t see that teh danger of toxic torts implies that shareholders have vicarious liabiltiy for torts of others.
I agree with you about small firms and the state, but large firms pollute – often as part of doing business with government – and generate risks too. The point is that the state grant of limited liability has as its purpose cutting off liability at the corporate level, thereby freeing shareholders. Without such a grant, investors and shareholders in firms would be much more careful about the risks that they generate.

You: it’s not obvious to the anticorpo crusaders, who think it’s a Holy Crime to NOT impute liability to them! They “are” “owers,” after all!
Thanks for the acknowledgement that *merely being a shareholder* is not by itself a sufficient basis to exclude a shareholder from liability. But there you go again, “yapping” about other people who aren’t on this thread!

Me: In addition there’s a larger point – without limited liability, shareholders would have had potentially unlimited liablility,
You: Auugh! No, they wouldn’t. Not if they were merely passive shareholders.
I agree with you that merely passive shareholders probably would not have liability, but the potential risk is there that they would have to face. They could wall off the risk by insurance (which would put an insurer in a position to evaluate the riskiness of a business and the degree of insulation that a shareholder is afforded by how the rights of shareholders are structured), or self-insure by making a similar analysis. But absent the limited liability rule, no doubt some shareholders would opt for measures that ensure better management by the company of risks of injury to third parties.

Me: I’m not opposed to a nuanced and fact-specific approach, but the fact is that the grant of limited liability has essentially eviscerated it.
You: Probably; but none of us are in favor of a state grant of limited liability.
Progress!

You: We just think that the left’s focusing on this as the Root of All Evil is confused and misplaced.
It does sound like it may be confused, but is it really misplaced? My own view is that without a state grant of limited liability on torts that we would see greater shareholder efforts to control the risks of injury to third parties, more responsible corporate behavior, more responsible management, fewer efforts by citizens groups to get government to impose asset/bonding requirements, to impose broader liability in pollution cases (Superfund), and to regulate. There would be less vilification of corporations generally.

Me: “How about actually answering my question? Where does “the state” impose vicarious tort liability? The common law is not state-imposed.
You: sure it is; and in any event, it is not necessarily libertarian.
How about actually answering my question? Where does “the state” impose vicarious tort liability?

You: No. I still think it’s unjust for them to have liability where it’s not warranted–it’s just that it would make little difference, which shows that this is just a straw man for the left–it masques their real issue which is hostility to modern business and capitalism.
Again, I’m not “the left” (and off of this site I am considered radically right); it may be a strawman for some of them, but I actually think that the grant of limited liability has had serious pernicious affects and removing it would be a great positive step. Under libertarian principles, individuals are responsible to the full extent of their assets for their harms to others; the creation of legal entities with limited liability for torts has allowed for the massive generation of risks, without regard to whether such risks are backed by the assets of real individuals. Rather, such risks are cut off by fiat at the corporate level, allowing shareholders to take profits for the upside of gains but not having to bear downside risk.

Regards,

Tom

TokyoATom December 16, 2008 at 5:22 am

FWIW, I have further refined a list of legal resources concerning the evolution of limited liability, the consequences, proposals for reform and on vicarious liability:

“Legal resources on state-created limited liability for shareholders, consequences and reform”
http://mises.org/Community/blogs/tokyotom/archive/2008/12/16/legal-resources-on-state-created-limited-liability-for-shareholders-consequences-and-reform.aspx

rhys November 21, 2009 at 2:01 pm

I missed the debate, but I think that there is an easy metaphor for understanding the limited liability issue.

Let me start by saying that I believe that limited liability is as baseless as the State which authorizes property owners’ liability to be limited. The reason is because a corporation is not an entity. It is property. To allow property to hold title to property is an absurdity created by the State. I can own a mop, but it would be silly to think that my mop could own a house.

Even if I hired a manager to direct my mop, it is pure interventionist fiction that would force others to respect my mop’s right to homestead or own title to property itself.

It is true that, if it were the case that my mop could own property, I could not be responsible for the torts that could possibly result from my mop’s or my mop’s managers’ actions, but it is probabaly becoming apparent why corporations cannot legitimately allow shareholders to escape liability for the damage that they or their property cause.

Now, more than one person can own property; more than one person may be a share-holder; and the owners of property are free to hire managers to manager their property. But, that in no way means that limited liability would exist on the free market. Absent State coercion, I don’t think people would accept the idea that property can itself own property.

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