Yes, but, because people own corporations, and want to use the corporation can use the corporation to exercise their rights, it is frequently convenient to treat the corporation as a person when deciding how to apply the law to corporations. :P
I was under the impression limited liability was exactly why corporations are legal persons. So they can sign contracts and be liable for violations of those contracts as well as breaches of law.
The article is lighting a vintage 1980's straw man on fire. Nowadays, we find the government bailing out Too Big To Fail banks, insurers, and other enterprises that have conglomerated themselves into owning industries that they can convince the government are of national strategic importance.
TBTF means certain corporations have a much higher level of protection than limited liability. You can't liquidate them. Evidently you can't nationalize them. And you can't even stop the bonuses because that would make it look like they are distressed. Feh.
> we find the government bailing out Too Big To Fail banks, insurers, and other enterprises that have conglomerated themselves into owning industries that they can convince the government are of national strategic importance
It's a transfer of wealth. Taxpayer money to the Oligarchy & entrenched interests.
I disagree with the OP. Costs should not be externalized. Businesses should be responsible for the havoc that they cause. If they go bankrupt, then it's fertile soil for more responsible companies.
What has happened as a consequence is more fiat money will be created to pay off such debts to the insurers. The insurance company should go bankrupt & the government should not bail it out. If that wreaks havoc on the markets, the markets should be corrected to account for this risk. It's better than further hiding the risk by creating more money, further devaluing the national currency.
There are many categories of people behind a "business", but you can generally classify them into three:
1. Employees (incl. management)
2. Shareholders
3. Investors
In criminal law, if a group does something illegal outside of a corporate context, then the individuals doing that act (ie. a relevant subset of employees) are always guilty, the people who ordered them (ie. management) are guilty if they knew or should have known what was going on, and the people who financed them (ie. investors and customers) are guilty if they knew or should have known. I'm not a civil law expert, but I would expect something similar to exist there as well with regard to liability. Hence, applying this principle, it seems reasonable to hold management accountable as individuals for a corporation does, and then once we get to individuals and investors it all gets down to what standard we apply for "should have known". On the extreme side, if there is a business which is obviously set up with the mission of supporting terrorism, then investors and customers should be held responsible. On the other hand, if it's a scandal where management expertly hid the details from everyone else, then investors and customers would both be clear. Everywhere in the middle, it's a judgement call for the court.
I generally support making investors liable more often; the one thing that worries me is that people will find some way of investing by proxy via derivatives, where if one organization figures out how to base itself internationally so as to be immune from lawsuits then that organization will hold lots of shares and everyone will enter into a contract-for-difference with them. Would setting yourself up to have positive exposure to a corporation's stock price count as investment no matter how it's done? From an economic standpoint, it basically is, but it might be hard to unravel the knots there.
> Would setting yourself up to have positive exposure to a corporation's stock price count as investment no matter how it's done? From an economic standpoint, it basically is, but it might be hard to unravel the knots there.
It's even worse than that. Imagine you find some indigent person and he put his name down as the owner of the business, then you sell him the assets necessary to do business and various consulting services, all on credit. Let the loan payments be well in excess of the profits the business is expected to make, so that he always pays you every dime the business makes and still owes more and accumulates late fees etc. Almost immediately he comes to owe more than the business is worth and so all the profits the business makes will perpetually go to you.
You can't cleanly distinguish a loan from an investment. They're the same creature with only modestly different terms. So unless we're going to make people responsible for the debts of their debtors (which would have the snake eating its own tail), you can't get rid of limited liability in practice.
I believe liability must rest on he who makes the decision.
Will the following work?
1. An executive must carry some personal liability for the decisions he took during his tenure.
2. If the decision was made with the knowledge of the board of directors, directors too, carry some liability.
3. If you are an investor, you carry the same percentage of liability as stock. E.g. if you own 10% stock, you are directly liable for $1 million of a $10 million liability (financial or legal).
4. Investors are expected to do their due diligence before buying stock in a company that may be exposed to liability.
5. Investor liability for decisions made in accordance with corporate policies is unlimited.
> If you are an investor, you carry the same percentage of liability as stock. E.g. if you own 10% stock, you are directly liable for $1 million of a $10 million liability (financial or legal).
I think there is where you run into problems. The real problem is that the investor really is not in a position to ensure that the company is run a certain way.
Now if the shareholders vote on a resolution to dump toxic waste in the river, then I think applying liability to the vote in proportion to the share is appropriate. But then those who vote against would have no liability.
The reason why limited liability exists is to help ensure that non-decision-makers are protected from the decisions of others. But if you aren't going to give them protection, why not also have a rule that banks who loan money to corporations are liable for misuse of the money loaned?
Because under limited liability, the owners would lose their equity. Under too big to fail, the owners are not liable at all. I.e. for really big businesses, we have gone from limited liability to no liability.
I feel like this line of thought became dominant even though it's inaccurate.
First, Lehman Brothers went bankrupt and was liquidated.
What would nationalization look like? Well, it would mean that the government would become the majority or complete shareholder. This happened with AIG. AIG became government owned until the government eventually sold off its interest to third parties. AIG was nationalized, the government owned the company for several years, and then sold it off.
General Motors went through bankruptcy and came out owned by the government and the union. That's nationalization.
Wachovia and Washington Mutual were sold off at cut-rate prices before they could fail via government intervention. The government could have put up the money itself and nationalized them, but preferred to have private companies take the risk.
In terms of the large banks that still exist, the government got a portion of the company as compensation for the government's capital. The issue for many banks wasn't that they had failed, but that the government wanted them a great distance from failing. Think of it this way, many people need their paycheck to clear before they pay their rent. Similarly, banks need people to pay their mortgages so they have the funds to pay out their obligations. Some banks were getting closer to "paycheck to paycheck" than the government wanted. The government wanted them to take the money because chaos is bad for everyone.
The government could have nationalized these banks. But, that would have required more money and more risk. If they wanted to nationalize the banks, they would have had to pay out a lot more money than they did and accept more risk. By providing less money, the government ended up without owning the whole of the banks, but it also meant that the amount that the government could lose would be less.
In terms of salaries and bonuses, that's an issue of contract law between an employer and employee. It wasn't about whether it would make them look distressed by stopping bonuses. Let's say you work for Chase. The government wants to stabilize Chase and steps in with the government's money. You have an employment contract for the next two years that says you'll get paid $10M per year. Maybe you're the idiot that got them into the mess. Well, is there anything in the contract that lets them terminate or reduce your pay? If not, they can't just alter it because they want to.
So, the question here would have to be: why not pull a GM on the banks? In bankruptcy, compensation packages could be changed, people could be removed, etc. The issue is that the banks weren't going bankrupt, but they were in that "paycheck to paycheck" range that the government didn't want. Since the crisis, the government has been requiring banks to carry healthy amounts of reserves and testing that they have enough to whether another crisis. But if you're a bank that is on the bubble, but still making it work, you're going to keep trying to make it work until it all comes tumbling down if the alternative is wiping out all the shareholders. The banks weren't nearly as bad as GM, AIG, and Lehman. So, the government came along and said, "you're going to take our money. We want you to have more reserves and you're going to give us part of your company." While the investment was semi-forced upon some of the banks, they also realized that it was a reasonable price to pay. If the government came by and said you have to give us 100% of your company, they would have said, "nope, we'll gamble that we'll whether the storm." Think of it this way, you think your paycheck won't clear before your rent is due. If I come along and say, "well, give me your children and I'll cover the rent for the few days" you'd tell me to take a hike. Let's say you thought there was a 10% chance that your paycheck wouldn't clear befor...
Proof of fraud in the court of law is sufficient to pierce the corporate veil and hold the principals accountable. It is another thing that most of the so-called "corporate crimes" fail to clear even the basic bar of proof under due legal process. Just because someone disagrees with a business decision of a corporate executive does not make that decision a crime.
Unlimited liability would have the effect of stifling entrepreneurship and/or export of capital and jobs into more favorable jurisdictions, including offshore shells.
Torts of all sorts can potentially "pierce the veil"; it's probably safer to think of the liability protection of a corporation as something pertaining exclusively to contracts (though that obviously oversimplifies it).
I believe the simplest explanation is that while all you need is a preponderance of evidence to sue in civil court, you need beyond a reasonable doubt in criminal court which is what is required to pierce the veil of the corporation.
Put another way, if I prove in a civil suit that you wronged me, that is not automatically enough proof to go after you criminally (which is likely what most people believe).
Also remember that the veil does not protect individuals from being found liable their own part in corporate actions. This is the basic promise of a limited partnership: I give you money to start your business. I am liable only to the point of my investment, but you are responsible for all of your decisions.
I think we should just treat corporate C-level officers as unlimited partners with regard to decisions made under their watch. That would mean effectively that business debts that the corporation could not pay would fall on the officers to guarantee, and that things like product liability would be treated a little differently.
Limited liability isn't an entitlement for anyone except maybe managers.
Employees that don't directly do something shouldn't be liable, going bankrupt because you worked at a bank and did nothing wrong is silly.
Investors are actually personally liable, just their liability is only their capital investment and is weirdly assignable, they aren't sued directly but instead their investment becomes worth less.
Managers are hard to pin the blame on in big companies, but this is definitely a grey area.
Issue: the LLC works well for the rich and for publicly-traded companies and their officers. It isn't working for small businesses. If you want to take bank loans, you have to take on personal liability. That defeats the point of the LLC, which is protect you in the case of good-faith business failure. It ends up protecting large corporations and their officers (who often abuse the corporate veil) but not the little guy as much as it should.
For low-risk businesses where principal loss is rare, bank loans work. For example, it's rare that a coffee shop will go to zero. Most "failing" small businesses earned a profit that didn't justify the proprietor's work and opportunity cost and were therefore discontinued, but they didn't go to zero.
Mid- and high-risk businesses (like any software company) are not a fit for bank loans. For the very high risk, there's VC. The middle of the risk spectrum is completely underserved when it comes to investment. (VC could target the mid-risk businesses aiming for 20-40% per year and it would work, but VC is a celebrity economy and individuals are motivated by the careerist benefit of being in on a Facebook, not building a strong business over 10 years that'll last 40.)
Right now, we see a lot of abuse of the corporate veil. For example, health insurers. Health insurers are protected from civil and criminal charges resulting from their decisions, and they absolutely shouldn't be. The LLC's valid purpose is to protect people in the case of good-faith business failure, but not to shield scumbags like the health insurers.
I wonder what the author's view is about the asbestos litigation itself? Do they believe that it was justified?
If they don't, then there is the author's big problem, and the example doesn't even need to touch on the concept of limited liability. It all becomes a problem of out of control lawsuits.
But if the author believes that the lawsuits were justified, why then are they happy about limited liability? It results in companies not paying out the full damages due. So the people harmed by asbestos have lost out. Is that something we really should be glad about?
> If they don't, then there is the author's big problem
I don't think that is a valid simplification. He is allowed to disagree with the lawsuit but also point out the damage it caused. If you want to call it a strawman that is fine, but it isn't otherwise a flawed argument.
> It results in companies not paying out the full damages due
What other option is there? Unless weird things happened the entirety of the capital invested in the company was consumed.
In theory we could build a way to say "you are liable for your investment plus X%" but how do you measure X%? And without some kind of limit the current capital investment strategy becomes difficult to maintain.
The author seems confused or is deliberately straw-manning the issue:
>[unlimited liability] would basically make the corporate form untenable. Imagine, if you would, that by buying and holding the share of a firm for 10 minutes, you thereby subjected yourself to seizure of all your goods to satisfy potential lawsuit judgments
Here, she is conflating ownership (of any type/duration) with the actual decisions made and actions taken by the company. The reality is that we know that common shareholders, for instance, are seldom involved with day-to-day or even long-term decision making of the type that frequently causes companies to incur liability. Are we really to believe that a court would sieze the assets of Joe Blow because he day-traded the stock of company X once upon a time?
But, if a common shareholder, who happened to be holding voting-stock during a 10-minute interval, in which the company decided to hold a public vote on, say, whether to deny a recent study on asbestos health-effects, did vote in the affirmative, then perhaps he/she should be liable.
But, such a scenario is ridiculous on its face for many obvious reasons. Not the least of these reasons is that the average shareholder is generally just as likely to be as duped by the company as the general public when it comes to issues of potential liability. Shareholders are effectively treated as customers too, with regard to the image the company wants to put forward, lest there be a devaluation of the stock.
So, by conflating the shareholders with the actual decision makers in such a ridiculous way, the author uses FUD to provide cover for the true beneficiaries of limited liability: the board and executive leadership.
In a world without limited liability, investor Joe Blow is absolutely liable for the corporation's debts (even if it's simply a proportionate liability) and all of his assets are fair game towards the collection of said debts.
Joe Blow doesn't even have to be very sophisticated. He could be a mid-level (or any level) worker who works hard to sock money away in his 401k. Everything is going along fine, until one of the company's his managed 401k invested in gets hammered with a massive judgment in litigation. Now, he and everyone else who invested in that company regardless of their size or wealth, is on the hook. Even if the small size of his investment simply means that he's only liable for a few thousand dollars, that's still one hell of a hit.
And that's not even touching the issue of smaller firms (such as family businesses, startups that issue their employees stock benefits, or employee-owned firms) where the potential risk per individual investor goes up significantly simply because they own a greater proportion of the company.
Every time I stumble across people arguing about limited liability (or corporate personhood... oh boy, does it seem like people confuse personhood with citizenship), I walk away with the impression that those seeking to end it don't really understand what they're asking for. It's sort of like opening Pandora's Box, but without hope lingering at the bottom.
Personally (and I expect this to be controversial here) I think that we should stop treating corporations as different liability-wise from limited partnerships in terms of what owners and managers can be held liable for. The problem is not really limited liability for passive owners. Why should a passive investor have more liability than a lender? The problem is that we provide even more limitations in some areas (like product liability) exclusively to the corporate form.
So suppose a company dumps toxic waste into a river. I think we should be able to accept the following two propositions:
1. The company's investors themselves, absent any part in this decision on their part, should be liable only to the extent of their investment.
2. The folks who signed off on the decision should be personally liable for the rest.
That's not far from the situation today. The problem really are all the exceptions to this approach (product liability for example) and the fact that nobody actually sues individuals for their personal parts in such things.
So let's have a simple rule: There should be no difference in liability between an unlimited partner and a corporate executive for decisions actually made under their watch. That preserves corporate limited liability, but also limits it appropriately.
> That's not far from the situation today. The problem really are all the exceptions to this approach (product liability for example) and the fact that nobody actually sues individuals for their personal parts in such things.
The problem is the reason nobody sues individuals for their personal acts is that individuals don't have any real money. Even executives have peanuts compared to the amount of liability a corporation can incur. If you have a claim large enough to bankrupt the corporation, going after the CEO just to get his three year old Lexus isn't worth the trouble. And if you sue the executives then they hire lawyers and by the time you get a judgment the lawyers have burned through any assets they might have had to pay you with, unless they have litigation insurance in which case you can look forward to fighting them in court until the end of time.
It doesn't do much good to make parties liable who pretty much never have the capacity to pay.
But liens against homes can be useful. Additionally if you can get a temporary lien pending litigation, it means that both sides are relatively tied up. But more to the point if individuals were to be held legally responsible, then you give incentive to behave.
Also keep in mind one's options for participating in other companies with international legal concerns may be impacted by personal bankruptcy. Many European countries do not allow those who have filed bankruptcy to sit on the board or have legal responsibilities on behalf of a corporation.
Limited liability is just not fair. If an entity's (Person or corporation) actions cause harm, they must be held liable for the full extent of the harm that they have caused, matching their level of participation in said activity.
What is really at fault here is the tort law, that allows plaintiffs to sue for unreasonably huge amounts, and for ridiculous reasons. In the example given in the article, a person could be sued for owning shares in asbestos production, in the past for as short a time as 10 min. I think that person should be liable, how else would the peoples' grievances be fulfilled. Partially fulfilled grievances is not a fair solution.
I also think it is unfair to hold that person liable for a huge amount. His liability should be calculated based on how many people he affected during his 10 min of holding the shares, and how many shares he had in the establishment during that time.
TLDR; Liability should be limited by the extent of participation in harmful activity (whether intentional or not) and to the measurable amount of damage done rather than arbitrarily.
One of the proposals for unlimited corporate liability is for _pro rata_ liability, where the shareholder is only liable for his share of the damages based on how much stock he or she owns. If you bought $1,000 worth of stock, you might lose what you invested plus a few thousand on top of that, but not necessarily all your savings.
It could still be a disaster for some people—what if the claims on the company are 100x the share price or 1,000x?—but it’s more workable than joint and several liability. Liability in general partnerships, for example, is joint and several. Even if you only own 1% of the business, but you are much wealthier than the other owners, the creditors will come after you for everything.
There would also be some thought put into which shareholders would be liable, and perhaps someone who only held the stock for a few days would have less liability than someone who held it for years while the toxic waste was being dumped.
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[ 2.8 ms ] story [ 92.0 ms ] threadTBTF means certain corporations have a much higher level of protection than limited liability. You can't liquidate them. Evidently you can't nationalize them. And you can't even stop the bonuses because that would make it look like they are distressed. Feh.
It's a transfer of wealth. Taxpayer money to the Oligarchy & entrenched interests.
I disagree with the OP. Costs should not be externalized. Businesses should be responsible for the havoc that they cause. If they go bankrupt, then it's fertile soil for more responsible companies.
What has happened as a consequence is more fiat money will be created to pay off such debts to the insurers. The insurance company should go bankrupt & the government should not bail it out. If that wreaks havoc on the markets, the markets should be corrected to account for this risk. It's better than further hiding the risk by creating more money, further devaluing the national currency.
1. Employees (incl. management)
2. Shareholders
3. Investors
In criminal law, if a group does something illegal outside of a corporate context, then the individuals doing that act (ie. a relevant subset of employees) are always guilty, the people who ordered them (ie. management) are guilty if they knew or should have known what was going on, and the people who financed them (ie. investors and customers) are guilty if they knew or should have known. I'm not a civil law expert, but I would expect something similar to exist there as well with regard to liability. Hence, applying this principle, it seems reasonable to hold management accountable as individuals for a corporation does, and then once we get to individuals and investors it all gets down to what standard we apply for "should have known". On the extreme side, if there is a business which is obviously set up with the mission of supporting terrorism, then investors and customers should be held responsible. On the other hand, if it's a scandal where management expertly hid the details from everyone else, then investors and customers would both be clear. Everywhere in the middle, it's a judgement call for the court.
I generally support making investors liable more often; the one thing that worries me is that people will find some way of investing by proxy via derivatives, where if one organization figures out how to base itself internationally so as to be immune from lawsuits then that organization will hold lots of shares and everyone will enter into a contract-for-difference with them. Would setting yourself up to have positive exposure to a corporation's stock price count as investment no matter how it's done? From an economic standpoint, it basically is, but it might be hard to unravel the knots there.
It's even worse than that. Imagine you find some indigent person and he put his name down as the owner of the business, then you sell him the assets necessary to do business and various consulting services, all on credit. Let the loan payments be well in excess of the profits the business is expected to make, so that he always pays you every dime the business makes and still owes more and accumulates late fees etc. Almost immediately he comes to owe more than the business is worth and so all the profits the business makes will perpetually go to you.
You can't cleanly distinguish a loan from an investment. They're the same creature with only modestly different terms. So unless we're going to make people responsible for the debts of their debtors (which would have the snake eating its own tail), you can't get rid of limited liability in practice.
Will the following work?
1. An executive must carry some personal liability for the decisions he took during his tenure.
2. If the decision was made with the knowledge of the board of directors, directors too, carry some liability.
3. If you are an investor, you carry the same percentage of liability as stock. E.g. if you own 10% stock, you are directly liable for $1 million of a $10 million liability (financial or legal).
4. Investors are expected to do their due diligence before buying stock in a company that may be exposed to liability.
5. Investor liability for decisions made in accordance with corporate policies is unlimited.
I think there is where you run into problems. The real problem is that the investor really is not in a position to ensure that the company is run a certain way.
Now if the shareholders vote on a resolution to dump toxic waste in the river, then I think applying liability to the vote in proportion to the share is appropriate. But then those who vote against would have no liability.
The reason why limited liability exists is to help ensure that non-decision-makers are protected from the decisions of others. But if you aren't going to give them protection, why not also have a rule that banks who loan money to corporations are liable for misuse of the money loaned?
First, Lehman Brothers went bankrupt and was liquidated.
What would nationalization look like? Well, it would mean that the government would become the majority or complete shareholder. This happened with AIG. AIG became government owned until the government eventually sold off its interest to third parties. AIG was nationalized, the government owned the company for several years, and then sold it off.
General Motors went through bankruptcy and came out owned by the government and the union. That's nationalization.
Wachovia and Washington Mutual were sold off at cut-rate prices before they could fail via government intervention. The government could have put up the money itself and nationalized them, but preferred to have private companies take the risk.
In terms of the large banks that still exist, the government got a portion of the company as compensation for the government's capital. The issue for many banks wasn't that they had failed, but that the government wanted them a great distance from failing. Think of it this way, many people need their paycheck to clear before they pay their rent. Similarly, banks need people to pay their mortgages so they have the funds to pay out their obligations. Some banks were getting closer to "paycheck to paycheck" than the government wanted. The government wanted them to take the money because chaos is bad for everyone.
The government could have nationalized these banks. But, that would have required more money and more risk. If they wanted to nationalize the banks, they would have had to pay out a lot more money than they did and accept more risk. By providing less money, the government ended up without owning the whole of the banks, but it also meant that the amount that the government could lose would be less.
In terms of salaries and bonuses, that's an issue of contract law between an employer and employee. It wasn't about whether it would make them look distressed by stopping bonuses. Let's say you work for Chase. The government wants to stabilize Chase and steps in with the government's money. You have an employment contract for the next two years that says you'll get paid $10M per year. Maybe you're the idiot that got them into the mess. Well, is there anything in the contract that lets them terminate or reduce your pay? If not, they can't just alter it because they want to.
So, the question here would have to be: why not pull a GM on the banks? In bankruptcy, compensation packages could be changed, people could be removed, etc. The issue is that the banks weren't going bankrupt, but they were in that "paycheck to paycheck" range that the government didn't want. Since the crisis, the government has been requiring banks to carry healthy amounts of reserves and testing that they have enough to whether another crisis. But if you're a bank that is on the bubble, but still making it work, you're going to keep trying to make it work until it all comes tumbling down if the alternative is wiping out all the shareholders. The banks weren't nearly as bad as GM, AIG, and Lehman. So, the government came along and said, "you're going to take our money. We want you to have more reserves and you're going to give us part of your company." While the investment was semi-forced upon some of the banks, they also realized that it was a reasonable price to pay. If the government came by and said you have to give us 100% of your company, they would have said, "nope, we'll gamble that we'll whether the storm." Think of it this way, you think your paycheck won't clear before your rent is due. If I come along and say, "well, give me your children and I'll cover the rent for the few days" you'd tell me to take a hike. Let's say you thought there was a 10% chance that your paycheck wouldn't clear befor...
You are seriously suggesting the people who wrote those disastrous derivatives contracts could not be terminated for cause.
Proof of fraud in the court of law is sufficient to pierce the corporate veil and hold the principals accountable. It is another thing that most of the so-called "corporate crimes" fail to clear even the basic bar of proof under due legal process. Just because someone disagrees with a business decision of a corporate executive does not make that decision a crime.
Unlimited liability would have the effect of stifling entrepreneurship and/or export of capital and jobs into more favorable jurisdictions, including offshore shells.
I'd be interested in elaboration.
Put another way, if I prove in a civil suit that you wronged me, that is not automatically enough proof to go after you criminally (which is likely what most people believe).
I think we should just treat corporate C-level officers as unlimited partners with regard to decisions made under their watch. That would mean effectively that business debts that the corporation could not pay would fall on the officers to guarantee, and that things like product liability would be treated a little differently.
Employees that don't directly do something shouldn't be liable, going bankrupt because you worked at a bank and did nothing wrong is silly.
Investors are actually personally liable, just their liability is only their capital investment and is weirdly assignable, they aren't sued directly but instead their investment becomes worth less.
Managers are hard to pin the blame on in big companies, but this is definitely a grey area.
Answer any blindingly obvious potential critiques of this position? Why bother? Everything is great full stop!
For low-risk businesses where principal loss is rare, bank loans work. For example, it's rare that a coffee shop will go to zero. Most "failing" small businesses earned a profit that didn't justify the proprietor's work and opportunity cost and were therefore discontinued, but they didn't go to zero.
Mid- and high-risk businesses (like any software company) are not a fit for bank loans. For the very high risk, there's VC. The middle of the risk spectrum is completely underserved when it comes to investment. (VC could target the mid-risk businesses aiming for 20-40% per year and it would work, but VC is a celebrity economy and individuals are motivated by the careerist benefit of being in on a Facebook, not building a strong business over 10 years that'll last 40.)
Right now, we see a lot of abuse of the corporate veil. For example, health insurers. Health insurers are protected from civil and criminal charges resulting from their decisions, and they absolutely shouldn't be. The LLC's valid purpose is to protect people in the case of good-faith business failure, but not to shield scumbags like the health insurers.
If they don't, then there is the author's big problem, and the example doesn't even need to touch on the concept of limited liability. It all becomes a problem of out of control lawsuits.
But if the author believes that the lawsuits were justified, why then are they happy about limited liability? It results in companies not paying out the full damages due. So the people harmed by asbestos have lost out. Is that something we really should be glad about?
I don't think that is a valid simplification. He is allowed to disagree with the lawsuit but also point out the damage it caused. If you want to call it a strawman that is fine, but it isn't otherwise a flawed argument.
> It results in companies not paying out the full damages due
What other option is there? Unless weird things happened the entirety of the capital invested in the company was consumed.
In theory we could build a way to say "you are liable for your investment plus X%" but how do you measure X%? And without some kind of limit the current capital investment strategy becomes difficult to maintain.
>[unlimited liability] would basically make the corporate form untenable. Imagine, if you would, that by buying and holding the share of a firm for 10 minutes, you thereby subjected yourself to seizure of all your goods to satisfy potential lawsuit judgments
Here, she is conflating ownership (of any type/duration) with the actual decisions made and actions taken by the company. The reality is that we know that common shareholders, for instance, are seldom involved with day-to-day or even long-term decision making of the type that frequently causes companies to incur liability. Are we really to believe that a court would sieze the assets of Joe Blow because he day-traded the stock of company X once upon a time?
But, if a common shareholder, who happened to be holding voting-stock during a 10-minute interval, in which the company decided to hold a public vote on, say, whether to deny a recent study on asbestos health-effects, did vote in the affirmative, then perhaps he/she should be liable.
But, such a scenario is ridiculous on its face for many obvious reasons. Not the least of these reasons is that the average shareholder is generally just as likely to be as duped by the company as the general public when it comes to issues of potential liability. Shareholders are effectively treated as customers too, with regard to the image the company wants to put forward, lest there be a devaluation of the stock.
So, by conflating the shareholders with the actual decision makers in such a ridiculous way, the author uses FUD to provide cover for the true beneficiaries of limited liability: the board and executive leadership.
Joe Blow doesn't even have to be very sophisticated. He could be a mid-level (or any level) worker who works hard to sock money away in his 401k. Everything is going along fine, until one of the company's his managed 401k invested in gets hammered with a massive judgment in litigation. Now, he and everyone else who invested in that company regardless of their size or wealth, is on the hook. Even if the small size of his investment simply means that he's only liable for a few thousand dollars, that's still one hell of a hit.
And that's not even touching the issue of smaller firms (such as family businesses, startups that issue their employees stock benefits, or employee-owned firms) where the potential risk per individual investor goes up significantly simply because they own a greater proportion of the company.
Every time I stumble across people arguing about limited liability (or corporate personhood... oh boy, does it seem like people confuse personhood with citizenship), I walk away with the impression that those seeking to end it don't really understand what they're asking for. It's sort of like opening Pandora's Box, but without hope lingering at the bottom.
So suppose a company dumps toxic waste into a river. I think we should be able to accept the following two propositions:
1. The company's investors themselves, absent any part in this decision on their part, should be liable only to the extent of their investment.
2. The folks who signed off on the decision should be personally liable for the rest.
That's not far from the situation today. The problem really are all the exceptions to this approach (product liability for example) and the fact that nobody actually sues individuals for their personal parts in such things.
So let's have a simple rule: There should be no difference in liability between an unlimited partner and a corporate executive for decisions actually made under their watch. That preserves corporate limited liability, but also limits it appropriately.
The problem is the reason nobody sues individuals for their personal acts is that individuals don't have any real money. Even executives have peanuts compared to the amount of liability a corporation can incur. If you have a claim large enough to bankrupt the corporation, going after the CEO just to get his three year old Lexus isn't worth the trouble. And if you sue the executives then they hire lawyers and by the time you get a judgment the lawyers have burned through any assets they might have had to pay you with, unless they have litigation insurance in which case you can look forward to fighting them in court until the end of time.
It doesn't do much good to make parties liable who pretty much never have the capacity to pay.
Also keep in mind one's options for participating in other companies with international legal concerns may be impacted by personal bankruptcy. Many European countries do not allow those who have filed bankruptcy to sit on the board or have legal responsibilities on behalf of a corporation.
What is really at fault here is the tort law, that allows plaintiffs to sue for unreasonably huge amounts, and for ridiculous reasons. In the example given in the article, a person could be sued for owning shares in asbestos production, in the past for as short a time as 10 min. I think that person should be liable, how else would the peoples' grievances be fulfilled. Partially fulfilled grievances is not a fair solution.
I also think it is unfair to hold that person liable for a huge amount. His liability should be calculated based on how many people he affected during his 10 min of holding the shares, and how many shares he had in the establishment during that time.
TLDR; Liability should be limited by the extent of participation in harmful activity (whether intentional or not) and to the measurable amount of damage done rather than arbitrarily.
It could still be a disaster for some people—what if the claims on the company are 100x the share price or 1,000x?—but it’s more workable than joint and several liability. Liability in general partnerships, for example, is joint and several. Even if you only own 1% of the business, but you are much wealthier than the other owners, the creditors will come after you for everything.
There would also be some thought put into which shareholders would be liable, and perhaps someone who only held the stock for a few days would have less liability than someone who held it for years while the toxic waste was being dumped.