
Be Glad That Corporate Liability Is Limited - jseliger
http://www.bloombergview.com/articles/2014-04-04/be-glad-that-corporate-liability-is-limited
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joosters
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?

~~~
Guvante
> 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.

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dmk23
The liability is not truly limited anyways.

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.

~~~
rayiner
> 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.

I'd be interested in elaboration.

~~~
Guvante
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).

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einhverfr
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.

~~~
AnthonyMouse
> 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.

~~~
einhverfr
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.

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msandford
Corporate liability is limited and it has no downsides whatsoever! It's all
roses and sunshine!

Answer any blindingly obvious potential critiques of this position? Why
bother? Everything is great full stop!

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Zigurd
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.

~~~
mdasen
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 before the rent and I came along
and said, "for $100, I'll handle it in the case that it doesn't". That sounds
a lot more reasonable.

The fact is that some institutions were liquidated and some were nationalized,
while others were unlikely to fail, but were closer than would be comfortable.
In those cases, shareholders of those companies were hit because the loans had
to be repaid with interest and the government received warrants for portions
of the companies. But the hit to shareholders was going to be proportional,
not absolute.

TARP was one of those programs that people really didn't understand, but
wanted to be mad about.

~~~
Zigurd
> _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._

You are seriously suggesting the people who wrote those disastrous derivatives
contracts could not be terminated for cause.

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hammadfauz
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.

------
guan
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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nroose
Yes. And that is one big reason why a corporation is not a person.

~~~
gerbal
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.

~~~
ScottBurson
Well -- perhaps it's a person in some senses -- but it's not a _citizen_.

~~~
GFK_of_xmaspast
Not yet.

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analog31
I appreciate the economic justification for limited liability. Still, I
consider it to be the mother of all entitlements.

~~~
Guvante
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.

~~~
analog31
I was thinking of a technical definition of "entitlement" as a right granted
by the government, not necessarily as a give-away to anybody.

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bsbechtel
Libertarian - The author kept using that word. I do not think it means what
she thinks it means.

~~~
vbuterin
Given that even libertarians don't agree on what it means I think it's fair to
give that one a pass.

~~~
bsbechtel
Fair enough

------
unclebucknasty
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.

~~~
Bluestrike2
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.

------
michaelochurch
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.

