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I was not surprised at the low quality of this piece, but was shocked that the author is a law professor, and at Columbia no less. The professor should know bet

I was not surprised at the low quality of this piece, but was shocked that the author is a law professor, and at Columbia no less. The professor should know better. Limited legal liability is not the essential aspect of incorporation, legal personhood is. The ability to sue and be sued as its own entity is the one unique aspect of the corporation that distinguishes it from what came before. Limited liability, on the other hand, is commonly used in contract law. The entire insurance industry is based on this idea. It even has a respectable, legalese name: indemnity. In a world of shareholders having unlimited liability, shareholders would buy insurance against any loss beyond the cost bases of their investments, or they'd require the corporate entity - again, still a legal person - to indemnify them for any losses beyond the investment, or maybe the clever lawyers - including the professor's own students - would use indemnity to make even more innovative agreements and tools. By creating out of whole cloth a market for insurance that heretofore has not existed, we'd probably see even more of a culture of haves vs have nots in the investment world. Those with more money and prestige would be able to buy better protection; ordinary people would be less well-protected. In the end, we'd have a less equal system, more uncertainty and no change in the behavior of corporations with respect to liabilities of their shareholders.

Arnt 7y ago
I don't really see how it would be better. The corporations that I've heard described as evil most often don't seem to be affected at all, at first thought at least. Some because they're profitable, others were at risk around 2008-2010, but were kept from bankruptcy (with or without shareholder liability) because of systemic risk. Could you explain what problem this would solve?
hogFeast 7y ago
It is interesting (or worrying) to think about why someone like this writes an article like this. It seems kind of self-evident that limited liability gives people the opportunity to sue companies, and her main issue is apparently with the quantum of judgement against companies (left unsaid is why they would be larger against individuals or whether employees are able to shoulder those legal liabilities). But this is where we are now...a sizeable proportion that think that everything companies do is innately evil (these people often have tidy public sector jobs that are paid for by these companies). It is very weird...it is like life is a Disney film with evil rich people and virtuous poor people.
zozbot234 7y ago
You can just increase capital requirements on the firm, or (alternately) allow the firm itself to take on liability insurance where the insurance company has adequate capital requirements of its own. Shareholders would not be required to self-insure or anything like that, they would just need to up their ante until it actually covers the worst-case loss. It's totally fair.
- pjc50 7y ago
  What does that actually mean in practice when liabilities can exceed assets? Also, what does it look like to try to have "sufficient" cash reserves for contingency? We've had enough trouble trying to do that with banks and Basel III. To use a concrete example: Electricite de France (EDF). They operate a large fleet of nuclear reactors. How much should they be required to put aside against the contingency of a massive Chernobyl-level incident? Their "total assets" are 283.2 billion EUR according to Google. Is that enough? (Slightly bad example in that the majority shareholder is the French government, but never mind) > up their ante until it actually covers the worst-case loss The worst-case loss is difficult to predict in advance and may be a huge number with low probability. What do you think the minimum "ante" should be required for a low-end business such as opening a restaurant?
  - Spooky23 7y ago
    The "cap" is imposed by bankruptcy. In some of the examples cited, the beneficial owners will get to keep ill-gotten gains, while the company implodes. The Sacklers/Purdue is a great example. The owners picked the corporate carcass clean, shipped the money out of the jurisdiction of the US Courts, and are protected against most future claims.
- deleted 7y ago
  [deleted]
rahimnathwani 7y ago
"or they'd require the corporate entity - again, still a legal person - to indemnify them for any losses beyond the investment" But if the shareholders are being called on for more money, it's because the corporation has run out. And in that scenario, contractual indemnity from the corporation would be of no use, because it neither (i) provides funds to pay those who are suing, or (ii) protects the shareholders from lawsuits from third parties.
- baryphonic 7y ago
  > But if the shareholders are being called on for more money, it's because the corporation has run out. And in that scenario, contractual indemnity from the corporation would be of no use, because it neither (i) provides funds to pay those who are suing, or (ii) protects the shareholders from lawsuits from third parties. The definition of indemnity is protection from lawsuits filed by third parties. This is in fact why you have insurance. Person A sues person B (an investor in C) for something corporation C did. Person B produces the indemnity agreement between himself and C, and the court throws out the suit. And worthless judgments happen all the time. A party's inability to pay does not dissolve that party's agreements to indemnify some other party, or expose them to liability. And, besides, it would likely never get to this point anyway, unless this proposal also involves abolishing corporate bankruptcy.
  - RHSeeger 7y ago
    > The definition of indemnity is protection from lawsuits filed by third parties. This is in fact why you have insurance. Person A sues person B (an investor in C) for something corporation C did. Person B produces the indemnity agreement between himself and C, and the court throws out the suit. This sounds like it's missing something. Why wouldn't company B pay company D, a small LLC with 0 assets, to indemnify it against everything it does, period. There has to be a case where, in your scenario, C can't cover the issue and B is on the hook, rather than the case just being "thrown out".
    - baryphonic 7y ago
Spooky23 7y ago
The concept is fine and makes sense, but it's been allowed to run amok and we're seeing blowback as a result. Insurance would probably be a transformational force, as business structures vulnerable to fraud wouldn't be insurable. Another obvious problem has been allowing professionals to transform from partnership structures to corporate structures. I would argue that insulating attorneys, accountants, and investment bankers from risk hasn't been a net positive for society.
- Enginerrrd 7y ago
  This depends on the state. In CA, professionals (operating a business under a licensure) automatically carry personal liability.
marnett 7y ago
> [...] we'd probably see even more of a culture of haves vs have nots in the investment world. There are no have nots in the investment world. The investment world, intuitively, is made up of have and have mores.
- davidw 7y ago
  In Italy, it used to be that you'd have to sink 10,000 euros, approximately, of capital into the equivalent of an LLC to create it. Otherwise, you could create an unlimited liability type partnership or something similar. Company formation was for the wealthy.
  - marnett 7y ago
    Having, gaining, and increasing investment builds wealth. My largest point is projecting a binary grouping like "have" and "have nots", which is typically used to delineate the poor and the not-poor is disingenuous. The poor (have-nots) are not even in the arena. A majority of people in the world today do not have and will not have any investments of any kind ever; those are the have-nots. A more honest statement would be that the wealthiest investors would gain more power over less wealthy investors; however, that is already the case, the wealthiest non-institutional investors are free to create their own hedge funds, an extraordinary overhead - but one some take on, to gain a leg up on the little (rich) guy.
- Arnt 7y ago
  The have-nots are people who buy a few shares in an index fund. That doesn't require significant time or thought, so you can do it even if all you can spare is €1k and very little time.
  - leetcrew 7y ago
    as someone with a tech job, I don't consider myself a "have-not" but I basically just buy index funds with whatever surplus income I have every few months. if my losses weren't limited to the cost basis of my shares, it would basically be too risky for me to invest at all. this would drastically change my retirement prospects.
closeparen 7y ago
You might see some behavioral change from the controls that underwriters would make businesses implement. Often it's the insurance industry driving security engineering, fire protection, safety protocols, etc. On the other hand, shareholders have about the same incentives and there is already corporate governance.
- baryphonic 7y ago
  I doubt we'd see much at all of a difference, since large (and even most small) businesses are already insured against losses subject to underwriter enforcement of actuarial policy. If we take the Deepwater Horizon oil spill from 2010, certainly one of the largest potential liabilities we've seen, BP's liability was capped at $75M.[1] BP ultimately waived its liability as a condition of settling with affected parties, but I think I'm justified in thinking this arrangement was just a particularly expensive PR cost. Insurance providers looked at BP's minuscule liability and were happy to sign the papers. I'm guessing the underwriters had only minimal conditions for the insurance policy. In a world where BP's liabilities were uncapped, I'm guessing the insurance underwriters (and ultimately actuaries) would have taken a much closer look at BP's operations on the oil rig. If someone wants to propose lifting statutory caps on liability, or even creating liability for e.g. sea level rise, I'd be fully in favor. That solution is like a scalpel rather than a machete (such as revoking limited liability for corporate entities). [1] https://www.nytimes.com/2010/05/02/us/02liability.html https://www.nytimes.com/2010/05/02/us/02liability.html
jyrkesh 7y ago
You can't really insure against going to jail. As others have said, I think she was off the mark with regards to calling out "shareholders" vs. "managers" / "those actually responsible for making the criminal decisions", but if you made the call and gave orders to negligently cut your safety standards, and then your oil company has a spill, you should go to jail.
- baryphonic 7y ago
  Are you interpreting this op-ed to say that investors who have no active hand in the operations of a business should have criminal liability for any actions people in the corporation take? I discounted that possibility out of hand since it seems patently absurd when I think about it a bit more.
  - unishark 7y ago
    Some seem to be arguing for that here. It would obviously go against the principle of mens rea. Limited liability doesn't protect anyone from criminal charges anyway.
  - dkarras 7y ago
    I don't have a clear position here, but why not? Shareholders can do their due diligence after all. If you are not directly involved in the decision making that caused suffering to occur then you perhaps incur monetary losses (either through insuring yourself or paying fines). This will of course, change the risk equation. Previously potentially profitable investments suddenly become non-viable because when you factor in insurance costs / possible fines, you can think more than once about funding endeavors by people which might be crooks. If you were directly responsible for the decision making that caused predictable suffering, you can be criminally liable. You can go to jail. What is the problem with that?
gamblor956 7y ago
Limited liability is not indemnity. Indemnity means that one party has to cover the other party's losses--in other words, pretty much the exact opposite of limited liability for the covering party. Limited liability means that a party is not responsible for their business' debts beyond their investment in the business. Frequently, this means that no one is responsible for the businesses' debts if it fails. See for example, most environmental cleanup litigation or asbestos litigation.
- baryphonic 7y ago
  > [...] Frequently, this means that no one is responsible for the businesses' debts if it fails. See for example, most environmental cleanup litigation or asbestos litigation. This is incorrect. A business that has legal personhood (i.e. a corporate entity) is still responsible for its own debts if it fails (i.e. it goes into bankruptcy and is fully liquidated). Just like any other person. By way of analogy, imagine a (natural) person's parents pass away deep in debt, and this person is not party to the parents' debts. In this case, the person may lose any potential inheritance, but the creditors may not go after the person's own assets in order to satisfy the parents' debts. Any assets belonging to the parents' estates may be liquidated to satisfy any outstanding creditors unless and until all of the debt is recovered. Businesses in receivership are treated in substantially similar ways. Therefore, _someone_ does indeed pay: the business itself. > Limited liability is not indemnity. > > Indemnity means that one party has to cover the other party's losses--in other words, pretty much the exact opposite of limited liability for the covering party. I never meant to argue that limited liability was identical to indemnity, but they are practically similar. Because a corporation is a legal person (again, merely meaning that it can enter into agreements, sue and be sued, and thus can acquire or dispose of property), limitation of liability is equivalent in effect to the corporation itself indemnifying any investors from having to cover any costs that are incident to the corporation's operations exceeding the investors' contributions. Perhaps the law could be structured in such a way that investors would retain some of the firm's liability exceeding their investments. This might be set up as some sort of bond held in escrow that an investor must post before investing, or maybe would involve the law authorizing creditors to go after investors up to some percentage of that person's share in equity in the event of collapse (this would almost certainly lead to large numbers of personal bankruptcies). My whole point was originally that there are already legal tools - like indemnity and insurance - that would preserve the aspects of limited liability. However, these would not be distributed in an equitable way, instead being most available for the wealthiest investors and the largest corporations, and inaccessible to ordinary people or entrepreneurs. In practice, we'd still have limited liability, but a more unequal one with higher lawyer fees.
alimw 7y ago
Pointing out that the currently default structure could be replicated by other means currently available is no argument for keeping it the default. It is not in fact some God-given design to which all paths must inevitably converge. Clearly the author is proposing that it be discouraged one way and another over a period of time; your characterisation of that as an impossible task is backed up only by speculation.

Arnt 7y ago

I don't really see how it would be better. The corporations that I've heard described as evil most often don't seem to be affected at all, at first thought at least. Some because they're profitable, others were at risk around 2008-2010, but were kept from bankruptcy (with or without shareholder liability) because of systemic risk. Could you explain what problem this would solve?

hogFeast 7y ago

It is interesting (or worrying) to think about why someone like this writes an article like this. It seems kind of self-evident that limited liability gives people the opportunity to sue companies, and her main issue is apparently with the quantum of judgement against companies (left unsaid is why they would be larger against individuals or whether employees are able to shoulder those legal liabilities). But this is where we are now...a sizeable proportion that think that everything companies do is innately evil (these people often have tidy public sector jobs that are paid for by these companies). It is very weird...it is like life is a Disney film with evil rich people and virtuous poor people.

zozbot234 7y ago

You can just increase capital requirements on the firm, or (alternately) allow the firm itself to take on liability insurance where the insurance company has adequate capital requirements of its own. Shareholders would not be required to self-insure or anything like that, they would just need to up their ante until it actually covers the worst-case loss. It's totally fair.

pjc50 7y ago
What does that actually mean in practice when liabilities can exceed assets? Also, what does it look like to try to have "sufficient" cash reserves for contingency? We've had enough trouble trying to do that with banks and Basel III. To use a concrete example: Electricite de France (EDF). They operate a large fleet of nuclear reactors. How much should they be required to put aside against the contingency of a massive Chernobyl-level incident? Their "total assets" are 283.2 billion EUR according to Google. Is that enough? (Slightly bad example in that the majority shareholder is the French government, but never mind) > up their ante until it actually covers the worst-case loss The worst-case loss is difficult to predict in advance and may be a huge number with low probability. What do you think the minimum "ante" should be required for a low-end business such as opening a restaurant?
- Spooky23 7y ago
  The "cap" is imposed by bankruptcy. In some of the examples cited, the beneficial owners will get to keep ill-gotten gains, while the company implodes. The Sacklers/Purdue is a great example. The owners picked the corporate carcass clean, shipped the money out of the jurisdiction of the US Courts, and are protected against most future claims.
deleted 7y ago
[deleted]

rahimnathwani 7y ago

"or they'd require the corporate entity - again, still a legal person - to indemnify them for any losses beyond the investment" But if the shareholders are being called on for more money, it's because the corporation has run out. And in that scenario, contractual indemnity from the corporation would be of no use, because it neither (i) provides funds to pay those who are suing, or (ii) protects the shareholders from lawsuits from third parties.

baryphonic 7y ago
> But if the shareholders are being called on for more money, it's because the corporation has run out. And in that scenario, contractual indemnity from the corporation would be of no use, because it neither (i) provides funds to pay those who are suing, or (ii) protects the shareholders from lawsuits from third parties. The definition of indemnity is protection from lawsuits filed by third parties. This is in fact why you have insurance. Person A sues person B (an investor in C) for something corporation C did. Person B produces the indemnity agreement between himself and C, and the court throws out the suit. And worthless judgments happen all the time. A party's inability to pay does not dissolve that party's agreements to indemnify some other party, or expose them to liability. And, besides, it would likely never get to this point anyway, unless this proposal also involves abolishing corporate bankruptcy.
- RHSeeger 7y ago
  > The definition of indemnity is protection from lawsuits filed by third parties. This is in fact why you have insurance. Person A sues person B (an investor in C) for something corporation C did. Person B produces the indemnity agreement between himself and C, and the court throws out the suit. This sounds like it's missing something. Why wouldn't company B pay company D, a small LLC with 0 assets, to indemnify it against everything it does, period. There has to be a case where, in your scenario, C can't cover the issue and B is on the hook, rather than the case just being "thrown out".
  - baryphonic 7y ago

Spooky23 7y ago

The concept is fine and makes sense, but it's been allowed to run amok and we're seeing blowback as a result. Insurance would probably be a transformational force, as business structures vulnerable to fraud wouldn't be insurable. Another obvious problem has been allowing professionals to transform from partnership structures to corporate structures. I would argue that insulating attorneys, accountants, and investment bankers from risk hasn't been a net positive for society.

Enginerrrd 7y ago
This depends on the state. In CA, professionals (operating a business under a licensure) automatically carry personal liability.

marnett 7y ago

> [...] we'd probably see even more of a culture of haves vs have nots in the investment world. There are no have nots in the investment world. The investment world, intuitively, is made up of have and have mores.

davidw 7y ago
In Italy, it used to be that you'd have to sink 10,000 euros, approximately, of capital into the equivalent of an LLC to create it. Otherwise, you could create an unlimited liability type partnership or something similar. Company formation was for the wealthy.
- marnett 7y ago
  Having, gaining, and increasing investment builds wealth. My largest point is projecting a binary grouping like "have" and "have nots", which is typically used to delineate the poor and the not-poor is disingenuous. The poor (have-nots) are not even in the arena. A majority of people in the world today do not have and will not have any investments of any kind ever; those are the have-nots. A more honest statement would be that the wealthiest investors would gain more power over less wealthy investors; however, that is already the case, the wealthiest non-institutional investors are free to create their own hedge funds, an extraordinary overhead - but one some take on, to gain a leg up on the little (rich) guy.
Arnt 7y ago
The have-nots are people who buy a few shares in an index fund. That doesn't require significant time or thought, so you can do it even if all you can spare is €1k and very little time.
- leetcrew 7y ago
  as someone with a tech job, I don't consider myself a "have-not" but I basically just buy index funds with whatever surplus income I have every few months. if my losses weren't limited to the cost basis of my shares, it would basically be too risky for me to invest at all. this would drastically change my retirement prospects.

closeparen 7y ago

You might see some behavioral change from the controls that underwriters would make businesses implement. Often it's the insurance industry driving security engineering, fire protection, safety protocols, etc. On the other hand, shareholders have about the same incentives and there is already corporate governance.

baryphonic 7y ago
I doubt we'd see much at all of a difference, since large (and even most small) businesses are already insured against losses subject to underwriter enforcement of actuarial policy. If we take the Deepwater Horizon oil spill from 2010, certainly one of the largest potential liabilities we've seen, BP's liability was capped at $75M.[1] BP ultimately waived its liability as a condition of settling with affected parties, but I think I'm justified in thinking this arrangement was just a particularly expensive PR cost. Insurance providers looked at BP's minuscule liability and were happy to sign the papers. I'm guessing the underwriters had only minimal conditions for the insurance policy. In a world where BP's liabilities were uncapped, I'm guessing the insurance underwriters (and ultimately actuaries) would have taken a much closer look at BP's operations on the oil rig. If someone wants to propose lifting statutory caps on liability, or even creating liability for e.g. sea level rise, I'd be fully in favor. That solution is like a scalpel rather than a machete (such as revoking limited liability for corporate entities). [1] https://www.nytimes.com/2010/05/02/us/02liability.html https://www.nytimes.com/2010/05/02/us/02liability.html

jyrkesh 7y ago

You can't really insure against going to jail. As others have said, I think she was off the mark with regards to calling out "shareholders" vs. "managers" / "those actually responsible for making the criminal decisions", but if you made the call and gave orders to negligently cut your safety standards, and then your oil company has a spill, you should go to jail.

baryphonic 7y ago
Are you interpreting this op-ed to say that investors who have no active hand in the operations of a business should have criminal liability for any actions people in the corporation take? I discounted that possibility out of hand since it seems patently absurd when I think about it a bit more.
- unishark 7y ago
  Some seem to be arguing for that here. It would obviously go against the principle of mens rea. Limited liability doesn't protect anyone from criminal charges anyway.
- dkarras 7y ago
  I don't have a clear position here, but why not? Shareholders can do their due diligence after all. If you are not directly involved in the decision making that caused suffering to occur then you perhaps incur monetary losses (either through insuring yourself or paying fines). This will of course, change the risk equation. Previously potentially profitable investments suddenly become non-viable because when you factor in insurance costs / possible fines, you can think more than once about funding endeavors by people which might be crooks. If you were directly responsible for the decision making that caused predictable suffering, you can be criminally liable. You can go to jail. What is the problem with that?

gamblor956 7y ago

Limited liability is not indemnity. Indemnity means that one party has to cover the other party's losses--in other words, pretty much the exact opposite of limited liability for the covering party. Limited liability means that a party is not responsible for their business' debts beyond their investment in the business. Frequently, this means that no one is responsible for the businesses' debts if it fails. See for example, most environmental cleanup litigation or asbestos litigation.

baryphonic 7y ago
> [...] Frequently, this means that no one is responsible for the businesses' debts if it fails. See for example, most environmental cleanup litigation or asbestos litigation. This is incorrect. A business that has legal personhood (i.e. a corporate entity) is still responsible for its own debts if it fails (i.e. it goes into bankruptcy and is fully liquidated). Just like any other person. By way of analogy, imagine a (natural) person's parents pass away deep in debt, and this person is not party to the parents' debts. In this case, the person may lose any potential inheritance, but the creditors may not go after the person's own assets in order to satisfy the parents' debts. Any assets belonging to the parents' estates may be liquidated to satisfy any outstanding creditors unless and until all of the debt is recovered. Businesses in receivership are treated in substantially similar ways. Therefore, _someone_ does indeed pay: the business itself. > Limited liability is not indemnity. > > Indemnity means that one party has to cover the other party's losses--in other words, pretty much the exact opposite of limited liability for the covering party. I never meant to argue that limited liability was identical to indemnity, but they are practically similar. Because a corporation is a legal person (again, merely meaning that it can enter into agreements, sue and be sued, and thus can acquire or dispose of property), limitation of liability is equivalent in effect to the corporation itself indemnifying any investors from having to cover any costs that are incident to the corporation's operations exceeding the investors' contributions. Perhaps the law could be structured in such a way that investors would retain some of the firm's liability exceeding their investments. This might be set up as some sort of bond held in escrow that an investor must post before investing, or maybe would involve the law authorizing creditors to go after investors up to some percentage of that person's share in equity in the event of collapse (this would almost certainly lead to large numbers of personal bankruptcies). My whole point was originally that there are already legal tools - like indemnity and insurance - that would preserve the aspects of limited liability. However, these would not be distributed in an equitable way, instead being most available for the wealthiest investors and the largest corporations, and inaccessible to ordinary people or entrepreneurs. In practice, we'd still have limited liability, but a more unequal one with higher lawyer fees.

alimw 7y ago

Pointing out that the currently default structure could be replicated by other means currently available is no argument for keeping it the default. It is not in fact some God-given design to which all paths must inevitably converge. Clearly the author is proposing that it be discouraged one way and another over a period of time; your characterisation of that as an impossible task is backed up only by speculation.