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There are many categories of people behind a "business", but you can generally classify them into three: 1. Employees (incl. management) 2. Shareholders 3. I

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.

AnthonyMouse 13y ago
> 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.
dalek_cannes 13y ago
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.
- einhverfr 13y ago
  > 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?

AnthonyMouse 13y ago

> 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.

dalek_cannes 13y ago

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.

einhverfr 13y ago
> 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?