Shareholder Liability for Corporate Torts: A Historical Perspective

Abstract:     
From toxic torts to poison pills, no corporate undertaking is unaffected by the workings of one of corporate law's bedrock principles: limited liability. But in the past forty years, critics of the doctrine's application to corporate torts have argued forcefully that limited liability creates negative externalities, encouraging harmful (and sometimes tortious) corporate behavior. Grotesque accidents, mass torts, environmental abuses, accounting frauds, and other instances of corporate wrongdoing sparked the debate, and each new scandal breathes wind into its embers. Two of the most prominent critics premise their case for unlimited liability on the claim that, historically, the doctrine was meant to protect shareholders from corporate contract liability and claims brought by voluntary creditors, but not from tort liability and involuntary creditors. Believing that the doctrine has little normative or historical justification, several critics have suggested reforms aimed at eliminating limited liability in the case of corporate torts.

This Note questions that historical premise and supplies its own historical narrative to explain the origin of the rule. This Note explains how limited liability's application to corporate torts finds its origins not in the complacent or confounding application of contract principles, but instead in attempts by judges to distinguish contract and tort liability. In so doing, judges conferred benefits upon contract claimants that were denied to tort claimants. This Note argues that the rule stems from discrimination, not equivocation. In developing a new historical narrative, the Note aims to challenge the orthodox assumptions underlying the consensus position in the larger normative debate.

Number of Pages in PDF File: 26

Keywords: limited liability, shareholder liability, history, torts

JEL Classification: K13, K22

Accepted Paper Series