A Control-Based Approach to Shareholder Liability

Nina A. Mendelson

University of Michigan Law School

Columbia Law Review, Vol. 102, 2002

Some commentators defend limited shareholder liability for torts and statutory violations as efficient, even though it permits corporations to externalize the costs of risky activity and encourages overinvestment in such activity. Others propose its replacement with pro rata unlimited shareholder liability for corporate torts. Both approaches, however, fail fully to account for qualitative differences among shareholders. Control shareholders, in particular, may have lower information costs, greater influence over managerial decisionmaking, and greater ability to benefit from corporate activity.

The paper develops a control-based approach to shareholder liability. It first explores several ways in which differences among shareholders affect the efficiency of shareholder liability rules. For example, a control shareholder can more easily curb managerial risk-aversion and consequently, the presence of such a shareholder will prompt a company to externalize more costs. Further, because a control shareholder can obtain special benefits from corporate activity, the imposition of pro rata liability for tort judgments exceeding corporate assets likely will not fully deter overinvestment in risky activities.

The paper then proposes the concept of a control-based shareholder liability regime, which would hold shareholders with a capacity to control corporate activity fully responsible for corporate torts and statutory violations. When compared with the limited liability and pro rata liability regimes, a control-based liability regime is most likely to compel corporations to internalize their costs and to ensure compensation for injured corporate tort plaintiffs. The regime is not without disadvantages. For example, it could overdeter some socially beneficial activities for which insurance is unavailable. Definitively resolving the relative size of such effects requires further empirical investigation of issues such as the significance of litigation and information costs and the value attributable to corporate control. Nonetheless, because a control-based liability regime more explicitly addresses shareholder differences and appears most likely to address limited liability's moral hazard, the paper concludes that such a regime offers a promising alternative.

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Date posted: June 7, 2001  

Suggested Citation

Mendelson, Nina A., A Control-Based Approach to Shareholder Liability. Columbia Law Review, Vol. 102, 2002. Available at SSRN: http://ssrn.com/abstract=272454

Contact Information

Nina Mendelson (Contact Author)
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
734-936-5071 (Phone)
734-763-9375 (Fax)
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