An Economic Analysis of Limited Shareholder Liability in Contractual Claims

70 Pages Posted: 11 Sep 2014 Last revised: 10 Oct 2014

See all articles by Thomas K. Cheng

Thomas K. Cheng

The University of Hong Kong - Faculty of Law

Date Written: September 10, 2014

Abstract

This Article evaluates the economic basis for limited liability in contractual claims and proposes the introduction of unlimited liability for such claims against closely held corporations. It argues that the existing justifications for limited liability are unconvincing, and that unlimited liability is an economically more efficient rule for these corporations in light of savings in monitoring costs and more efficient allocation of risks. It rejects the frequently made argument that limited liability is justified in contractual claims because the contractual counterparty had a prior opportunity to negotiate for modifications. This argument demonstrates a fundamental misunderstanding of the nature of the bargaining process between a corporation and its various groups of contractual creditors, many of which are simply not in a position to negotiate for modifications to the default rule. It further examines some of the implementation problems for unlimited liability and suggests possible solutions for them.

Keywords: Limited liability, economic analysis, piercing of corporate veil

Suggested Citation

Cheng, Thomas K., An Economic Analysis of Limited Shareholder Liability in Contractual Claims (September 10, 2014). Berkeley Business Law Journal, Vol. 11, No. 1, 2014, University of Hong Kong Faculty of Law Research Paper No. 2014/033, Available at SSRN: https://ssrn.com/abstract=2494157

Thomas K. Cheng (Contact Author)

The University of Hong Kong - Faculty of Law ( email )

Pokfulam Road
Hong Kong, Hong Kong
China

HOME PAGE: http://hub.hku.hk/rp/rp01242

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