Are All Risks Created Equal? Rethinking The Distinction Between Legal and Business Risk in Corporate Law

46 Pages Posted: 9 Feb 2022 Last revised: 25 Feb 2022

See all articles by Adi Libson

Adi Libson

Bar-Ilan University - Faculty of Law; Van-Leer Institute

Gideon Parchomovsky

Hebrew University of Jerusalem - Faculty of Law; University of Pennsylvania Carey Law School

Date Written: February 11, 2021

Abstract

Should corporate legal risk be treated similarly to corporate business risks? Currently, the law draws a clear-cut distinction between the two sources of risk, permitting the latter type of risk and banning the former. As a result, fiduciaries are shielded from personal liability in the case of business risk and are entirely exposed to civil and criminal liability that arises from legal risk-taking. As corporate law theorists have underscored, the differential treatment of business and legal risk is highly problematic from the perspective of firms and shareholders. To begin with, legal risk cannot be completely averted or eliminated. More importantly, decisions involving negligible levels of legal risk might yield significant profits for firms. Thus, the outright ban on legal risk-taking harms shareholders, who would have favored a more nuanced regime to legal risk.

Keywords: Corporate Governance, Compliance, Business Judgement Rule, Legal Risk, Business Risk,

JEL Classification: K2, K40, K41, M12, M14

Suggested Citation

Libson, Adi and Parchomovsky, Gideon, Are All Risks Created Equal? Rethinking The Distinction Between Legal and Business Risk in Corporate Law (February 11, 2021). Boston University Law Review, forthcoming, Vol. 102, 2022, U of Penn, Inst for Law & Econ Research Paper No. 22-10, Available at SSRN: https://ssrn.com/abstract=3961415 or http://dx.doi.org/10.2139/ssrn.3961415

Adi Libson (Contact Author)

Bar-Ilan University - Faculty of Law ( email )

Faculty of Law
Ramat Gan, 52900
Israel
97225631156 (Phone)

Van-Leer Institute ( email )

43 Jabotinsky Street
POB 4070
Jerusalem, 91040
Israel
9725631156 (Phone)

Gideon Parchomovsky

Hebrew University of Jerusalem - Faculty of Law ( email )

Mount Scopus
Mount Scopus, IL 91905
Israel

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-1603 (Phone)

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