Document Type
Article
Publication Date
2002
Abstract
Some commentators defend limited shareholder liability for torts and statutory violations as efficient, even though it encourages corporations to overinvest in and to externalize the costs of risky activity. Others propose pro rata unlimited shareholder liability for corporate torts. Both approaches, however, fail to account fully for qualitative differences among shareholders. Controlling shareholders, in particular, may have lower information costs, greater influence over managerial decisionmaking, and greater ability to benefit from corporate activity. This Article develops a control-based approach to shareholder liability. It first explores several differences among shareholders. For example, a controlling shareholder can more easily curb managerial risk aversion and consequently will likely prompt a company to externalize more costs. Further, because a controlling shareholder can obtain special benefits from corporate activity, imposing pro rata shareholder liability likely will not fully deter overinvestment in risky activities. This Article then proposes to hold shareholders with a capacity to control corporate activity fully responsible for corporate torts and statutory violations. Compared with the limited liability and pro rata liability regimes, a control-based liability regime is the most likely to compel corporations to internalize their costs and to ensure that injured tort plaintiffs are compensated. However, the regime could potentially overdeter some socially beneficial activities if insurance is unavailable. While definitively resolving the size of such effects requires further empirical investigation, a control-based liability regime more explicitly addresses shareholder differences and appears most likely to address limited liability's moral hazard. This Article accordingly concludes that such a regime offers a promising alternative.
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Recommended Citation
Mendelson, Nina A. "A Control-Based Approach to Shareholder Liability for Corporate Torts." Colum. L. Rev. 102, no. 5 (2002): 1203-303.