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Toward Unlimited Shareholder Liability for Corporate Torts

Henry Hansmann and Reinier Kraakman
The Yale Law Journal
Vol. 100, No. 7 (May, 1991), pp. 1879-1934
DOI: 10.2307/796812
Stable URL: http://www.jstor.org/stable/796812
Page Count: 56
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Toward Unlimited Shareholder Liability for Corporate Torts
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Abstract

In this Article, Professors Hansmann and Kraakman present a comprehensive case for imposing pro rata liability on shareholders for tort damages that exceed the value of a corporation's net assets. Unlimited liability, they argue, would mitigate the current regime's incentives to overinvest in hazardous industries and to underinvest in precautions. Contrary to the conventional wisdom, a well-crafted rule of unlimited liability could be imposed on both closely-held and publicly-traded corporations without inefficiently impairing capital formation. Rather, the most serious objections to unlimited liability are the difficulty of administering the rule across international jurisdictions, the incentive it would create to disaggregate industrial ownership, and the opportunity it might afford for irresponsible deployment of liability rules. None of these objections, however, seem sufficiently strong to outweigh the advantages of unlimited liability. The authors conclude that unlimited liability is also superior to alternative reforms such as liberalized veilpiercing, expanded officer and director liability, and requirements for minimal capitalization or insurance.

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