Dialogue of the Damned: Corporate Limited Liability (again)
A respectable amount of my time today (yesterday, actually, but I want to say “today” because I haven’t slept yet) was taken up by a discussion of corporate limited liability with Stephan Kinsella. A stray mention of the topic in blog comments set us off on that tangent via e-mail. This blog post is my effort to edit those emails into a coherent dialogue that can be referred to when discussing this topic in the future.
Kinsella: I just think arguments against “the corporation” based on the idea of limited liability are confused and wrongheaded.
Spangler: Only because you insist on conflating contractually limited liability (which left-Rothbardians don’t oppose) with limited tort liability granted by the state incorporation charters you claim to oppose.
Kinsella: I am not conflating them. It’s the other way around: when you guys oppose corporations based on their limited liability features, your arguments would apply equally to a free market version of it. That’s why they are flawed.
Spangler: No, I would have no objection to a joint stock company formed on the freed market with no statist grant of limited tort liability. You might be confusing my position with someone else’s. I don’t know.
I will review my position on this matter below to make an accurate critique more convenient for you.
Tort liability limitation can’t be accomplished contractually. Said liability can be contractually distributed among contracting parties ahead of time prior to a tort being brought against them as a group (that’s what liability insurance does, after all). You can NOT, though, contractually limit the rights (such as the right to pursue compensation for tortious damages) of people who are NOT parties to your contracts. I could, for example, write contracts all day specifying what you supposedly owe me and it wouldn’t do me any good if you never sign them. You can’t contractually limit the right of others to pursue compensation for tortious damages because that right is not yours to bargain away.
The corporate form is illegitimate because it depends on state granted tort liability [limitation] that is itself illegitimate. We know this because even the state recognizes business forms that don’t possess limited tort liability. Owners in partnerships and sole proprietorships face FULL tort liability that corporate stockholders are shielded from BY DEFINITION.
You may be aware that your own state of Texas recognizes and charters joint stock companies without granting them limited liability. I have no objections to Texas JSCs. They’re seldom used precisely because the unjust state grant of privilege in a grant of limited tort liability is valuable.
Kinsella: [Edited: rephrased for brevity and clarity] Most of what you’ve said is elementary and boring. My point is that shareholders usually should not be vicariously responsible in the first place for employee torts. When did I say you objected to joint stock companies?
Spangler: You said, Stephan that “…your arguments would apply equally to a free market version of it”.
My position is that your statement is inaccurate because THERE IS NO free market version of “it” where “it” is the statist privilege of limiting someone’s right to pursue compensation for tortious damages.
Possession of that privilege, AS A MATTER OF DEFINITION, distinguishes corporations from JSCs, general partnerships and sole proprietorships.
With regard to your statement that shareholders should not be able to be sued for employee torts, I have to ask…
First, do you extend that as well to employee torts for employees of general partnerships and sole proprietorships?
Second, if you DO, I would have to ask if you don’t see that as a rather extraordinary claim and wonder if you’d like to elaborate on it a bit.
Third, if you DO NOT, I’d have to ask why.
Fourth, how exactly do you propose to systematically disallow suits against people in a non-monopolized court system? The entire premise of our theory of law is that people with disputes will [tend to] seek arbitration rather than going to war. If you somehow arbitrarily disallow arbitration from even occuring between certain categories of disputants with real disputes, do you not see this as potentially unwise?
Kinsella: What I meant is that the typical criticism of limited liability is NOT restricted to its being granted by the state. It’s assumed that the shareholders should be liable in the first place. Why should they be?
[first question] — Well, I am not sure. I don’t think much good work has been done on this from a sound libertarian perspective. It seems to me that the first thing we know is the tortfeasor is liable, and he alone, unless we have sound libertarian grounds to attribute vicarious responsibilty to someone else. I am not even sure I agree with respondeat superior. I think the burden is on he who argues that a third person is responsible for the torts of another. You have to show how and why, in each case, whether it be managers, co-workers, vendors, stakeholders, creditors, customers, directors, investors, or shareholders.
[second question] — Why is it extraordinary that I do not automatically accept the state doctrine of respondeat superior and vicarious responsibiltiy?
[third question] — I’ve adumbrated on this many times. I wrote a whole view of my frameowrk of causation and responsibility, which is how I would start. But to start we need a sound understanding of rihgts, causation, and the way corporate an business law works.
[fourth question] — I am simply saying that if A sues C for a tort committed by B, A will need to show why C is vicariously responsbile for B’s tort. If he can’t, then he can only sue B. I’m contending that A won’t be able to prevail if he sues C, in most cases, if C didn’t commit the harm.
Spangler: As near as I can determine, when asking about whether or not shareholders ought to be liable for employee torts, you could ONLY say they ought not if you succeed in defending a claim that…
1) Firms are not property
-or-
2) We are not liable for damages caused by our property
You appear to be asserting that de facto limitation of tort liability could be achieved by means of consensus in the arbitration industry to never hold business owners liable for employee-committed torts.
Given that the doctrine of respondeat superior is not mere statist legislation but has relatively deep roots in the common law tradition, I find this argument lacking. I reserve the right to change my mind if you suddenly get a whole lot more convincing, though.
Kinsella: Property does not cause damage. People cause damage.
Spangler: Pets are property. If my dog bites you, do you sue me or my dog?
Kinsella: Let’s think of a general rule shall we, instead of trying to find intuitive common law rules you like and trying to inductively piece them together? The dog example is irrelevant since it has will and is not inanimate.
Spangler: The misbehaving dog analogy is relevant precisely because the dog has a
degree of agency, as do misbehaving managers in a firm that the owners don’t exercise adequate oversight over.
Kinsella: Ha ha! That’s kind of paternalistic, to assume a manager is like a dog owner. Hmm, wonder why no one ever sues the manager for torts committed by their doglike underlings?
Spangler: No, the stockholders collectively are like the dog owner. The manager is like the dog.
Kinsella: But why hold the shareholders responsible for torts of company management? Shareholders are passive after all.
Spangler: Why wouldn’t passivity with regard to oversight of your property that then results in damages to innocent others not be considered negligence?
Kinsella: Why do you call it their property? Just because the state classifies them this way? If I own shares in Wal-Mart, can I use one of their trucks or go into HQ without permission?
Spangler: I believe you’ve recently claimed that Kevin Carson’s assertion that corporations are essentially unowned property is “hogwash”? Which is it? Do shareholders own the company or not?
Kinsella: They have some rights of control. Others have other parts. It’s distributed and complex. Sorry. But of course it’s not unowned.
Spangler: Within the narrow confines of the libertarian non-aggression principle, I’m okay with complexities of contractually delegated control. That’s not what I’m talking about.
The company is property.
It is not unowned, as you acknowledge.
It has owners.
Those owners are shareholders.
Owners of property are responsible for their property.
Negligence by property owners is always legitimately actionable.
Restraint of such action in the form of grants of limited tort liability are statist privilege.
Contrasting the complexities of implementing collective control with the individual control of a single owner (as you have attempted to do) is not relevant to that point.
Kinsella: The company is not really property. The various things “it” owns are property.
You say that the owners of a company are its shareholders, but Ownership is the right to control. Who has the right to control FedEx’s fleet of trucks? Is it the shareholders? The directors? The managers? Drivers? It’s distributed.
You contend that Owners of property are responsible for their property, but that is merely an assertion on your part. Furthermore, use of A’s property by B to commit a tort is not necessarily “negligence” on A’s part.
Don’t you see how many assumptions your whole chain of reasoning is built on? You want to resort to what you take are a few easy, incontrovertible cases, even though you don’t have a coherent libertarian theory. WE need one. Until then, your case is not proven.
The framework I would recommend approaching this with is my piece on Causation and Responsibility with Tinsley. I think it’s a messed up area of law — messed up by statist doctrines and assumptions; we have to carefully rejuvenate and restore it.
=====
And there you have it. I find Kinsella unconvincing, but perhaps I’m just intellectually stunted. I have promised to give consideration to his work on causation, but I am (ironically) perhaps more “conservative” in my reliance on common law as a time-honored set of heuristics that Kinsella seems entirely to cavalier about tossing aside in my opinion. I am reminded of Proudhons remarks on the anarchist as conservative.
You can find Stephan Kinsella’s related blog post here at this link.
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Kinsella:
That was posted by Jeremy, not me…You seem to be attributing that quote to me for some reason…
However, allow me to make a rather obvious observation. The participants in this thread, all more or less fairly sophisticated when it comes to libertarian theory, all more or less sympathetic to some extent to the insights of the likes of Hayek and Rotthbard, nevertheless can’t even freakin come to a consensus, much less agree in principle to the nature or functioning of an entity denoted as a “corporation” in a stateless economy. That in and of itself should be illuminating. The price of anarchy is the coordination problem. The likes of Kinsella can dismiss coordination problems by making appeals to the need for a comprehensive, Apodictic formalization of Libertarian Justice, but I somehow doubt the 6 billion individuals on this planet will uniformly consent to whatever libertarian legal formalism Kinsella eventually ascribes to or endorses. And where there is no coordination, then it’s inevitable there will be fighting…
quasibill: “As for Kinsella, I think the real dispute here is even more fundamental than we realize. Kinsella does not believe the concept of a ruling class is important in fighting the state.”
What? Dude, my interests are in things like libertarian rights, legal theory. I don’t claim to be a some master ninja tactician expert. I do try to separate truth and substance, from strategical, rhetorical, tactical, activist concerns–that is, I don’t confuse a proposals’ popularity, appeal, or ability to persuade with its soundness.
As for what “concepts” are most “important” in “fighting the state”–I find such dorm-room bull session talk to be … unappealing. Sure, we need to identify our enemies–sure, the state is a ruler. As far as I can tell, however, the bad guys have won, and will continue to. I like fighting on my self-chosen side of righteousness and goodness, even though we will continue to lose. If you think trotting out another strategy or polishing up another argument will finally do the state in–have it it, good sir, with my blessing.
To re-state the point I made in my last comment, Kinsella sets preconditions that essentially assume the point he intends to make. Rights of enterprise control and potential liability are both results of “ownership”. By arbitrarily accepting the reality of shareholder rights of enterprise control and arbitrarily disregarding the ownership those same rights of enterprise control result from in the first place, then he himself is removing potential liability from consideration through his own God-like fiat. He acknowledges the rights of enterprise control, but ignores the reason for them, ownership, and thereby ignores all other results of ownership he finds inconvenient. The immaculately conceived shareholders of Kinsella-world don’t have to be owners in order to control the enterprise and don’t have to face potential liability BECAUSE HE (or the state) SAYS SO.
@ Brad
In my view, the basis of shareholders not being properly liable is that they do not control the enterprise. If the power to get a vote once a year on who will make up the board of directors, and nothing else, is sufficient to establish control, then voters are in control of the US government.
Less: good point.
Brad: “Kinsella sets preconditions that essentially assume the point he intends to make. Rights of enterprise control and potential liability are both results of “ownership”. By arbitrarily accepting the reality of shareholder rights of enterprise control and arbitrarily disregarding the ownership those same rights of enterprise control result from in the first place, then he himself is removing potential liability from consideration through his own God-like fiat. He acknowledges the rights of enterprise control, but ignores the reason for them, ownership, and thereby ignores all other results of ownership he finds inconvenient. The immaculately conceived shareholders of Kinsella-world don’t have to be owners in order to control the enterprise and don’t have to face potential liability BECAUSE HE (or the state) SAYS SO.”
I think you continue to miss the point. You can classify people as owners as you find this classificaiton useful. but you guys seem to try to *first* find out whether someone ontologically “is” an owner “or not”–and then, you deduce responsibility from this. I think this is too binary, too mechanistic, too un-nuanced, and too reliant on artificial, mostly statist, taxonomies and classifications. I say: let’s first ask: why should A be liable for B’s torts? Prima facie, he should not (A is shareholder; B is tortfeasor-employee). Unless we can find some extra, good reason to attribute B’s liability to A. I can think of several possible grounds–if A had conspired with B; or coerced B; or commanded B as part of a military institution. But I don’t see that any of these things obtains, merely on the grounds that A is a shareholder. Saying, “but he’s an owner” just is an attempt to short-circuit this reasoning. Show me exactly what role A played in causing or being responsible for B’s tort–by A’s nature as shareholder–that is, his right to receive some profit, his possible investment of some money, his occasional right to vote for directors. Which of these capacities or statuses makes him responsible?
Kinsella,
And from my viewpoint, you continue (for over 2 years!) to miss the point. The shareholders certainly are owners of the capital they initially invested into the stock certificate. Whether or not you want to actually respond to what is being argued *here*, as opposed to what you’ve heard others, especially your evil leftist strawmen, once argue somewhere that sounds Marxist, the argument here is that they are responsible for that decision. I know that you don’t like people to actually be responsible for their actions, so long as it allows their Galtian selfs to get rich, but I do.
Again (for the 5th?6th time?), you’ve already conceded that a person could be liable for loaning their car to an obviously intoxicated person. Similarly, a shareholder who makes no effort whatsoever to determine whether his investment is being used properly, or takes no effort to curtail foreseeable negligence on the part of the person they are giving their property to, can be found to be liable *for that decision*. Again (it really is like ramming into a brick wall with you, because you constantly try to have the debate you want to have, instead of the debate that is actually going on, but I’ll try one more time), it is eminently foreseeable that an OTR rig driver will generate a negligence claim at some point in the course of his duties. As such, anyone hiring an OTR driver should be expected to take precautions against such liability - they shouldn’t be shocked that they, as principal, are found liable for the negligence of their agent in this endeavor.
Similarly, it is eminently foreseeable that directors and managers will try to externalize costs in an effort to raise shareholder value. To the extent that limited liability positive law shields shareholders from this liability (and it does, as I have told you repeatedly and cited for you at least once), it is a state granted privilege. The fact that *after* they have made the delegation of their property they have no further control is utterly irrelevant to the point I have made repeatedly for over 2 years. I’ll repeat it again, just for you to cut and paste out of context to a venue where comments are not allowed: YOUR ARGUMENT THAT SHAREHOLDERS HAVE NO CONTROL *AFTER* THEY HAVE INVESTED IS IRRELEVANT HERE. THEY ARE RESPONSIBLE FOR THEIR DECISION TO INVEST WITH NO FURTHER CONTROL IN THE FIRST PLACE.
Going back to the car example, if the lender sets up a business by hiring an aggressive young manager to act as his manager, and says “I relinquish all control of my inventory to you, with no further control by me possible, just pay me my profits” and the young manager subsequently lends the vehicle to an obviously intoxicated person, I would argue that liability accrues to the original owner, because his decision in delegating his property was careless, if not reckless.
No one ever (except for certain company plans, which, of course, would be a possible exception here, depending on circumstances) forces anyone to invest in anything. That you choose to invest is your decision, for which you can be liable for results that foreseeably flow from it. No amount of changing the subject can change that point, and as far as I can tell, you have never once (in the many, many exchanges spanning two years) even attempted to refute this argument. Until you at least address the real argument, I consider the exchange over.
somewhatbill:
“And from my viewpoint, you continue (for over 2 years!) to miss the point.”
Pretty impressive, no?
“The shareholders certainly are owners of the capital they initially invested into the stock certificate.”
This kind of make-it-up-as-you-go-along terminology is telling. What in the world are you talking about? In any event, so what? You are question-begging.
” Whether or not you want to actually respond to what is being argued *here*, as opposed to what you’ve heard others, especially your evil leftist strawmen, once argue somewhere that sounds Marxist, the argument here is that they are responsible for that decision. I know that you don’t like people to actually be responsible for their actions, so long as it allows their Galtian selfs to get rich, but I do.:
I have no idea what you are jabbering about, but sure, people ought to be held responsible for their actions.
“Again (for the 5th?6th time?), you’ve already conceded that a person could be liable for loaning their car to an obviously intoxicated person.”
Really? Do tell, where did I say this, and now?
“Similarly, a shareholder who makes no effort whatsoever to determine whether his investment is being used properly, or takes no effort to curtail foreseeable negligence on the part of the person they are giving their property to, can be found to be liable *for that decision*.”
But why?
“Again (it really is like ramming into a brick wall with you, because you constantly try to have the debate you want to have, instead of the debate that is actually going on, but I’ll try one more time), it is eminently foreseeable”
foreseeable! ha! are you a law student?
“that an OTR rig driver will generate a negligence claim at some point in the course of his duties.”
It’s alos foreseeable that if you buy a Hershey bar, you are contributing funds to an entity that will someday have an employee that causes someone damage via tort. Are you responsible?
“As such, anyone hiring an OTR driver should be expected to take precautions against such liability”
Are the shareholders hiring the rig driver? Say–do you really know what a shareholder is?
” - they shouldn’t be shocked that they, as principal, are found liable for the negligence of their agent in this endeavor.”
Yes, and if you go to gaol for using marihuana, you should not be shocked. So?
“Similarly, it is eminently foreseeable that directors and managers will try to externalize costs in an effort to raise shareholder value.”
The wealth-maximizing utilitarians called, they want their sellout, unprincipled reasoning back.
“To the extent that limited liability positive law shields shareholders from this liability (and it does, as I have told you repeatedly and cited for you at least once), it is a state granted privilege. The fact that *after* they have made the delegation of their property they have no further control is utterly irrelevant to the point I have made repeatedly for over 2 years. I’ll repeat it again, just for you to cut and paste out of context to a venue where comments are not allowed: YOUR ARGUMENT THAT SHAREHOLDERS HAVE NO CONTROL *AFTER* THEY HAVE INVESTED IS IRRELEVANT HERE. THEY ARE RESPONSIBLE FOR THEIR DECISION TO INVEST WITH NO FURTHER CONTROL IN THE FIRST PLACE.”
But not all shareholders are investors. So what in the world are you talking about? What status or action of a shareholder is it that you say imputes liability to him? Is it having given money? but not all do; and some customers and lenders give more. Is it the right to vote for directors? What?
“Until you at least address the real argument, I consider the exchange over.”
I hereby address the real argument. Now what?
Assuming this thread isn’t completely dead, here’s my two cents on these issues:
1. Supra-individual juridical persons (i.e. “entities” or “corporations” in the broadest sense) are ontologically real, not a “legal fiction,” not creatures of the state or of positive law. The positive law only appears to have created them via a usurpation (the so-called Concession Theory), and through its selective and rather arbitrary recognition of some real group-persons as legal corporations, its refusal to acknowledge other real group-persons as legal corporations (Here the state is deploying a kind of “nominalism” or bad-indidividualism often against entities that pose some threat to it and that it cannot be easily coopted or controlled by the state; e.g. Henry VIII’s dissolution of the monasteries, Chapelier’s Law, the non-recognition of the group-personhood of unions in earlier labor history), as well as its recognition of some non-real goup-persons as legal corporations (what one might call ‘paper entities’). For more on this, I would strongly recommend that aspiring libertarian-law gurus pull out there Robert Nisbet here, or better yet: Read Otto von Gierke, FW Maitland, John Neville Figgis, or GDH Cole.
2. I think Quasibill is right about how the foreseeability of tortious use of one’s money before investing can constitute sufficient control and causality to give rise to shareholder liability. however, Kinsella’s point about how (after that), one only owns a few rights in the corporation’s assets (a right to receive pro rata distributions upon the declaration of dividends and upon liquidation, a right to vote periodically on certain narrowly defined issues, etc.) does I think mean that a non-controlling shareholder who purchased his/her share(s) in the secondary market would not be liable qua shareholder even though he/she perhaps purchased the shares from someone who would be.
Araglin,
So, in the situation you described in cent #2, would the original investor *always* be liable? Or can he sell/abandon his liability?
Maybe he can’t, I don’t know. I think we’re getting closer to a conclusion, though.
MikeD,
This is somewhat off the cuff, but I would think the former:
That is, once liable for wrongfully turning over money to a corporation, one could not cut off liability for future torts of the corporation (or its agents) simply by selling one’s shares, since in doing so one would merely be putting the purchaser of those shares in a position to exercise the various rights associated with share ownership.
In a partnership situation by contrast, one could cut off one’s practical exposure to liability for potential future torts of the partnership (or its agents) by exercising a right to force a liquidation of the partnership’s assets.
Thanks,
Araglin
[...] there’s also an exchange between Stephan Kinsella and Brad Spangler here. More stuff to weigh in on – [...]