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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Now, why does this conversation sound so familiar?
Oh, yeah - http://blog.mises.org/archives/005679.asp
Having been down this road with Kinsella several times before, I advise you take plenty of preventive aspirin; banging your head against that brick wall leads to worse hangovers than tequila.
In the interest of moving it along a little bit for you, I’d focus on this statement:
“Furthermore, use of A’s property by B to commit a tort is not necessarily “negligence” on A’s part.”
*not necessarily* means it is possible under at least some circumstances. Current limited liability says *never*. Under a free market, the question would be asked. Under current law, it cannot be. And the Georgie W. example I used in that old thread should imply lots of other examples you can use.
And force him to explain how the complicated corporate ownership structure differs from the complicated ownership structure of socialist or communist property regimes. This is the argument I didn’t make, but Carson did, that really puts the nail in Kinsella’s arguments; even if in Bizarro universe Kinsella were right on the legal standards, he’d still be arguing against Mises on the calculation problem.
Quasibill, Brad and I had a quite civil and substantive discussion. There is no call for your insult and attitud. We are all supposed to be libertarians here searching for truth and the right just principles, are we not? As a general mattter, “passive” shareholders it seems to me are generally not involved enough to be liable (as Hessen points out). If one goes beyond this and starts interefering with what is done, the law has ways to pierce the corporate veil or to hold him liable in his capacity as a manager instead of as a cshareholder or whatever. But in the end, I of course agree this should all be done privately, with no state involvement.
As for Carson putting some “nail” — that’s ridiculous. HE can’t prove some magic calculational chaos threshold that proves a given corporation is running when it ought to be in chaos. All we know is that the calculation problem gets worse as companies increase in size. this is not a criticism of the corporation form, or even of bigness in general. In fact the calculation argument works the other way around IMHO: if you guys are right, basically all businesses in America (say) above the mom and pop size (maybe them too: they are corporations, usually) are in effect “part of the state”. But if they are part of the state, we don’t have a free market, or even a real private sector–just a huge public sector with parts of it falsely labeled “private”. But the calculation argument would show that a huge public sector is in calculational chaos and could not produce a $14T GDP, for example.
On Kinsella’s post on the Mises blog, Tokyo Tom posted a few links in a comment, including one that looks particularly interesting…
From the Yale Law Journal, “Towards Unlimited Shareholder Liability for Corporate Torts” by Hansmann, H and Krackman, R (1991)
http://www.law.yale.edu/documents/pdf/Faculty/Hansmann_Toward_Unlimited_Shareholder_Liability_for_Corporate_Torts.pdf
Brad, but we have to be careful of these mainstream law professor arguments–they almost always rely on positive law assumptions.
Thank you for sharing this exchange with us, Brad. I really, really want to see where Kinsella’s coming from. I’m glad you pursued this path of arguing against limited liability.
I think, however, one has to mount a second attack on entity status itself. Kinsella wants to apply libertarian theory *presupposing* that there are interests other than human ones - this abstraction called the “corporation” that somehow has its own set of interests separate and apart from natural persons. I believe that the most powerful left libertarian argument is to attack the power of the state to grant entity status.
As long as Kinsella can talk about “it” doing something - in other words, as long as he can variously pretend the abstraction of the corporate entity is a convenience representing shareholders without physical reality and simultaneously claim it has reality and agency apart from its owners - he will be able to obfuscate the application of libertarianism to the corporate form. He will be able to claim that the burden is on *you* to prove that this entity doesn’t have the qualities that he, and the state, claim it has. The problem, essentially, is that in presupposing the corporate form, he doesn’t give us a good idea of how it blossoms from the interests and actions of actual human beings - you know, those entities that do not require the fiat declaration of the state to exist. The burden is on him to show us how the application of libertarian theory applies not only to humans, but also explains the emergence of non-human entities in a completely voluntary context.
The way forward, of course, is to completely deny that there *is* such a thing as an entity arising from sheer human will or agreement. This, to my mind, is the exact same reason we deny the legitimacy of that abstract entity called the “state” - or rather, that convenient label we give to the complex patterns of human behavior that end up effecting a monopoly on force in the real world.
Stephan, I’m sorry if I’m slightly uncivil, but -
We’ve had that *exact* same conversation two years ago. I addressed all the arguments you are putting forth to Brad *2 years ago*. Now, either you’re dishonest, or you’re stupid, to bring them up again as if they have never been addressed. I’ve read enough of your writing to know you’re not stupid. Which leaves me with dishonest, which I don’t want to believe, but I’m not sure what else to think.
As for your point about piercing the corporate veil, I refuted that point in the earlier thread. Piercing the corporate veil is not a causation question/analysis, it is a question of whether the proper corporate rituals were followed. It does nothing to answer the objection that shareholders receive a positive law privilege from current corporate law (heck, I even provided quotes from cases and citations in one of our dialogues). If a person can be liable for negligently lending (or even giving) a car to an obviously drunk person, a shareholder should be possibly liable for negligently providing capital to another (the management), and would probably be considered *reckless* if they did it while saying “I don’t want to know what you do with this, I just want 20% interest by Friday.” I’d be very comfortable arguing that such a mental state was a knowing disregard for a high level of risk, and feel pretty certain I could establish it was careless.
“if you guys are right, basically all businesses in America (say) above the mom and pop size (maybe them too: they are corporations, usually)”
Well, that’s probably overstating it, although you are right that some make that argument. I personally think that the cut-off is probably slightly higher on average, with significant deviations upward in certain capital intensive industries (my common example is steel). But yeah - retail and service probably don’t get much bigger than mom and pop in a free market, at least not sustainably bigger. As implied by the history of the U.S. at the turn of the 20th century, firms may be able to get pretty large for a short time (a decade?) in a free market, but they need the state to sustain it for longer.
“But the calculation argument would show that a huge public sector is in calculational chaos and could not produce a $14T GDP, for example”
Why not? The Soviets produced quite a bit of material goods for several generations. Since you’re using a goofball statist statistic based upon funny money calculations created by privileged banking outfits (which in itself might be the biggest centralizing force in our economy) to justify their own centralized planning of the money supply, I’m not sure what you’re actually arguing here. Clearly, we’re less centrally planned than the Soviets, so we should be able to do more for longer before the calculational chaos compounds enough to render an implosion.
On that point - have you read the financial news lately?
You’ll notice that I floated the possibility to Stephan that one of his options would be to defend the claim that business firms are not property. He eventually came around to exactly that position ["The company is not really property."] but he didn’t actually demonstrate that. In fairness to him, I was cutting things short at that point in the email exchange, sp he might have gone on to do exactly that if I had let him. In my own defense, even though Stephan was gracious enough to praise the civility of our exchange, there are stylistic qualities of his that I simply find draining.
I think my long response was captured by Brad’s spam filter for some reason. So here’s another shot:
Stephan, I’m sorry if I’m less than civil about this, but we had the exact same conversation two years ago. I addressed every argument you’re giving Brad, and you conceded almost every one of them. So, for you to trot them out again two years later is either dishonest or stupid. I don’t want to think you’re dishonest, but I know you’re not stupid, so that’s where I’m at.
As to your response here:
“f one goes beyond this and starts interefering with what is done, the law has ways to pierce the corporate veil or to hold him liable in his capacity as a manager instead of as a cshareholder or whatever.”
As I told you on the 2006 thread, this is simply not true (I even provided quotes from published cases and citations at some point). Piercing the corporate veil is *not* a causation analysis. It is a compliance with positive law rituals analysis. So this does not save your position in any form.
“basically all businesses in America (say) above the mom and pop size (maybe them too: they are corporations, usually) are in effect “part of the state””
Well, that’s overstating the case in several respects. First, none of the major personalities you are interacting with make the argument that large size necessarily equates to “part of the state.” What they do argue is that the size could not be achieved (and/or maintained) without the state. What most of us argue makes “the bagman” part of the state is if they actively lobby for the subsidies the receive.
Second, I would place the size threshold somewhere slightly above mom and pop, on the average in a free economy. However, there would be significant deviations upward based on specific industry (I personally think something like steel production would remain the work of relatively large concerns, for example) or during short time periods (say, up to a decade) based on fleeting competitive advantages. But, yes, retail and service operations would struggle to get bigger than mom and pop, due to the conditions that pertain to that market.
“But the calculation argument would show that a huge public sector is in calculational chaos and could not produce a $14T GDP, for example.”
Hah. I love when people cite to GDP as if it has some sort of meaning. I’m not sure what argument you’re trying to make by citing to a metric created by a state privileged set of banking executives to justify their centralized planning of the money supply (which banking system, BTW, gets my vote for being the single most powerful centralizing intervention into the world economy currently). But regardless, the Soviet Union managed to produce massive amounts of physical goods for several generations before the calculational problems caused an implosion. I think we can both agree that we are less centrally planned than the soviets, so wouldn’t it make sense if we could make more stuff, for a longer time, before the calculational problems resulted in an implosion? Have you read the financial news for the past 12 months?
@Quasibill — Would you consider putting together a propaganda brochure on the topic?
jeremy:
“I think, however, one has to mount a second attack on entity status itself. Kinsella wants to apply libertarian theory *presupposing* that there are interests other than human ones”
I have no idea what you are talking about. I am simply interested in respecting individual property rights, and the right of consenting adults to engage in capitalist acts. I agree with Hessen’s criticism of the entity theory of the corporation. Since it’s not an entity, it ought not to be subject to income tax, would you agree? Let’s remove this abominable double-tax penalty that the state uses to help penalize corporations. All in favor?
” - this abstraction called the “corporation” that somehow has its own set of interests separate and apart from natural persons. I believe that the most powerful left libertarian argument is to attack the power of the state to grant entity status.”
You don’t need to be left to do this: I and all anarcho-libertarians attack the power of the state to grant entity status–or to do anything for that matter.
“He will be able to claim that the burden is on *you* to prove that this entity doesn’t have the qualities that he, and the state, claim it has.”
I think you are missing the point. There are several institutions, practices, arrangements that go on in the market, despite being hampered, distorted, and regulated by the state. One of these is the corporate form of organization. You guys say it’s illegitimate per se and that it could not exist on the free market, and one of your aguments is that it has entity status, and that is has a state privilege of limited liability. Well, we agree that it shoudl not have entity status but Hessen has shown that this theory is not necessary; and limited liability is only a privilege if it removes liability that would and should exist on the market. Well, a company on the free market that makes it clear to all people it deals contractually with that all debts are limited to assets of the corporation — its shareholders would not have any liability. So removing it is not a privilege. And there is a good argument shareholders would not have vicarious liability for torts of the employees either–so again, it’s not a privilege granted by the state to remove this non-existent liability.
“The way forward, of course, is to completely deny that there *is* such a thing as an entity arising from sheer human will or agreement. This, to my mind, is the exact same reason we deny the legitimacy of that abstract entity called the “state” - or rather, that convenient label we give to the complex patterns of human behavior that end up effecting a monopoly on force in the real world.”
States and corporations “exist”, of course; it is soft-headed California thinking that says they do not. A partnership and mom and pop shop also exists–this does not imply they are separate legal personalities.
Brad Spangler:
“You’ll notice that I floated the possibility to Stephan that one of his options would be to defend the claim that business firms are not property.”
The form itself is not property. In today’s system the corporation is property because you can own shares in it. But in a free market it would not be a separate entity, but rather just a contractual nexus or way of distributing ownership of a variety of types of property and assets among a network of individuals (which include shareholders, managers, employees, officers and executives, and board members).
“He eventually came around to exactly that position ["The company is not really property."]”
Yes–all I meant by this is that the company is just a set of relations between items of property (assets, equipment, etc.) and a group of people (shareholders and others). I was simply disavowing the entity theory.
“but he didn’t actually demonstrate that. In fairness to him, I was cutting things short at that point in the email exchange, sp he might have gone on to do exactly that if I had let him. In my own defense, even though Stephan was gracious enough to praise the civility of our exchange, there are stylistic qualities of his that I simply find draining.”
Brad, we are all for liberty and human prosperity. We all see the merit of freedom and private property. The rest are details. Let’s keep in mind that we are on the same side. Sorry for being draining. I get frustrated by the slippery, ambiguous, and evasive quality of many of the leftist arguments. I prefer clear, direct, unambiguous reasoning. And sometimes I feel like I’m a one-man army; and it gets tedious to have to rebut the same old canards over and over again; and tiresome and offensive to keep being maligned as being a “paleo” or corporate shill.
quasibill:
“Stephan, I’m sorry if I’m less than civil about this, but we had the exact same conversation two years ago. I addressed every argument you’re giving Brad, and you conceded almost every one of them. So, for you to trot them out again two years later is either dishonest or stupid. I don’t want to think you’re dishonest, but I know you’re not stupid, so that’s where I’m at.”
What? What did I concede? Are you saying I have changed my position between then and now? Show me a clear example please.
“As I told you on the 2006 thread, this is simply not true (I even provided quotes from published cases and citations at some point). Piercing the corporate veil is *not* a causation analysis. It is a compliance with positive law rituals analysis. So this does not save your position in any form.”
No, I agree with you–the current law is incohernet and is based on rituals, formalism, and the entity theory. Sure. But we all oppose this too. What I disagree with is teh *basis* of your criticsim of the corporation, that lets you single it out for special scorn. See my view is I agree the state should not grant corporate status–but I think it should leave it alone and let people arrange their affairs as they want on the free market. Your view seems to be that what is wrong with the corporation is that the state grants it entity status, and that it *needs* entity status to exist; and that it’s a privilege to grant it limited liability. I agree w/ Hessen that the corporation need not rely on “entity” theory to form on a free market; and that shareholders would not have liability in the first place, so it’s not privilege to refuse to impose liability on them. The only problem with corporations is that states have monopolized this function, just as with any other number of institutions, like defense, police, justice, roads, communications, money…. the state should get out of all of them, but we libertarians do not oppose private versions of these things.
““basically all businesses in America (say) above the mom and pop size (maybe them too: they are corporations, usually) are in effect “part of the state””
“Well, that’s overstating the case in several respects. First, none of the major personalities you are interacting with make the argument that large size necessarily equates to “part of the state.” What they do argue is that the size could not be achieved (and/or maintained) without the state.”
Yes, I know. But you argue that it’s okay to BRAKE THERE WINDOZ which implies they are criminal, and if they are criminal, they are part of the criminal side of things, and thus part of or affiliated with the criminal gang known as the state. I was just poiting out that, if anything, it is YOUr argument that suffers from teh calculation problem. It seems to me that as Mises noted, the *fact that*we have a stock market; the *fact that* we have a huge amount of economic productivity in corporate america — despite the state’s interference–means that it MUST be essentially “private”, and NOT “part of the state”. Only essentially private institutions could be so productive. But this is just an offhand observation.
“What most of us argue makes “the bagman” part of the state is if they actively lobby for the subsidies the receive.”
Yes, as do unions, workers, taxpayers, drivers, citizens, etc. It’s terrible.
“Second, I would place the size threshold somewhere slightly above mom and pop, on the average in a free economy. However, there would be significant deviations upward based on specific industry (I personally think something like steel production would remain the work of relatively large concerns, for example) or during short time periods (say, up to a decade) based on fleeting competitive advantages. But, yes, retail and service operations would struggle to get bigger than mom and pop, due to the conditions that pertain to that market.”
You are wecome to this opinion; but it is just that ,and you cannot really base much significant policy conclusions on it. Your opinions appear to most libetarinas as shoddy and influenced by leftish aesthetic preferences.
““But the calculation argument would show that a huge public sector is in calculational chaos and could not produce a $14T GDP, for example.”
“Hah. I love when people cite to GDP as if it has some sort of meaning.”
Let’s not pettifog please. Use whatever measure you want. We have had a very productive economy, however you assay it; it’s why the US has been the dominant hyperpower till now. Come on.
“I’m not sure what argument you’re trying to make by citing to a metric created by a state privileged set of banking executives to justify their centralized planning of the money supply (which banking system, BTW, gets my vote for being the single most powerful centralizing intervention into the world economy currently). But regardless, the Soviet Union managed to produce massive amounts of physical goods for several generations before the calculational problems caused an implosion. I think we can both agree that we are less centrally planned than the soviets, so wouldn’t it make sense if we could make more stuff, for a longer time, before the calculational problems resulted in an implosion? Have you read the financial news for the past 12 months?”
You seem to be conceding that your argument does rest at least implicitly on the idea that our economy is not even substantially free market–that is basically a communist-socialist mess akin to Soviet Russia in the 20th century. If that is your contention–and I agree, it does seem to be implicit in your arguments–go ahead and make it explicitly, because you’ll have to do a lot of arguing to convince anyone of this. We are a heaviyl hampered market, sure, but we have a market economy (at least for now).
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I’m surprised that neither of you has mentioned Anthony Hargis’s writings on free-market business trusts. He advocates something like the Massachussetts business trust, where liability is limited by the fact that investors have no operational control. Let me quote from The Voluntaryist number 38 (link: http://www.voluntaryist.com/backissues/038.pdf), starting around the end of page 5:
“The contractual company, which Hargis favors, is based on the common law rights of the individuals establishing it… The main difference between a traditional business trust and a corporation… is that those who purchase certificates or shares in a business trust exercise no control or management rights, and obtain no voting rights. A business trust is normally operated by non-shareholding trustees for the benefit of the shareholders, whereas shareholders in a corporation elect directors, who in turn appoint managers to operate the business.
“Hargis claims that corporate shareholders enjoy limited liability by statue, whereas business trust shareholders have limited liability according to the principle that one who has no control over property or persons, cannot be held responsible for their actions.”
By analogy, if the bank loans you money to expand your business, they do not thereby become liable for any torts you incur in the operation of your business; YOU are responsible. In a business trust, the investors may be thought of as making a perpetual loan to the trustee, at an interest rate that is determined by the profitability of the enterprise. Like a bank making a business loan, the investors do not thereby become liable for any torts arising from the operation of the business — the TRUSTEE is responsible.
But note carefully: unlike the corporation, with a business trust there is always an actual, living, breathing human being who bears ultimate responsibility.
Ksvanhorn: interesting. I had not heard of this. His intuitions are good, however. But he seems to assume that *merely having the right to vote* for directors (may be) enough to impute liability to the shareholders. Why? They still don’t exericse control or management over business decisions and managent of the company, merely by voting for a director.
I wonder who appoints the directors in the business trust favored by Hargis, if the shareholders cannot?
I think it worth noting that Roderick Long remains an agnostic on this issue, considering the arguments against unlimited shareholder tort liability to be reasonable. He stated so in connection with his recent Cato Unbound article (http://www.cato-unbound.org/2008/11/25/roderick-long/free-market-firms-smaller-flatter-and-more-crowded/):
“It is unclear who owns the corporation, given that there is no identifiable group whose relationship to the corporation involves the usual characteristics of ownership such as unlimited liability (in tort). Note that I’m not claiming that shareholders ought to have unlimited liability; at any rate, I see the point of the argument that their separation from direct day-to-day control makes their exemption from liability reasonable. (I’m undecided as to whether I agree or disagree with that argument, but at any rate I don’t automatically dismiss it.)”
Since shareholders (and limited partners in a limited partnership) are forbidden from using company property or participating in management decisions, their absence of liability seems reasonable to me as well, and I do not believe it depends on statutory limits. Were I a juror in a common law case, I would find it absurd to hold a shareholder liable for actions that they had no authority to prevent and, except in the case of a director’s action, no authority even to punish. All they can do is vote on who will be the directors, and even here the average shareholder in a public corporation has as much chance of affecting the choices as a voter in a government election, nor do they have any ability whatsoever to bind the elected directors to any particular action.
Common law is filled with the use of “reasonable person” standards, and I don’t think any reasonable person would think that the owner of 100 shares of Google (or, for that matter, 3,000,000 shares, which is still under 1%) has the slightest influence over its policies and actions. Moreover, the typical shareholder didn’t even provide capital to the corporation: they paid an earlier shareholder to acquire the stock. Even a customer or creditor has done more, and is not considered liable, as far as I know, by any libertarian theory.
To be negligent, once must have shown an absence of due care. Perhaps a majority shareholder, or someone owning at least 20% of the stock, which has been determined to give significant influence over a corporation’s activities, might owe a duty of care in the selection of the directors, and then there might in some rare cases be a causal chain to hold such a large shareholder liable, but I cannot imagine a future anarchist society in which it would be considered reasonable to cripple the ability of a person to diversify their investments by holding them to an impossible standard of unlimited liability for the behavior of every activity they help finance.
@ Less re: “…I don’t think any reasonable person would think that the owner of 100 shares of Google (or, for that matter, 3,000,000 shares, which is still under 1%) has the slightest influence over its policies and actions.”
So you contend that the apparent systemic needs of large institutions outweigh notions of justice arrived at via a priori reasoning?
I’m sorry if the size of my example obscured the point, but I wanted to start with an example where it should have been crystal clear that being a shareholder didn’t give one anything remotely resembling the control one would need to assert responsibility for a tort. I’m prepared to cut the size of the company considerably, but preferred to avoid gray areas in making the pont.
I’m not at all clear why you think I’ve shown no interest in justice: I’m arguing that it is UNJUST to hold a shareholder liable for an action over which they have no effective control.
Kinsella:
RE: Your update at LRC (http://www.lewrockwell.com/blog/lewrw/archives/024335.html)
If you are offended by being called a “paleo,” then I suggest you update your own Libertarian Bio (http://www.stephankinsella.com/bio/bio2.php)
In terms of your original post (http://www.lewrockwell.com/blog/lewrw/archives/024320.html), you wrote:
“Laid-off workers occupy Chicago factory: Fired union thugs trespass on private property: time for the vandarchists to celebrate! After all, I’m sure they’re reaaal separated from their labor.”
“Vandarchists” linked to this post (http://www.lewrockwell.com/blog/lewrw/archives/022995.html) “Shoot the Looters”
You can call me a liar all you want, but I stand by what I originally posted (http://freedomdemocrats.org/node/3177)
Now regarding this thread, specifically “Corporate Limited Liability,” you haven’t addressed the most pertinent objection that was pointed out by Spangler: namely, external agents would be under no obligation to respect “Coporate Personhood.” True, agents would be free to privately contract into a “corporate person” and issue shares to investors, but that hardly imposes an obligation on everyone else to recognize the “Corporate Person” in the event of legitimate claim disputes. In cases of 3rd party arbitration, “limited liability” would become a bargaining point. That type of uncertainty therefore would have to be factored into the contractual basis of the corporate firm. In the end, firms, to assume a de facto status of a “corporation,” would probably have to purchase “limited-liability insurance” to indemnify against the risk of arbitration. Would such an “insurance market” spontaneously arise to meet whatever limited-liability demand there might be from firms. And note, private insurance companies themselves likely couldn’t be corporations, otherwise who would insure the insurers’ limited corporate liability.
To me, it’s more or less obvious that “Corporate Charters” likely depends on some condition of monopoly to be viable. From an empirical standpoint, historical cases of market type of anarchies and cases of recent government failure tend to validate the left-libertarian notion of “market anarchy” rather than pure anarcho-capitalism.
Well, Less, as I’ve argued before, you’re leaving out the first step in the process. The shareholders certainly have control over who they lend or give their money to, and under what conditions they provide the money. The easy, clear cut counter to your example is if you invest in shares of AQ, inc., who has a CEO named OBL, and which has a business plan of “waging jihad”. Once you invest, you exercise no further control of what is done with your money.
As a juror, would you expect me to say that your action in investing in AQ was reasonable?
From there, we can move down a spectrum of culpable mental states. That example can be classed as, at the least, knowingly culpable conduct. To move to reckless conduct, all we need to change in the hypo is your state of knowledge of AQ, and your desire to know. If, in fact, you take no effort to discover what you’re investing in, that could be found to be reckless decision under tort law. Do you think that describes many investors today?
Moving down the spectrum, the decision to invest reasonably requires some effort of “due diligence” (I know I’m not using it in its technical sense, hence the quotes) to discover what uses it will be put to. Lack of proper “due diligence” would then be negligence, in tort law.
Now, to a certain extent, I agree that in today’s culture, not many people feel that people should be responsible for their actions. But in most other contexts, libertarians decry this cultural artifact of statist cultural engineering. Only here, where really big money interests are at stake, do they suddenly find something to like in shirking. I certainly find that interesting…
Exactly.
Plus, I think there’s something fundamentally artificial about an arrangement where one can profit without limit, indefinitely, but there are limitations on one’s liability. This seems to short circuit a basic reciprocity in human behavior.
Exactly. This is what I mean by “entity status”: the privilege of being able to force others to deal with you on special terms.
In my article Let the Free Market Eat the Rich I talk about the large role the state plays in stabilizing large wealth aggregations and capital intensive establishments. In other words, it takes pretty massive intervention by the state to make the corporate form anything more than a massive fraud on shareholders.
Well, Less, as I’ve argued before, you’re leaving out the first step in the process. The shareholders certainly have control over who they lend or give their money to, and under what conditions they provide the money. The easy, clear cut counter to your example is if you invest in shares of AQ, inc., who has a CEO named OBL, and which has a business plan of “waging jihad”. Once you invest, you exercise no further control of what is done with your money.
As a juror, would you expect me to say that your action in investing in AQ was reasonable?
From there, we can move down a spectrum of culpable mental states. That example can be classed as, at the least, knowingly culpable conduct. To move to reckless conduct, all we need to change in the hypo is your state of knowledge of AQ, and your desire to know. If, in fact, you take no effort to discover what you’re investing in, that could be found to be reckless decision under tort law. Do you think that describes many investors today?
Moving down the spectrum, the decision to invest reasonably requires some effort of “due diligence” (I know I’m not using it in its technical sense, hence the quotes) to discover what uses it will be put to. Lack of proper “due diligence” would then be negligence, in tort law.
Now, to a certain extent, I agree that in today’s culture, not many people feel that people should be responsible for their actions. But in most other contexts, libertarians decry this cultural artifact of statist cultural engineering. Only here, where really big money interests are at stake, do they suddenly find something to like in shirking. I certainly find that interesting…
As far as
“but I cannot imagine a future anarchist society in which it would be considered reasonable to cripple the ability of a person to diversify their investments by holding them to an impossible standard of unlimited liability for the behavior of every activity they help finance”
Who’s forcing them to finance anything? Why shouldn’t they be careful about how they invest their money? Why should the victim of a tort be forced to make their diversification strategy a viable method of preserving their wealth? Perhaps diversification is, itself, a part of the problem in that it makes sure that people can’t possibly make informed, responsible decisions about how their money is used?
Brad,
On what topic specifically?
(and my response to Less was eaten again - am I doing something wrong here? I’ll try to repost it later)
@ka1igu1a
I can’t speak for Kinsella, but I don’t see any need to rely on Corporate Personhood to make the case for shareholders not being liable. The case is based on the fact that it is wrong to confiscate A’s personal property for a tort that B commits against C.
It isn’t appropriate to start from the presumption that shareholders are liable for torts they didn’t commit, which is the implicit assumption of those saying the government is artificially limiting the tort liability of shareholders. It is necessary to first demonstrate that the shareholder is responsible for acts they didn’t commit, and if they have no effective control over the actions of employees hired by management hired by directors who don’t have to follow any shareholder directions, I don’t see where there is any reasonable basis for doing so. Proprietors and general partners have actual management power: that is why they have unlimited tort liability. Limited partners and shareholders do not have such power.
BTW, I consider myself a market anarchist, and would be perfectly comfortable with worker cooperatives or a world of one-person businesses, if that is what the market produced, although I would truly be surprised to see the corporate form disappear in our anarchotopia, and believe that common law negligence would hold shareholders harmless from acts committed by corporate employees, with the possible exception of those owning such a large percentage of the company as to have effective control.
I do think the average size of corporations would be massively reduced, however, in an anarchist society. As John Kay put it so beautifully, “there really are economies of scale in political lobbying.” [http://www.ft.com/cms/s/0/4d4df866-c624-11dd-a741-000077b07658.html]
@Jeremy
“Plus, I think there’s something fundamentally artificial about an arrangement where one can profit without limit, indefinitely, but there are limitations on one’s liability. This seems to short circuit a basic reciprocity in human behavior.”
Nobody is arguing against shareholders having unlimited liability for their own actions. We are arguing against the artificial assignment of liability to people for actions which they did not commit and over which they have no effective control.
A line of argument to consider:
(1) Do you believe that creditors, customers, and suppliers of a business should also have unlimited liability for torts committed by employees of that business, since they all have helped finance and make that business viable?
Assuming no:
(2) Then is your sole basis for holding shareholders liable the fact that they vote on who will be members of the board of directors?
Assuming yes:
(3) Would you then not hold liable any shareholder who didn’t submit his voting proxy, or who voted against the slate of directors that was in charge when the tort was committed?
Just wondering.
I have wrestled with this issue for years, having both been a market anarchist and taught business law for more than 20 years. I take very seriously the need for consistency in anarchist theory, and think an anarchist who seizes the property of a shareholder for something the shareholder didn’t no nor had the power to prevent is a violation of market anarchist principles.
Less:
In a market anarchy today, I would tend to speculate that capital goods would tend more toward worker cooperatives and the knowledge economy would tend toward Proprietorships/Partnerships, but there obviously would have to be a role for banking, insurance and investment capital, but there is a dearth of theory when it comes to the “anarchist firm.” Frankly, even traditional microeconomic theories of the firm are a subject of much debate, even given the context of the State. So we really don’t know for sure the diversity of firm organizations that would emerge in anarchist context, but I’m skeptical about the free market “viability” of self-chartered corporations.
But this reflects the statist nature of the corporation in spades, Less. In other words, under normal conditions, why would you give money to somebody over whom you have no effective ability to dictate actions? Why would somebody do that? On its face, is that a rational act? If it’s not, as I think it isn’t, we can either conclude that investors are stupid (unlikely) or that there is some other force outside the contractual arrangement that is exerting an influence on expectations.
You can guess what I think this outside force is. The state provides regulation for corporations to serve as a subsidized watchdog over corporate managers, thereby releasing stockholders from the need to keep a watch over how their investment is used to some degree. This way stockholders can genuinely claim they didn’t know what was going on with their own property. The state creates the whole context for stockholders accruing profits from a “black box” over which they have no control.
In a way, I think Van Creveld’s distinction between the “personal state” of yore and the “impersonal state” of today is a good way of understanding the corporation. It is a way of aggregating the product of people’s labor (investments) into an entity that can then put that capital to work in a way that normal humans cannot: without conscience (because it is a non-human entity), mechanistically, and in perpetuity. The corporation is the realization of an “impersonal partnership” that can aggregate capital, contracts, and labor without the need to accurately represent the human interests involved, becoming itself an entity without (as Carson argues) clear ownership or chain of responsibility proportionate to its power.
I also appreciate quasibill’s chief argument which is (as I understand it, essentially) that shareholder designation of management and conference of agency constitutes a chain of responsibility. If shareholders relinquish agency to management, they still bear responsibility for that assignment of agency in the first place. The management doesn’t just appear out of nowhere and appropriate the corporation’s identity, assets, and employees.
Just to clarify, when I asked above why somebody would give money to another without effective ability to dictate their actions, I mean when this happens in an impersonal context. Obviously, people who know each other give money to another, but there’s a personal relationship underlying that gift. But a gift is not the same thing as an investment or the grant of agency. The statist nature of the corporation lies, in the end, in the systemic manner in which this impersonal relationship is allowed to operate. I believe this kind of impersonal relationship would never occur, or rarely occur, without the backing, regulation, and stabilization provided by the state.
What is the standard for “due care” to avoid being held liable for what you can’t currently be held liable for anyway? Mr. Antman begs the question.
Right: the state creates an artificial standard when otherwise liability might be decided on a case by case basis (which is quite similar to what Kinsella advocates, except he presupposes the corporate veil, IIRC - correct me if I’m wrong). This is part of the stabilization subsidy the state provides to make investment more reliable than it might otherwise be.
Less Antman:
This is similar to my position. I think the inquiry is very fact-intensive, and requires careful thought and application of sound libertarian principles of causation and responsibility.
Brad Spangler:
Apriori reasoning does not specify that shareholders are automatically vicariously responsible for torts committed by others.
ka1igu1a:
Fair point. I’ve just updated it–it was time. Thanks for the reminder. However, please note I did not there call myself a paleo–I only said I had been influenced by “paleolibertarian” thinkers such as Rockwell, Rothbard, Hoppe. I was using the term commonly used at this time to refer to these thinkers though I am not sure now that this is am accurate classifation of their thought. Even Hoppe does not use “paleo” on his statement of principles for his Property and Freedom Society; at most he says he is culturally conservative–which all of us are to some degree to the extent we have civilized manners, jobs, respect the good aspects of private society, etc.
Fine; but any reader can see there is no quotation of any statement by me anywhere saying to have no mercy on these people or calling for them to be shot. In fact I am opposed to this, of course.
I’m opposed to personhood, along the lines of Hessen’s explanation of the problems with the statist “entity” theory of corporations. Essentially what has happened is that the state dreams up its own semi-mystical explanation of the corporation to justify its own role in creating and regulating them, and the leftists have played into the state’s hands. The state is not needed for corporate status.
Agreed. If someone is damaged by tort, they can sue whichever individuals directly cause the damage or are causes of it in the sense of vicarious responsibility. For contractual debts, however, such parties deal voluntarily with the “corporation” and are on notice they have more limited rights in the case of a contractual dispute.
jeremy:
This is not very good libertarian reasoning. It’s easy to imagine many cases where you can make a lot of profit and have no liability. For example suppose you buy a lottery ticket. You give the lottery commission a dollar, and you might make hundreds of millions, but you also have no liability for actions of the lottery. So what?
Less Antman:
Exactly.
As they do NOW.
Quite right. As even Long seems to be sympathetic to.
ka1igu1a:
It’s comments like this that reinforce my view that much of the left-libertarian hostility to corporations and business stems from ignorance of how it really works. Why woudl you ever loan someone money? After all, you don’t have complete control over their actions?
In fact, this is the point of why the joint stock corporiation can make sense: you invest in what you see as a viable business, but where you want to remain passive; the right to elect directors is a very minor and indirect type of control, but is there as a way to replace board members if you believe the company could be better run, etc.
jeremy:
(second try at posting this):
Less Antman:
This is similar to my position. I think the inquiry is very fact-intensive, and requires careful thought and application of sound libertarian principles of causation and responsibility.
Brad Spangler:
Apriori reasoning does not specify that shareholders are automatically vicariously responsible for torts committed by others.
ka1igu1a:
Fair point. I’ve just updated it–it was time. Thanks for the reminder. However, please note I did not there call myself a paleo–I only said I had been influenced by “paleolibertarian” thinkers such as Rockwell, Rothbard, Hoppe. I was using the term commonly used at this time to refer to these thinkers though I am not sure now that this is am accurate classifation of their thought. Even Hoppe does not use “paleo” on his statement of principles for his Property and Freedom Society; at most he says he is culturally conservative–which all of us are to some degree to the extent we have civilized manners, jobs, respect the good aspects of private society, etc.
Fine; but any reader can see there is no quotation of any statement by me anywhere saying to have no mercy on these people or calling for them to be shot. In fact I am opposed to this, of course.
I’m opposed to personhood, along the lines of Hessen’s explanation of the problems with the statist “entity” theory of corporations. Essentially what has happened is that the state dreams up its own semi-mystical explanation of the corporation to justify its own role in creating and regulating them, and the leftists have played into the state’s hands. The state is not needed for corporate status.
Agreed. If someone is damaged by tort, they can sue whichever individuals directly cause the damage or are causes of it in the sense of vicarious responsibility. For contractual debts, however, such parties deal voluntarily with the “corporation” and are on notice they have more limited rights in the case of a contractual dispute.
jeremy:
This is not very good libertarian reasoning. It’s easy to imagine many cases where you can make a lot of profit and have no liability. For example suppose you buy a lottery ticket. You give the lottery commission a dollar, and you might make hundreds of millions, but you also have no liability for actions of the lottery. So what?
Less Antman:
Exactly.
As they do NOW.
Quite right. As even Long seems to be sympathetic to.
ka1igu1a:
It’s comments like this that reinforce my view that much of the left-libertarian hostility to corporations and business stems from ignorance of how it really works. Why woudl you ever loan someone money? After all, you don’t have complete control over their actions?
In fact, this is the point of why the joint stock corporiation can make sense: you invest in what you see as a viable business, but where you want to remain passive; the right to elect directors is a very minor and indirect type of control, but is there as a way to replace board members if you believe the company could be better run, etc.
jeremy:
@ ka1igu1a
Obviously, what both of us want is for all government support for existing structures to be removed, and then to see what the market produces. I’m Hayekian enough to admit I just don’t know, but I do believe that differences in personal consumption vs saving preferences, comparative advantage, and the risk reducing benefits of nt having all of one’s eggs in a single basket will lead to a far greater role for absentee capital investment, and that we will virtually all be both workers in our own specialty and investors in the work of many others. That is the mutual aid society in my vision, but all I really want is the freedom that allows the choice. In this thread, I’m predicting rather than prescribing.
@ Jeremy
I see nothing stupid in offering small parts of my savings to each of a hundred or thousand businesses in exchange for commitments to share residual profits. I see mutual fund investing to be a worthy model of a mutual aid society. I would even go so far as to deny the need for enforcement of contracts in these cases: reputation, ostracism, and boycott are all enforcement mechanisms of enormous power. Of course, I believe enforcement of contracts is legitimate.
Seriously, are you arguing that you would never lend money to anyone without demanding the right to control their behavior?
@ Brad
“What is the standard for “due care” to avoid being held liable for what you can’t currently be held liable for anyway? Mr. Antman begs the question.”
I am arguing that application of common law principles such as due care would lead to the same conclusion on shareholder liability as the current statutory result. If the government passed a law granting you immunity from liability for the invasion of Iraq, we would both agree that the government had no right to grant you such immunity, but that doesn’t mean you would have been liable in the absence of such a law.
Look, we’re both anarchists: we both consider everything done by the state to be illegitimate. What we’re trying to do now is predict what structures would exist in the absence of state support. I’m willing to maintain that we’d all drive on the right side of the road in American territory even if a vicious state monopoly no longer enforced traffic laws. And that a reasonable third party arbiter would see no basis for holding any shareholder liable for acts he couldn’t prevent.
Question: do you extend the assertion of liability to all creditors, customers, and suppliers of a business, who help finance and enable it to operate? Is it merely the fact that a shareholder gets one vote on a decision as to who will make up the board of directors that creates a presumption of unlimited personal liability for all actions by anyone in that business? Would you then exempt a shareholder who didn’t vote or who voted against the board in place when the tort occurred?
“Question: do you extend the assertion of liability to all creditors, customers, and suppliers of a business, who help finance and enable it to operate? Is it merely the fact that a shareholder gets one vote on a decision as to who will make up the board of directors that creates a presumption of unlimited personal liability for all actions by anyone in that business? Would you then exempt a shareholder who didn’t vote or who voted against the board in place when the tort occurred?”
I wouldn’t necessarily, no. In fact, I’ll even go so far as to say “usually not.”
But I hope you can see the problem in saying that one person with 100% control is 100% liable, but 100 people with 1% control each are each 0% liable.
Less, you seem to be wanting to attribute positions to me not my own. Unlimited personal liability for any particular shareholder is not what I would argue for, but (instead) proportional shareholder liability according to percentage of shares owned.
I’m against “limits” in the sense that shareholders as owners should be no more off limits than partners or sole proprietors. I never got far enough to properly elucidate that — because I accepted Kinsella’s bait that he offered because he wanted a foil to use in flogging his work on causation!
The Mises/Rockwell crowd has, prior to this point, largely mischaracterized the liability debate as solely a matter of liability for regular business debts incurred over the normal course of business — which, most of the left-lib crowd would agree as far as I can determine, can reasonably be “limited” (in the sense of removed from being a burden on shareholders) contractually w/o the state. The thing is, though, they’ve dodged and dodged on the tort liability side of the matter, and now we get this load of malarkey about how Kinsella thinks maybe proprietors and partners ought to not face liability EITHER. And THEN it’s like pulling teeth to get it out of him that he didn’t actually want to prohibit holding business owners liable, but that he wanted to overhaul the theory of what constitues liability in the first place so that they TYPICALLY would never be considered liable. There’s a million directions I could have gone with that, but why should I bother when Kinsella acts like he’s just making stuff up on the spur of the moment???
I’m just saying that where busines owners CAN be held liable, shareholders ought to face that prospect just as much as a partner or proprietor would (in proportion to their share ownership, of course) — and that removal of that limitation on tort liability would be a crucial step in transforming the corporation as we know it into a free-market-kosher joint stock company, thereby “abolishing” state chartered corporations.
I mean, take a look at the crap he’s pulling, saying stuff like it supposedly wouldn’t matter because the JSC (he insists on calling it a corporation in that context) would just take out insurance — AS IF INSURANCE IS NOT A COST!
“I’m just saying that where busines owners CAN be held liable, shareholders ought to face that prospect just as much as a partner or proprietor would (in proportion to their share ownership, of course) — and that removal of that limitation on tort liability would be a crucial step in transforming the corporation as we know it into a free-market-kosher joint stock company, thereby “abolishing” state chartered corporations.”
I think the general question should be rephrased to “when should a shareholder/owner/manager/whatever be responsible in the first place?”
Either a shareholder can be responsible for a tort or he can’t. I think it depends on the situation. But the notion that he CAN be liable, but that liability is LIMITED in some way to some absolute numerical maximum makes very little sense to me.
@Stephan re: “Apriori reasoning does not specify that shareholders are automatically vicariously responsible for torts committed by others.”
Straw man. Who said “automatically” liable? I don’t want liability to be automatically disallowed based on status of the business owners as shareholders in a corporation instead of partners in a partnership or sole proprietors. Why do you insist on nearly always using deceptive tactics?
Brad:
Now this makes no sense at all. If you are liable, you ought to be jointly and severally liable. You are advocating some middle ground, for some reason.
Why? Partners and esp. sole proprietors typically have more involvement in the firm than shareholders do. Why shouldn’t this matter?
You know, Brad, I really resent this snide remark. It’s as if I’m to be penalized for having tried to think this through. I was not flogging my own work–rather, I am weighing in on this because I’m interested in it, and that is also what motivated me to write on it; and this combination leads me to realize what I think are errors others make, and so I point them out. What in the world is wrong with this? I cannot believe I’m being criticized now for having a somewhat informed opinion! It’s like you are advocating a Rawlsian veil of ignorance!
I am not sure at al that most lefties agree even w/ the contractual issue. But I don’t agree any of us characterized this as the only issue.
Brad, most critics don’t even seem to get normal corporate law right. And I don’t agree that “tort liability” limitations is what animates the critics. They are just anti-corporate. What, really, would change if we eliminated tort limited liability? First, I’m not sure shareholders would be liable anyway, so not sure there is any difference. Second, the corporate insurance would just be extended to shareholders and would probably cost almost no more since the liability is the same. This is just a straw man.
Well, it depends–a proprietor probably should, since he is a manager too.
Brad. I don’t want to overhaul it, as there is nothing to overhaul. There is NO THEORY there–no libertarian one. We just have a bunch of amateur-lawyer libertarians hopping around making assumptions about causation as if this issue is settled, when it’s not. They apparently do not even realize that their conclusions rest on implicit assumptions about this–yet there is not yet a coherent, carefullly developed theory of causation, yet one is needed. I’m not changing anyting–I’m stepping into a vacuum.
My causation stuff was not spur of the moment. It was my attempt to as carefully as I can establish the proper starting point.If you have something better, by all means trot it out.
2 mistakes here. First, you are relying on the state’s calling them “owners”. Let’s say there is no state. We have people voluntarily form a joint stock corp. All we know is there are people who call themselves “stockholders”, and they have certain rights to receive payments, and (maybe) certain rights to elect directors. This is what they are. We don’ need to decide whether they “are” or “are not” “owners”. Do *these* characteristics make them liable, or not? If so, why?
There is no of course here at all! The fact that you add it makes me think YOU are making this up on the fly, or writing in ignorance of this area. The law properly holds joint tortfeasors jointly and severally liable. Why should it not? If A and B conspire to harm C, then C can obtain full damages from EITHER A or B; if A has to pay 100%, then HE can try to obtain partial payment from B, but if B is bankrupt, etc., why should the victim suffer?
I think not much would change, but I guarantee you the leftoids who fulminate against “alienation of labor” and “separation of ownership and control” would not stop bitching, until the bigness they really hate disappeared.
It’s a cost but they *already pay it*. Covering shareholders would probably add almost nothing to it, since it does not add any extra liability.
@Stephan,
re: “It’s a cost but they *already pay it*.”
Well, no, they don’t *already* pay to insure shareholder liability for tort awards in excess of the value of the stock owned. I *could* be wrong on the following, but I’m under the impression that almost no firm insures against tort awards in excess of the value of the company precisely BECAUSE the worst that could happen currently is the liquidation of the company. Management might have professional liability insurance for themselves as individuals, and the company might pick up the cost on that, but that’s not the same thing as a policy covering the company itself (and, by extension, shareholders).
So, no, it’s not at all obvious that such insurance would be some trivial cost. It depends on what you’re insuring against.
I can see that I need to write a followup post. Time constraints might not allow me to write it immediately
There are disturbing parallels between the ways modern democratic states and modern corporations are run. Kevin Carson mentioned one of them: Management always claims to be serving the shareholders. They claim to be answerable to the shareholders, while in reality they act as *de facto* owners, except with less caution.
I think left-libertarians have picked up on this, and just as Hoppe prefers monarchy to democracy, left-libs prefer proprietorships (and cooperatives) to corporations. Many of Hoppe’s insights apply here. (Yes, Hoppe’s.)
Now, I know Kinsella does not want anyone to assume shareholders in a corporation are the actual owners. Let’s do it anyway for just a moment. In this case, it follows that liability extends to the shareholders, and it is *for this reason* that I believe the typical modern corporate structure would not be sustainable in a freed market. Instead of part-owners, there would be lenders.
Think of how things were supposed to work for shareholders. In return for their investment, they would get a stake in the corporation and share in the dividends for the life of the corporation. Thanks to the state-backed financialization of the economy, dividends are largely irrelevant today.
In my hypothetical scenario of lenders instead of owners, I believe *bonds* (probably with certain strings attached) would nearly always be used instead of stocks. This is to avoid the liability problem for owners. The actual owners, then, would at first be those who started the enterprise. They would also be the managers, unless they hired others to do it for them.
@ Mike D
If you would not even exempt a shareholder who voted against the board in place at the time of the tort, then I am unsure why you think the shareholder ought to be liable for the actions of the board, management, and employees. What more could he have done to prevent the tort?
“But I hope you can see the problem in saying that one person with 100% control is 100% liable, but 100 people with 1% control each are each 0% liable.”
Yes, I can see the potential problem. For one thing, though, I am not arguing that a 100% shareholder has 100% control. The structure of a corporation gives all power over the activities of the business to the board of directors. A 100% shareholder is not comparable to a proprietor: the board is the only party in a comparable position. A shareholder literally cannot carry out any business activity whatsoever, including the hiring or firing of any employee, the selection of the goods or services to be offered, or the purchase or sale of any asset of the business. The proprietor can do all of these, as can the board of directors of a corporation.
My concession to the possibility of a large shareholder being liable in some cases is that they may use their influence over the board in a fashion that clearly makes them a party to the commission of the tort. But that would have to be established in a court of law, and they would be liable because of their positive actions related to the tort. I could see a major creditor, customer, or supplier becoming liable in the same manner by using the influence they have over the business. But I believe the correct default position is that the shareholder, creditor, customer, and supplier are not liable for the actions of the board, management, or employees of the business.
Let me also add, although not directly necessary to support my view, that 100 shareholders owning 1% each do not have the same power as 1 shareholder owning 100%: the division of power demolishes it, just as the 300 million members of an anarchist America wouldn’t collectively have the same power to do violence as a single totalitarian dictator ruling the country. The market demonstrates that they aren’t comparable, as the valuation of assets for financial statement or tax purposes (I’m a CPA) always discounts fractional shares because of the lack of influence. To make the same point differently, whenever there is a takeover rumor involving a company, its price soars, because it is recognized that the 100% buyer will pay a premium to acquire the entire business over the market price per share when the shares are divided up among many. This premium is to account for the fact that the 100% shareholder gets something more than the sum of the separate values of fractional shares.
Finally, I think it is clear that even the power over the selection of the board is not strictly proportional. Even a 51% shareholder can vote in a board that it likes, regardless of opposition, and has the same level of influence as a 100% shareholder. And if the other 49% of the shares are owned by one person, that 49% shareholder has ZERO influence over the selection of the board. Even absent a majority owner, the probability of a 1% shareholder being able to change the constitution of the board is vanishingly small, not even remotely close to 1%: their vote would have to be the difference between the vote of the lowest winner and highest loser in a board election, it would subsequently have had to result in the board taking an action that was decided by a 1 vote margin in which the lowest winner and highest loser would have voted differently, and the action taken would have had to have some connection to the tort committed by an employee of the business. The chain of unlikely coincidences boggles the mind.
Anyway, I’m finding this a very interesting argument, but I’m leaving for a trip shortly, and will check the responses again in a few days. I do intend to make one more post to address Brad, though, before signing off tonight. Thanks for your comment.
@ Brad
It was not my intention to put words in your mouth: I’m just doing my best to interpret your postings, and I apologize for any misinterpretation. I heartily agree that many have missed the critical difference between contractual and tort liability, and that my reason for believing shareholders ought not to be liable for torts they haven’t committed isn’t the same line of argument being pursued by some others who share my overall conclusion.
I think the assertion that a shareholder is an owner comparable to a proprietor or partner is incorrect. A shareholder has a claim on residual profits of a business, and an annual vote on who will make up the board, but absolutely no authority to determine how the business is run. Proprietors and partners do. The corporate charter vests all power to make decisions in the board, and even names the initial board, which begins serving PRIOR to the existence of any shareholders (after all, the board is needed to be an offeror of shares in the first place). They choose how many shares to issue, whether to repurchase, and other financing activities. They decide who will run it on a day-to-day basis and approve policy. It is the Board of Dictators, and that is why it is only just not to hold shareholders personally liable.
Two final points:
(1) Partners actually have joint and several liability, not proportional liability, for torts, and that was established under common law, so if you think shareholders should be treated the same as common law partners are treated, you should be advocating unlimited liability for the cost of torts without proportional limits.
(2) I think you overrate the importance of shareholder liability in the growth of big business. California had unlimited shareholder liability from its founding in 1849 until 1931, applicable to any corporation chartered in the state OR doing business in the state. I see no evidence that big businesses were less likely to operate in California than elsewhere during that time period.
Ah, but wouldn’t it be wonderful for us to have the real life experiment and see whether shareholders are deemed liable for torts in an anarchist America? Anarchy first, then let’s see what the market decides.
Kinsella:
Exactly what comments attributed to me are you referring to? FWIW, I am a CTO of a corporation, so I do find it mildly amusing to be accused of hostility to corporations and business and ignorance of how it really works. I can pretty much say categorically that if weren’t for the State, our business would not be incorporated.
Frankly, I find the hubris of that statement remarkable coming from a purported anarchist. The Raison d’être of anarchism (market or otherwise) is NO RULING CLASS. The idea that spontaneous market anarchist orders need the guidance of those versed in STATIST Law strikes me similar in concept to the Marxist Contention of the Need of the Party of the Proletariat to direct the withering away of the State.
Brad Spangler:
But there is no extra liability. If you sue McDonald’s for $1M then that comes out of their insurance. If you could add shareholders as defendants, that would not increase your damages award, so it would not cost the insurance company much more.
ka1igu1a:
Like this: “But this reflects the statist nature of the corporation in spades, Less. In other words, under normal conditions, why would you give money to somebody over whom you have no effective ability to dictate actions? ”
Why? And, so what?
It’s not hubris. WE need a sound theory of rights and aggression and justice and causation. If you think there already is a sound, well developed theory of causation that I’m missing, feel free to point us to it. BUt the fact that people like you knee jerk assume that “shareholders” (who are after all the “owners,” according to the STATE) are liable for employee torts, while not realizing the implications this has for a host of other actors (vendors, creditors, stakeholders, unions…) is telling.
Anarchism is against the STATE, not against “the ruling class” (whatever that is).
Repost:
There are disturbing parallels between the ways modern democratic states and modern corporations are run. Kevin Carson mentioned one of them: Management always claims to be serving the shareholders. They claim to be answerable to the shareholders, while in reality they act as *de facto* owners, except with less caution.
I think left-libertarians have picked up on this, and just as Hoppe prefers monarchy to democracy, left-libs prefer proprietorships (and cooperatives) to corporations. Many of Hoppe’s insights apply here. (Yes, Hoppe’s.)
Now, I know Kinsella does not want anyone to assume shareholders in a corporation are the actual owners. Let’s do it anyway for just a moment. In this case, it follows that liability extends to the shareholders, and it is *for this reason* that I believe the typical modern corporate structure would not be sustainable in a freed market. Instead of part-owners, there would be lenders.
Think of how things were supposed to work for shareholders. In return for their investment, they would get a stake in the corporation and share in the dividends for the life of the corporation. Thanks to the state-backed financialization of the economy, dividends are largely irrelevant today.
In my hypothetical scenario of lenders instead of owners, I believe *bonds* (probably with certain strings attached) would nearly always be used instead of stocks, and they would work essentially as described above. This is to avoid the liability problem for owners. The actual owners, then, would at first be those who started the enterprise. They would also be the managers, unless they hired others to do it for them.
@ Mike D
If you would not even exempt a shareholder who voted against the board in place at the time of the tort, then I am unsure why you think the shareholder ought to be liable for the actions of the board, management, and employees. What more could he have done to prevent the tort?
“But I hope you can see the problem in saying that one person with 100% control is 100% liable, but 100 people with 1% control each are each 0% liable.”
Yes, I can see the potential problem. For one thing, though, I am not arguing that a 100% shareholder has 100% control. The structure of a corporation gives all power over the activities of the business to the board of directors. A 100% shareholder is not comparable to a proprietor: the board is the only party in a comparable position. A shareholder literally cannot carry out any business activity whatsoever, including the hiring or firing of any employee, the selection of the goods or services to be offered, or the purchase or sale of any asset of the business. The proprietor can do all of these, as can the board of directors of a corporation.
My concession to the possibility of a large shareholder being liable in some cases is that they may use their influence over the board in a fashion that clearly makes them a party to the commission of the tort. But that would have to be established in a court of law, and they would be liable because of their positive actions related to the tort. I could see a major creditor, customer, or supplier becoming liable in the same manner by using the influence they have over the business. But I believe the correct default position is that the shareholder, creditor, customer, and supplier are not liable for the actions of the board, management, or employees of the business.
Let me also add, although not directly necessary to support my view, that 100 shareholders owning 1% each do not have the same power as 1 shareholder owning 100%: the division of power demolishes it, just as the 300 million members of an anarchist America wouldn’t collectively have the same power to do violence as a single totalitarian dictator ruling the country. The market demonstrates that they aren’t comparable, as the valuation of assets for financial statement or tax purposes (I’m a CPA) always discounts fractional shares because of the lack of influence. To make the same point differently, whenever there is a takeover rumor involving a company, its price soars, because it is recognized that the 100% buyer will pay a premium to acquire the entire business over the market price per share when the shares are divided up among many. This premium is to account for the fact that the 100% shareholder gets something more than the sum of the separate values of fractional shares.
Finally, I think it is clear that even the power over the selection of the board is not strictly proportional. Even a 51% shareholder can vote in a board that it likes, regardless of opposition, and has the same level of influence as a 100% shareholder. And if the other 49% of the shares are owned by one person, that 49% shareholder has ZERO influence over the selection of the board. Even absent a majority owner, the probability of a 1% shareholder being able to change the constitution of the board is vanishingly small, not even remotely close to 1%: their vote would have to be the difference between the vote of the lowest winner and highest loser in a board election, it would subsequently have had to result in the board taking an action that was decided by a 1 vote margin in which the lowest winner and highest loser would have voted differently, and the action taken would have had to have some connection to the tort committed by an employee of the business. The chain of unlikely coincidences boggles the mind.
Still, I think your challenge is reasonable, and I don’t believe the issue is cut and dried by any means.
Robertpaul: “Now, I know Kinsella does not want anyone to assume shareholders in a corporation are the actual owners. Let’s do it anyway for just a moment. In this case, it follows that liability extends to the shareholders, and it is *for this reason* that I believe the typical modern corporate structure would not be sustainable in a freed market. Instead of part-owners, there would be lenders.”
The problem is for me ownership is just a label I would slap on after analyzing what the real situation is. You want to go ahead and make that classification (well, the state makes it for you), then build up implications based on this. Let’s just look at the reality instead: shareholders have certain rights: (a) to receive a prorata share of assets upon liquidation; (b) to receive dividends *if* they are ever paid; (c) to vote in elections of directors; (d) to attend shareholder meetings; (e) to sue for mismanagement etc. (derivative actions). Now, why do these rights (whatever you classify them as) imply responsibility for torts of employees?
@Stephan:
“Let’s just look at the reality instead: shareholders have certain rights…”
Exactly why are “rights” more real than “ownership”? I won’t necessarily say that you can’t make such a distinction, but I want to see its particular rationale made explicit.
The context of this is that the rights of enterprise control are accorded *because* the shareholders are considered owners of the enterprise, so it doesn’t seem to make sense to not consider ownership and right of control as a bundle.
We’re all geeks here, so I’ll put it in Star Trek terms…
A: “This man is a Vulcan.”
B: “That’s merely an abstraction. The reality is that he has green blood.”
A: “He has green blood because he’s a Vulcan. That’s also why, if he takes his hat off, you’ll see he has pointed ears.”
B: “His having green blood doesn’t demonstrate that his ears are pointed.”
A: “Right. The context of this is that he has green blood because he’s a Vulcan, which is also why he most likely has pointed ears, provided they haven’t been surgically altered. Green blood doesn’t cause pointed ears. Green blood and pointed ears are both characteristics typically bundled in with being a Vulcan.”
Similarly, rights of control and potential liability are both bundled together as typical aspects of “ownership”. Notable exceptiosn include corporations, where the state has “surgically removed” potential (tort) liability from the shareholders.
Kinsella:
I’m not suggesting that all shareholders in today’s market should suddenly be held liable for torts of employees. I was speaking of a hypothetical freed market where shareholders actually would be owners, with all the rights and responsibilities that implies. That’s why I came to the conclusion that such a structure would not be sustainable.
Just to be clear, in today’s market, would you classify someone who holds 100% of a corporation’s shares as the owner? Why or why not? If you would, it’s not just the state’s classification anymore, is it?
Incidentally, the most vociferous defenders of that classification tend to be officers of *widely held* corporations. One of the consequences of state-backed financialization is this massive diffusion of shares, which is another reason for these extreme agency problems.
Ownership and control normally go together. Either a corporation that issues shares is closely held, or it borrows money instead of issuing shares. This is why the current structure - widely held state-regulated corporations - causes so many problems, and you’ve provided supporting evidence for that.
I’ve tried to post several times and have been blocked as spam. I emailed Brad and got no response. I’m hoping this goes through and Brad sees it and can post the long responses I wrote.
Less,
I had the same problem, and Brad eventually got the posts up, but they’ll be buried back in where they’re time stamped. On a related note, I have a double post above that is buried back in previous comments that was directed to you.
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. Most of the rest of us realize that it is one of the, if not the, most important aspects in de-legitimizing state mythology: If you ignore the body of the hydra, and focus only on its heads, you’re never going to win. If you ignore the primary beneficiaries of the state and presume that they are on your side, you’ll never get anywhere.