Does Control Make a Difference? The Moral Foundations of Shareholder Liability for Corporate Wrongs

DOIhttp://doi.org/10.1111/j.1468-2230.2012.00895.x
AuthorJonathan Crowe
Publication Date01 Mar 2012
THE
MODERN LAW REVIEW
Volume 75 March 2012 No 2
Does Control Make a Difference?The Moral Foundations
of Shareholder Liability for Corporate Wrongs
Jonathan Crowe*
The doctrine of limited liability,as traditionally understood, prevents shareholders frombeing held
personally liable for corporate wrongs. Several authors have recently argued that the doctrine
should be modified to make some or all shareholders individually liable for torts committed by
corporations in which they hold shares. This article distinguishes three types of argument that
might provide a moral basis for shareholder liability in such cases. I contend that while these
arguments support holding at least some shareholders liable for corporate torts, they fail to justify
a general regime of unlimited pro rata shareholder liability. The level of control shareholders
exercise over a company makes an important difference to their moral duties to compensate
victims of corporate wrongdoing.
Imagine a corporation fails to provide its employees with a safe system of work
and thereby causes them to suffer personal injury. Perhaps the form of injury
affects a substantial class of employees and only begins to manifest itself years after
the harm was first inflicted.1The company is structured in such a way that only
a limited pool of resources exists to satisfy tort claims by its former workers.
Should shareholders then be held individually liable to compensate the claimants?
The doctrine of limited liability, as traditionally understood, answers this
question in the negative. A number of authors have recently argued that this
position should be changed.2Some of these writers, such as Christopher Kutz
and Christian Witting, argue that all shareholders, regardless of their influence,
may legitimately be held liable for corporate torts.3Others, such as José Antunes
*Senior Lecturer, T. C.Beir ne School of Law, University of Queensland. I would like to thank Nick
Gaskell,Ross Grantham, Andrew Johnstonand the anonymous referees for their helpful comments and
suggestions. An earlier version of this article was presented as part of the Working Paper Series in the
T.C. Beirne School of Law at the University of Queensland. I am grateful to all who participated in
the discussion.
1 Compare Briggs vJames Hardie & Co Pty Ltd (1989) 16 NSWLR 549; Johns-Manville Products Corp
vContra Costa Superior Court (1980) 27 Cal 3d 465.
2 H. Hansmann and R. Kraakman, ‘Toward Unlimited Shareholder Liability for Corporate Torts’
(1991) 100 Yale LJ 1879; C. Kutz, Complicity: Ethics and Law for a Collective Age (Cambridge:
Cambridge UP, 2000) ch 7; N. Mendelson,‘A Control-Based Approach to Shareholder Liability
for Corporate Torts’ (2002) 102 Columbia LR 1203;C. Witting,‘Modified Limited Liability’(2009)
27 Company and Securities Law Journal 108; C.Witting, ‘Liability for CorporateWrongs’ (2009) 28
University of Queensland LJ 113.
3 Kutz, ibid ch 7; Witting,‘Modified Limited Liability’ ibid;Witting, ‘Liability for CorporateWrongs’
ibid.
© 2012The Author.The Modern Law Review © 2012 The Modern Law ReviewLimited. (2012) 75(2) MLR 159–179
Published by BlackwellPublishing, 9600 Garsington Road, Oxford OX42DQ, UK and 350 Main Street, Malden,MA 02148, USA
and Nina Mendelson, have limited their proposals to either parent companies4or
shareholders who exercise effective control over corporate decisions.5
This article examines the moral basis for these lines of argument. It begins
by distinguishing three types of reasoning that might provide a moral foundation
for holding shareholders personally liable in the type of case described above.
The first of these routes relies on considerations of corrective justice;the second
on principles of non-corrective justice; and the third on consequentialist factor s.
In principle, anyof these lines of reasoning could potentially suppor t an extension
of shareholder liability, but I argue that the first line of argument, if successful,
would provide the strongest case for extending liability in this way.
I then contend that while the three lines of argument outlined above support
holding at least some shareholders liable for corporate wrongs, none of them
justifies a general regime of unlimited pro rata shareholder liability. Rather, the
arguments support the more nuanced claim that liability for corporate wrongs
should extend first to parent companies and controlling shareholders, with other
shareholders becoming liable only when those avenues are exhausted. I therefore
endorse what Mendelson has called a ‘control-based approach’ to shareholder
liability, although in a different form and for significantly different reasons.6
I begin this article by describing the three types of argument in question.The
subsequent sections then consider each of these routes in more detail.First, I discuss
arguments based on the moral culpability of shareholders for corporate wrongs. I
then consider arguments based on appeals to principles of non-corrective justice
and consequentialist factors concerning the beneficial effects of shareholder
liability, focusing particularly on the reasoning employed by Kutz and Witting. I
argue that each of these lines of argument, when understood in a broader moral
context, supports the control-based model outlined above.
THREE LINES OF ARGUMENT
There are at least three possible ways that one might attempt to put forward a
moral case for holding shareholders individually liable for corporate wrongs.We
might summarise these routes as follows:
(1) One might argue that ordinary shareholders are morally culpable,onan
individual or collective basis,for cor porate wrongs.This makes their liability
a matter of corrective justice, since it concerns the responsibility of the doer
of a wrong to make restitution to the victim.
(2) One might argue that, although ordinary shareholders are not morally
culpable for corporate wrongs, there is nonetheless a relevant principle of justice
(although not, strictly speaking, of corrective justice) that makes it appropri-
ate to hold them liable.
(3) One might argue that, although there is no pr inciple of justice that requires
ordinary shareholders to account for corporate wrongs, there are nonetheless
4 J. Antunes, Liability of Corporate Groups (Deventer: Kluwer, 1994).
5 Mendelson, n 2 above.
6ibid.
Shareholder Liability for Corporate Wrongs
© 2012 TheAuthor.The Moder n Law Review© 2012 The Modern Law Review Limited.
160 (2012) 75(2) MLR 159–179

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