Limited Liability

Limited Liability

A Legal and Economic Analysis

Stephen M. Bainbridge and M. Todd Henderson

The modern corporation has become central to our society. The key feature of the corporation that makes it such an attractive form of human collaboration is its limited liability. This book explores how, by allowing those who form the corporation to limit their downside risk and personal liability to only the amount they invest, there is the opportunity for more risks taken at a lower cost.

Chapter 6: Veil piercing in statutory contexts

Stephen M. Bainbridge and M. Todd Henderson

Subjects: law - academic, corporate law and governance


Veil piercing and enterprise liability claims arise not only for common-law tort and contract cases, but also from a variety of state and federal statutes. Although liability for the corporation’s owners is at stake in both cases, the issues are substantially different. Permitting corporations to be structured to avoid statutory obligations would easily undermine the goals of those statutes; this same problem is much less severe in cases involving tort and contract obligations. For instance, we show how following state corporate law rules about separateness would permit corporations to dramatically reduce their tax obligations, avoid various labor rules, and frustrate a variety of other legislative objectives. We describe the doctrine used by federal courts, noting how it varies widely across the circuit courts and across statutory schemes. Some courts try to look behind the tests, asking whether the business was structured to avoid the statutory obligation or for other purposes. But, as we show, this is question begging and, in any event, is likely to try to make binary what is likely a continuous function. The cases in this area of law provide a series of multi-factor tests, some of which are judge made, while others come from administrative agencies responsible for the statute in question. Unfortunately, we show how these tests provide no more certainty than veil piercing tests in state law claims. We also offer an alternative test for statutory claims. One could consider the importance of the public policy, how significantly it would be frustrated if corporate separateness were respected, and the costs of avoidance for firms. This can be thought of as a sort of Hand Formula for statutory veil piercing, where the benefits of limited liability are compared against the losses to public policy from respecting it.

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