Beyond "Unlimiting" Shareholder Liability: Vicarious Tort Liability for Corporate Officers
Glynn, Timothy P., Vanderbilt Law Review
Although limited liability is the primary benefit of the corporate form, it continues to generate controversy. In this Article, Professor Glynn argues that extending vicarious tort liability to corporate officers is the best way to retain the benefits of limited shareholder liability while reducing its social costs.
Some commentators defend limited shareholder liability; others contend it inflicts excessive costs, including encouraging unduly risky corporate activities. These costs are most pronounced in the tort context because tort victims rarely are able to protect themselves through monitoring corporate activities or bargaining with corporate actors. Proposed reforms almost always focus on extending liability for corporate activities to some or all shareholders. To date, however, the discussion has largely overlooked a more promising solution: holding top corporate officers responsible for the torts of their enterprises.
Professor Glynn argues that extending vicarious liability to high-ranking corporate officers, rather than to shareholders, is the most efficient and realistic way to ensure that firms internalize tort risks. Given their unique role, these officers are the firm's most efficient risk bearers: they are best situated to monitor and avoid risks, and to implement efficient levels of risk spreading among customers, shareholders, and insurers. And officer liability, unlike shareholder liability, cannot be evaded through judgment proofing techniques. Ultimately, Professor Glynn's proposal synthesizes modern tort theory and corporate law theory, and offers a viable resolution to the lingering tension between limited liability and the aims of our tort regime.
Debate continues to rage over limited shareholder liability and the social costs it imposes.1 While proposals flourish for imposing liability on shareholders to reduce these costs, little attention has been devoted to a more promising solution: vicarious tort liability for high-ranking corporate officers. Limited shareholder liability produces benefits, but it also inflicts costs, including encouraging excessively risky corporate activity. These costs are most pronounced in the tort context because potential tort victims rarely can protect themselves by monitoring corporate activities or bargaining with corporate actors. Commentators disagree on limited shareholder liability's net impact on social utility and what, if anything, should be done to change limited liability. Some defend the current regime as efficient or at least preferable to alternatives, even in the tort context.2 Others propose curtailing limited liability, arguing that vicarious liability for corporate torts ought to extend to some or all shareholders in closely held corporations,3 or that courts ought to "pierce the corporate veil" more often.4 Still others have gone much further, arguing that liability for corporate torts should extend to all shareholders.5 Few, however, have seriously considered extending vicarious liability to the firm's other primary stakeholders, corporate management.6 Most who have addressed the idea have dismissed it with little analysis.7 In this post-Enron environment of concerns over corporate accountability and participant behavior, it is time to take seriously the option of holding top corporate officers responsible for the torts of their enterprises.
In a recent Columbia Law Review article, Professor Nina Mendelson offers the most thorough analysis to date of limited shareholder liability's moral hazard, i.e., its encouragement of excessively risky activities.8 Building on existing scholarship, she contends that the efficiency-based arguments in favor of limited shareholder liability fail to take into account qualitative differences among shareholders, that these arguments at most support limited liability only for small or passive investors, and that the limited liability of controlling shareholders for corporate torts harms social utility. …