Re: Corporate liability (WAS: Environmentalism in a Free society)

Peter C. McCluskey (
Sat, 9 Jan 1999 19:22:41 -0800 ( writes:
>With all due respect, this doesn't even come close to addressing the issues I
>raised. Saying that it's easier now to determine what a company's policies
>are than it used to be doesn't mean it's a good idea to make shareholders
>liable for a company's wrongs. Imagine that I had instantaneous, searchable
>electronic access right here in my study to every single record kept by
>General Motors for the last twenty years. Now, say you get a judgment against
>GM next year based on a defectively designed airbag that failed to deploy in
>an accident and you come looking to execute that judgment on my personal
>assets. Was I -- a non-engineer -- supposed to identify the records
>documenting that defect before I bought some GM stock this afternoon? If that

You certainly have an incentive under current law, and a slightly greater incentive if shareholders are fully liable, to evaluate GM's competence. But changes in your liability limits aren't likely to dramatically alter the optimum strategy for reacting to those incentives.

>were the law, believe me that I would never put another dime into the equity
>market and I would advise my clients to also refrain from doing it.

No, you would be perfectly comfortable with equity investments in such a legal system, because you could achieve virtually the same risks and rewards as under the current system simply by buying equities and simultaneously buying the corresponding put options with a strike price of zero. In practice, most people would find they could live with the risks even without buying the puts. If you look carefully enough, you will see that current law assigns more liability than most people assume. For example, if a company that pays out a dividend which later turns out to cause it to default on a debt, shareholders can be liable (I suspect up to the amount of the dividend). Also, when the Bank of United States collapsed in 1930, shareholders were asked to pay some money to help pay off depositors (I'm not sure if this was justified by dividends that had been paid to shareholders, and at any rate few shareholders paid other than those who were depositors and had it deducted from their deposits.)

>And you haven't addressed the cost to you as a judgment creditor of chasing
>me, as a stockholder, to get your money. Oh, and am I, as a stockholder,
>supposed to defend myself personally in your airbag case? If that's the law
>-- even if I genuinely believed that GM would never make a design mistake -- I
>would never buy their stock.

While I assume that you would be allowed to argue your own case, it would be more efficient to accept whatever result GM's lawyers are able to get.
Brokers usually keep good enough records that enough of the stockholders would be tracked down at tolerable costs, but the costs of transferring money from stockholders who don't have enough readily seizable liquid assets are probably reason enough to avoid this kind of system.

Peter McCluskey          | Critmail ( | Accept nothing less to archive your mailing list