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Article
An Economic Analysis of Limited Shareholder Liability in Contractual Claims
Berkeley Business Law Journal (2014)
  • Thomas K. Cheng, University of Hong Kong
Abstract
This Article evaluates the economic basis for limited liability in contractual claims and proposes the introduction of unlimited liability for such claims against closely held corporations. It argues that the existing justifications for limited liability are unconvincing, and that unlimited liability is an economically more efficient rule for these corporations in light of savings in monitoring costs and more efficient allocation of risks. It rejects the frequently made argument that limited liability is justified in contractual claims because the contractual counterparty had a prior opportunity to negotiate for modifications. This argument demonstrates a fundamental misunderstanding of the nature of the bargaining process between a corporation and its various groups of contractual creditors, many of which are simply not in a position to negotiate for modifications to the default rule. It further examines some of the implementation problems for unlimited liability and suggests possible solutions for them.
Keywords
  • Limited liability,
  • economic analysis,
  • piercing of corporate veil.
Publication Date
Fall September 10, 2014
Citation Information
Thomas K. Cheng. "An Economic Analysis of Limited Shareholder Liability in Contractual Claims" Berkeley Business Law Journal Vol. 11 Iss. 1 (2014) p. 113 - 181
Available at: http://works.bepress.com/thomas_cheng1/11/