Saturday, February 14, 2004

Is limited liability necessary?

Whilst in the midst of my research I came upon this interesting article: The Market for Shares of Companies with Unlimited Liability: The Case of American Express in The Journal of Legal Studies. Apparently at some point American Express was a pro rata unlimited liability company. The authors try to determine what the impact of unlimited liability was on stock prices, and conclude that investors didn't consider investments in AmEx any riskier than other investments. It's not a great article (in the sense that their conclusion doesn't seem particularly persuasive in light of the evidence), but it is interesting. I'm curious why AmEx was an unlimited liability company. Fascinating.

For anyone who's interested, the above article is part of a now-passe debate on whether limited liability is necessary following a series of articles by Henry Hansmann and Reinier H. Kraakman (e.g. Toward Unlimited Shareholder Liability for Corporate Torts, 100 Yale L J 1879, 1916 (1991)), where the authors argue for unlimited liability for shareholders distributed on a pro rata basis. I think that the arguments for limited liability are pretty strong, but Hansmaan and Kraakman make a very interesting proposal. There certainly is a strong case to make that corporate fictions sometimes result in unfair treatment of involuntary creditors (e.g. tort victims). But given the benefits of the corporate fiction, see Easterbrook & Fischel, Limited Liability and the Corporation, 52 U Chi L Rev 89, it would be hard to convince me that the overall benefits from unlimited liability would outweigh the costs.

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