The Role of the Corporation and Limited Liability
in a Private Law Society
Speech by Stephan Kinsella to the Eighth Conference
of the Property and Freedom Society,
Held in Bodrum in September 2013
(Reported and with a Commentary by Sean Gabb)
Note: This is not a transcript of Stephan’s speech. It is a summary made as he spoke, that was at first intended purely for my own diary. However, since mine appears to be the only written account of the conference as a whole, and since this speech raises issues that are of particular interest to me, I have decided to publish it on the Libertarian Alliance Blog. If I give myself the best side of the argument, that may be the effect of bias – or it may be because I won the argument. Of course, by publishing, I make it possible for Stephan or others to correct my view of whether I won. SIG
Murray Rothbard once asked Mises for a clear distinction between a free and a socialist economy. The answer was possession of a stock exchange: he believed this was crucial to the existence of capitalism and private property.
Now, a stock exchange means the existence of joint stock limited liability corporations. These exist in order to minimise transaction costs. There are upper limits to their size, and there are other forms of business organisation – sole traders, partnerships, and so on.
There are three essential features to a corporation. These are legal personality, perpetual duration and limited liability. A corporation is regarded by the law as a person, with most of the rights and civil responsibilities of a natural person. Following from this, it is responsible for its own debts. The directors and shareholders are not usually called on to pay from their own assets, if the corporation becomes insolvent. There is a veil of incorporation that, save in the case of plain fraud, the courts are reluctant to lift.
At the moment, these features are all obtained by state registration. Critics regard them as state-granted privileges. Critics from the left, like Ralph Nader, argue that these privileges should justify heavy regulation to enforce good and responsible conduct. But there are many libertarian critics who argue that the privileges are in themselves illegitimate.
Are corporations like roads? These are presently built and maintained by the State. But there is no doubt that they would be built and maintained in a free society. It is the same with marriage. This is presently defined and regulated by the State. But marriage would continue to exist in a free society. Or are corporations like patents and copyrights? These are purely creatures of state legislation, and probably could not exist without the State.
Those libertarians who deny the legitimacy of corporations go further, so far as they believe them to be part of an artificial order that involves a more hierarchical society than would otherwise exist – a society in which there is more paid employment than would otherwise exist.
Let us pay no further attention to these wider considerations. The main question is whether limited liability would exist in a free society. There is little argument about entity status. This could be obtained by various kinds of private agreement in much the same way as marriages would be recognised. Nor is there any argument about contractual limitations of liability. The debate is over limited liability in the event of insolvency due to a torts award.
I believe that the debate is misconceived. It is based on the assumption that, in the absence of a grant of limited liability by the State, the shareholders ought to be, or would be, liable for the debts of a corporation. This rests on two further assumptions. The first is that shareholders actually own a corporation. The second is that the owner of a business should be responsible for the torts of his employees.
The first assumption is dubious. Shareholders have the right to elect the directors of a corporation, and the right to a share of any profits. That is the limit of their “ownership.” They have no right to use the property of their corporation, nor any control over its day to day use.
The second assumption is based on the law of vicarious liability. This derives from a more hierarchical age than our own, when employers had non-contractual legal rights over their workers – rights comparable in nature if not in extent to those of an owner over his slaves, or of a lord over his serf. Vicarious liability has little justification in an age of purely contractual relationships.
Let me give the example of a gun company. If someone buys a gun and uses it to commit a crime, should the manufacturer or seller be held responsible for that crime/ Obviously not.
For this reason, even without a state to grant limited liability, it can be doubted whether the shareholders would be held responsible for the debts of a corporation.
[What follows next is based partly on the issues I raised in the
open question and answer session, and partly on a long debate I had
with Stephan during the next day’s boat trip along the Turkish
SIG Stephan, I’d like to thank you for so clear a summary of your argument, and for so fair an exposition of the opinions of those who disagree with you. However, I find your analogy of the gun shop defective. If I sell a gun to somebody, who then goes and shoots someone, the decision of the buyer to commit a crime is a new intervening cause and breaks the nexus between me and the crime.
But let us take this example, and let us leave aside any matters arising from the veil of incorporation. I am the sole proprietor running a delivery company. While going about my business in my time, one of my drivers causes an accident and hurts someone or damages valuable property. The driver himself may be without assets.
I grant that in both England and America, the doctrine of vicarious liability has been pressed too hard. At the same time, It troubles me that, in the case just given, I shall not be responsible for accident caused by my employee. And I say that regardless of whether I have been personally negligent in my selection and training of the driver, or in my choice and maintenance of the van. Your idea that ownership does not carry responsibility strikes me as bizarre.
And what applies in the case of a sole proprietor is not changed if I decide to run the company as a joint stock limited liability corporation.
SK I grant the impropriety of the gun shop example. I should have done better there. I also take your point about vicarious liability. In some cases, the directors and even the shareholders should be vicariously liable for the torts of their servants. But I still insist that shareholders cannot be regarded as the owners of a corporation. Their rights are so limited that they cannot be taken as the rights of an owner.
SIG So, who owns corporations like British Petroleum?
[The answer given here was not satisfactory. Its burden is “Not the
shareholders.” I cannot say more than this, because the answer had
no obvious focus.]
SIG Stephan, I deny your claim, that shareholders cannot be regarded as the owners of a corporation, because their ownership consists solely in the right to elect directors and share in the profits. You are confusing rights possessed with rights exercised. The shareholders of a corporation have the undeniable legal power to change the articles and memorandum of association, so that they must be consulted on all management decisions. It might not be consistent with good management for a company to be directed by something like the Assembly of democratic Athens. But that is beside the point. They have the power to do this. If they do not choose to make use of the power, that is their choice, and possibly their negligence. As such, they are as much the owners of a corporation as the proprietor in a sole tradership is the owner of his business. Granted you have allowed the legitimacy of some degree of vicarious liability, your whole argument about limited liability falls to the ground.
[The rest of the argument – all on the boat trip – was long and
involved, and mostly concerned the distinction between contracts of
permanent service and contracts for services. It is not strictly
relevant to this record. But here is my side of the argument. I look
forward, in due course, to Stephan’s response.]