Browsing by Author "Wyatt, Daniel Peter"

The limited liability company is the modern era’s overwhelming choice of business form. Its ubiquity is such that most aspects of our daily lives are influenced or affected by the operation of a company. Following numerous high profile scandals and catastrophes over the past few decades, however, the company’s role as a business vehicle has been thrown into sharp relief. From the Global Financial Crisis, to the Deepwater Horizon catastrophe, to unsustainable business practices generally, the viability of the modern company as a means by which to conduct environmentally and socially responsible business has become increasingly brought into question. This research paper argues that these sorts of harmful corporate actions will tend to continue due to the tandem operation of two of the apparent cornerstones of modern company law in the UK and Delaware: limited liability and shareholder primacy. The aim of this research paper is to explore whether the reform of limited liability through the introduction of a model of proportional shareholder liability would help to reduce harmful corporate activity of the sort described. Proportional shareholder liability in this paper means a system where shareholders will be personally liable for all corporate debts and liabilities in proportion to the percentage of issued shares owned by the shareholder. For example, a shareholder who owns 5% of a company’s issued shares will be personally liable for 5% of all of that company’s debts and liabilities. The hypothesis of this research paper is that such a system will work to curb socially and environmentally harmful corporate actions generated by the operation of limited liability and shareholder primacy. This is because the introduction of proportional liability will incentivise shareholders to monitor company management to a much greater extent than under limited liability. As their monitoring increases, it is assumed that they will naturally engage in more corporate activism to ensure that the company is taking generally socially and environmentally responsible decisions. To fully assess these claims, the research paper analyses the operation of a proportional shareholder liability system against the concepts of limited liability and shareholder primacy. The limited liability of shareholders is ostensibly one of the immovable pillars of the modern company. Proponents of limited liability argue inter alia that it is economically efficient, that it promotes investment from a broader segment of society and that it enables the functioning of securities markets. On the other hand, it has been argued that limited liability allows the shifting of risk from the company and onto voluntary and involuntary creditors. This negative risk-shifting mechanism becomes particularly pronounced through the operation of the corporate purpose norm of shareholder primacy. The norm of shareholder primacy—according to which a company is to be run solely in the interests of generating shareholder value—has effectively become the orthodox conceptualisation of corporate purpose in both the UK and Delaware. It is argued that the operation of shareholder primacy engenders myopic profit-driven management which places a strong focus on short-term share price increases, while largely ignoring wider social and environmental issues. This short-term management has the distinct potential to lead to many of the harmful social and environmental actions of the sort described above. However, it is contended that this myopia engendered by the norm of shareholder primacy can only survive and thrive in a system where shareholders are shielded from liability for corporate actions. By returning the risk of corporate actions to the shareholders, it is argued that proportional shareholder liability incentivises shareholders to become active in attempting to promote responsible corporate decision-making. Harmful corporate activity will therefore naturally decline. Also examined are the roles of the voluntary movements of corporate social responsibility and socially responsible investing as well as the doctrine of piercing the corporate veil in preventing environmentally and socially harmful corporate actions. The paper concludes that a system of proportional shareholder liability is theoretically feasible and has the potential to reduce harmful corporate action. It is conceded, however, that there are a number of criticisms that can be levelled against the model proposed. Nevertheless, without more research into the matter, no decisive conclusion can be reached.