Home > Vol. 84 > Issue 84:4 > A Risk-Based Approach to Limited Liability for Individuals and Corporate Parents

A Risk-Based Approach to Limited Liability for Individuals and Corporate Parents

Dane P. Shikman
84 Geo. Wash. L. Rev. 1104

Corporate parents and individual shareholders are fundamentally different. In particular, they have different sensitivities to economic risks—yet the limited liability doctrine has failed to account for that difference. This Note argues the customary practice of mechanically applying a checklist of veil- piercing factors commonly favors corporate parents over individual shareholders. The empirical results prove as much, which raises questions about whether the modern trend makes sense in light of limited liability’s evolutionary history as a shield for individuals, not corporations. Prompted by the disconnect between modern veil-piercing practices and the historical raison d’être of limited liability, this Note offers a unique theory—grounded in law and economics—for how courts can increase their fidelity to limited liability’s welfare-maximizing purpose and restore balance to disparate veil-piercing trends. To do this, this Note offers the “social risk” principle.

While courts ordinarily begin every veil-piercing inquiry with the presumption against liability, the social risk principle would have them abandon that presumption where the liability shield would not incentivize welfare-maximizing behavior. After all, the ultimate purpose of limited liability for non-public companies is to incentivize socially beneficial risk-taking. But limited liability for corporate parents raises moral hazard concerns to a greater degree than it does for individuals. It creates a double immunity shield within the corporate enterprise, lowering personal risk to the parent’s shareholders and thus diminishing incentives to refrain from excessive risk-taking. Therefore, as courts apply the social risk principle, they would end up discarding the nonliability presumption for corporations more frequently than for individuals. As corporate piercing rates climb, the disparate piercing outcomes would tend to equilibrium.

Read the Full Note Here.