Do the Capital Markets Compel Limited Liability? A Response to Professor Grundfest

Abstract

We had hoped that our recent article exploring a rule of pro rata shareholder liability for corporate torts would spark renewed interest in the limited liability doctrine. Indeed, we concluded that article by inviting limited liability proponents to redress the balance of the argument. We therefore enthusiastically welcome the spirited defense of limited liability offered by Professor Joseph Grundfest in this issue of The Yale Law Journal and by his colleague, Professor Janet Cooper Alexander, in a forthcoming article in the Harvard Law Review. We predicted in our original article that the strongest arguments supporting limited liability would have little to do with the particular concerns of corporate law or the requirements of the corporate form. Rather, they were likely to rest on a belief that investors would be able to evade a pro rata liability regime, or that the difficulties of extraterritorial enforcement would preclude effective adoption of such a regime in any single jurisdiction. Judging from the arguments of our critics, our prediction was on the mark. For what these critics do not argue is as important to us as what they do. Although we take the criticisms of Professors Grundfest and Alexander seriously, we remain unconvinced. In this Response, we attempt to show that Professor Grundfest's description of the difficulties of enforcing a pro rata liability rule against public shareholders are less daunting than he suggests. We respond to Professor Alexander in greater detail elsewhere.