Unpacking Limited Liability: Direct and Vicarious Liability of Corporate Participants for Torts of the Enterprise

The corporate form limits the liability of shareholders and other participants arising from the enterprise. This broad insulation shields corporate participants not only from vicarious liability for the acts of others, but even from liability for some of their own acts taken in the corporate name. The liability that is avoided does not disap- pear into a black hole; it falls onto another person. If the liability is shifted to a tort victim, the use of the corporate form seems particularly troublesome, permitting the enterprise to externalize part of the cost of doing business. This limitation seems inconsistent with the increased use of strict liability and other modern tort doctrines to extend liability to the enterprise. Indeed, some believe that corporate law undercuts tort law and represents a nineteenth-century relic that should be swept away in the face of current tort learning. Evaluating this possible conflict requires consideration of both corporate and tort law concepts. The impact of corporate law begins with its language. The corporate form separates individual participants into shareholders, officers, and directors. This division reflects the separation of function and specialization of effort, which are core corporate characteristics. Shareholders provide the equity capital for the enterprise but do not participate in management, other than by voting for directors or on fundamental corporate changes. Officers and directors manage the enterprise, but do not by virtue of their positions have a claim to any residual gain from the enterprise. In turn, this division shapes the discussion of individual liability. Limited liability for shareholders, officers, and directors is the norm in corporate law, but there are two major exceptions that break down along the functional division just described. First, some statutes hold managers personally liable for specified violations by their firms, without reference to whether the managers also are shareholders. Second, the judicial doctrine of piercing the corporate veil, a frequent means by which courts extend liability beyond the enterprise, focuses on the liability of shareholders, thereby suggesting a concern with participants who have the potential for economic gain even if they do not have the ability to exercise control