In preparing for the statutory drafting exercise for the exam, I’ve been thinking about whether and why sole shareholder corps should benefit from limited liability. In Kosmopoulos II (the 1987 case) Wilson J refused to pierce the corporate veil because it would create ‘an arbitrary difference between sole shareholder and multiple shareholder corps’. In my eyes, however, the difference isn’t arbitrary at all: the policy considerations that justify limited liability in multiple shareholder corps do not apply to sole shareholder corps, because neither efficiency nor outside investment, in this context, require limited liability. A sole shareholder corp, by definition, has no outside investment, and that shareholder (if also director) will be signing contracts and engaging in activities on the corp’s behalf, with or without limited liability. Allowing shareholders in such corporations to shield themselves with limited liability seems like an arbitrary license for them to avoid responsibility by simply donning their ‘corporate hat’. Why should there be any corporate veil when it is the same person investing and managing the corporation?
The biggest counter-arguments, and the reason I didn’t pursue this line of argument, are (1) that people would likely take most of the shares to themselves but give a few away to nominal shareholders, in order to avoid being a sole shareholder corp. And (2) the ethical concerns about limited liability tend to stem from huge multinational corporations, whose numerous directors, shareholders and officers allow for a diffusion of responsibility. Going after the smaller, sole shareholder corps might not be the best use of our time if the aim is to increase corporate social responsibility.
Still, the underlying policy rationale just doesn’t seem to be there in the case of sole shareholder corps. If such corporations were not protected by limited liability, I wonder if the Salomon judgement would still stand, and if not, how corporate law might look today.
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This is an interesting point, Cindy. You’re right that corporations with one shareholder and corporations with multiple shareholders are fundamentally different, so extending the same protections to the former as to the latter is odd when they’re so structurally distinct. That said, we already know that much of corporate law is based on fiction and pretense. Saying that sole shareholder corporations and multiple shareholder corporations are similar enough to warrant the same limited liability arrangement is perhaps just another bit of legal invention we’ve come to accept as reasonable. But to your comment about how, if the law were different, people would simply find superficial ways to get around formal sole shareholder status, I think that’s particularly astute. This course has helped me see how creative people can be at manipulating the law to suit their own ends while still, ostensibly, complying with it.