Limited liability and limited directors liability Prof Dr
Limited liability and limited directors’ liability Prof. Dr Joeri Vananroye Hazelhoff Guest Lecuture | University of Leiden 8 Nov 2018
owner shareholder usus fructus abusus
owner shareholder usus fructus abusus liability collateral for other debts
owner shareholder usus fructus abusus liability collateral for other debts
owner shareholder usus fructus abusus liability no liability collateral for other debts assets shielded
owner shareholder usus fructus abusus liability no liability collateral for other debts assets shielded
owner shareholder usus fructus abusus f i d u c i a r y liability no liability collateral for other debts assets shielded
Why distrust of limited liability ?
Benefits of limited liability? – less monitoring of management required diversified investment possible makes specialized management possible – eases transferability of shares – voluntary creditors can bargain with the knowledge of limited liability – some creditors can monitor the management better than shareholders (and have a strong incentive to do so because of the of shareholders) – unlimited liability is not that interesting if many shareholders – limited liability is just a default rule for voluntary creditors 9
SALANIO Believe me, sir, had I such venture forth, The better part of my affections would Be with my hopes abroad. I should be still Plucking the grass, to know where sits the wind, Peering in maps for ports and piers and roads; And every object that might make me fear Misfortune to my ventures, out of doubt Would make me sad. ANTONIO Believe me, no: I thank my fortune for it, My ventures are not in one bottom trusted, Nor to one place; nor is my whole estate Upon the fortune of this present year: Therefore my merchandise makes me not sad. SALARINO Why, then you are in love.
Limited liability is ‘just’ a default rule Source: T. Henderson & S. Baindridge, Limited Liability: a legal and economic analysis, Elgar, 2016
The corporate ‘technology’ which remedies the negative effects of limited liability 1. Publicity 2. Seizure of shares 3. Company creditors have priority 4. Directors’ liability 5. Accounting 6. Insolvency
Why is the corporate form currently more easily accepted than in the past? 1. Publicity 2. Seizure of shares 3. Company creditors have priority 4. Directors’ liability 5. Accounting 6. Insolvency
1. Publicity 2. Seizure of shares 3. Company creditors have priority 4. Directors’ liability Threat: shopping for corporate law 5. Accounting third party protection with a switch off button is no 6. Insolvency protection
1. Publicity 2. Seizure of shares 3. Company creditors have priority 4. Directors’ liability 5. Accounting 6. Insolvency
ely v i t a l e r gal e l t n e rec tion innova Shift to directors’ liability • Creditors are protected by: – external directors’ liability towards third parties – internal directors’ liability towards the company • In close corporations shareholder is often director • It is easier to allocate blame in a close corporation • “Fifty shades of gray” – not the ‘black’ automatic unlimited liability of an owner of business or acworking partner in a partnership – nor the blank absence of liability – but liability based on wrongdoing and actual damages
Reality of directors’ liability in Belgium • Rules of bankruptcy governance and remuneration and liability of bankruptcy trustee discourage claims • No adequate solution for “assetless estate” • Non-company law remedies underdeveloped or absent
Proposed “cap” on directors’ liability • Draft of a new Belgian Code for Companies and Associations proposes a “cap” on directors’ liability – amount function of turn-over and balance-sheet total
maximum liability turn-over balance-sheet total EUR 125. 000 < EUR 350. 000 < EUR 175. 000 EUR 250. 000 < EUR 700. 000 < EUR 350. 000 EUR 1 mio < EUR 9 mio EUR 3 mio > both limits on row 6, but < limits on row 5 EUR 12 mio > EUR 50 mio en/of or < EUR 4, 5 mio > EUR 43 mio
Proposed “cap” on directors’ liability • Draft of a new Belgian Code for Companies and Associations proposes a “cap” on directors’ liability – amount function of turn-over and balance-sheet total • The amount applies to the board as a whole • The limitation applies to : • liability towards the company and towards third parties • contractual and non-contractual liability (including bankruptcy liability and damages caused by criminal activity) • any wrongdoing short of fraud, including “manifestly serious wrongdoings) • The amount of the cap apply per fact or per set of facts that can cause liability, regardless of the number of claimants or claims • Exceptions: • Fraudulent intent or the intent to harm • Liability towards some public creditors (tax, social security) • Liability in another capacity, such as contractual liability in a guarantee towards a creditor
BELGIUM (draft Art. 2: 53) DELAWARE (Section 102 (b) 7) Default rule (even mandatory? ) Optional Fixed amount Possibility to vary Applied to both internal and external liability Only applied to internal liability Exception: no cap in case of fraud Broader exceptions such as intentional breaches, breach of duty of loyalty and unlawful Directors’ liability is underenforced Proper enforcement of directors’ liablity makes it a serious risk (e. g. “derivative action”) Roel Verheyden : https: //corporatefinancelab. org/2017/11/14/kwantitatieveaansprakelijkheidsbeperking-voor-bestuurders-in-delaware-en-belgie/
“Well, I get darn sick of tryin’ to pick up after a gang of fasttalking salesmen dumb enough to sell life insurance to a guy who sleeps in the same bed with four rattlesnakes. ” Edward G. Robinson as Barton Keyes
Will Belgium win the “regulatory competition”? 1. The cap is a strong inducement for businesses with activities in Belgium not choose for another corporate law 2. The cap will offer no protection for liability incurred outside of Belgium and will not be an inducement to incorporate in Belgium 3. The cap might be an inducement to undertake activities in Belgium and choose for Belgian corporate law. Issue: for liability incurred for activities in Belgium, directors of a Belgian company get a benefit that directors of a company governedby a different company law do not get
Race to the bottom or to the top?
Race to the bottom or to the top?
https: //corporatefinancelab. org/2016/10/17/ our-own-private-delaware-the-partnershipen-commandite/ https: //corporatefinancelab. org/2016/11/02/ you-cant-dance-at-two-weddings-with-onebehind-yiddish-proverb/ https: //corporatefinancelab. org/2016/10/27/ distributions-to-shareholders-inspirationfrom-the-partnership-en-commandite/ https: //corporatefinancelab. org/2017/12/26/ van-minimumkapitaal-naarmaximumkapitaal/ https: //corporatefinancelab. org/
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