The Risk of Shareholder Liability! Wait a Minute - We are Only a Shareholder and We are Not Liable for the Deeds of the Corporation!
The concept of limitation of liability is one of the hallmarks of a corporation. By becoming a shareholder in a corporation, the shareholder is not personally liable for the corporate liability. There are some exceptions of course. There are always some exceptions. But in normal circumstances a shareholder need not be concerned when the corporation is sued, unless the corporate identity is merely a sham, and the corporate formalities are not followed. The classic example is when the shareholder uses the corporation as a piggy bank and ignores all the corporate requirements.
Marc Ward's Blog, Ward of Iowa Limited Liability Companies has an interesting post discussing a recent court decision in a US District Court in Georgia. The court held that a party that was a minority shareholder when the contract in dispute was executed, and who later became the sole shareholder of the corporation, was bound by a choice of law provision in a contract it did not sign and was not a party to. This is a very troubling case on several fronts. The court found that a supplier to a corporation could have liability because it was a shareholder at the time the contract was formed. This is not the law is almost every jurisdiction. Marc Ward provides some additional thoughts that are worth reading.
I think the thing that troubles me the most is that the court is in essence rewriting a contract, and this the court is not authorized to do! Do rulings like this discourage the formation of corporations, or other entities that provide a limitation of liability to the owners? How is the shareholder to protect its self? Shareholders should not need to buy insurance against liability for corporate obligations.
