Asset Partitioning, Limited Liability and Veil Piercing - Review Essay on Bainbridge/Henderson, Limited Liability

One of the core features of modern corporate law is the partitioning of the corporation's assets and the shareholders' (private) assets affirmatively and defensively in the sense that the claims of a corporation's creditors are prior to those of shareholders' personal creditors with respect to corporate assets and that claims of the shareholders' personal creditors have priority over those of corporate creditors with respect to shareholders' private assets. The second principle is the rule of limited liability. What makes it special is that it may not be created by contract – or only under severe restrictions. Courts in many jurisdictions curtail the rule of limited liability by doctrines such as “piercing the corporate veil”, exposing shareholders to a creditor's claim and therefore to personal liability for the corporation's debts. The circumstances giving cause to such measures are not clear, however. Additionally, in historical perspective, combining business entities with defensive asset partitioning is not a self-evident maneuver; even modern scholars challenge the idea of limiting liability in general, at least vis-à-vis tort creditors. Stephen Bainbridge and M. Todd Henderson thus take up an important and timely topic with their book on limited liability and veil piercing. Considering the many aspects they discuss, their book provides a welcome chance not just to write a short review, but to take up some general issues of asset partitioning and veil piercing. This review essay, accepted for publication in the European Business Organization Law Review, runs the following course: After providing a historical perspective on limited liability in section II., section III. turns to its relationship with incorporation. Section IV. deals with the question why limited liability should be accepted at all, thus preparing the stage for a look at alternative approaches in section V