Where Exactly Is It Written That Shareholders Aren’t Liable For Corporate Debts?

Recently, UCLA Law School Professor Stephen Bainbridge took notice of Section 6.22(b) of the Model Business Corporation Act and asked what might lead a corporation to waive the limited liability of shareholders in its articles of incorporation.  That section provides “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct”.

Professor Bainbridge’s query got me thinking about another question – where exactly in the California General Corporation Law does the legislature say that a shareholder isn’t liable for the acts or debts of the corporation?  After giving the question some thought, I’m not sure that the GCL actually says that anywhere.  Some readers might point me to Section 409(b) (“Except as provided in subdivision (d) [dealing with partly paid shares], shares issued as provided in this section or Section 408 shall be declared and taken to be fully paid stock and not liable to any further call nor shall the holder thereof be liable for any further payments under the provisions of this division.”).  However, that statute seems directed to calls by the corporation and liability for payments under the GCL (as opposed to liability to third parties).  Section 423(a) governs the assessability of shares which relates to the right of a corporation pursuant to its articles of incorporation to require shareholders to make additional capital contributions.  If I’ve missed a statute, please let me know.

In contrast both Delaware and Nevada, neither of which has adopted the MBCA, expressly limit the liability of stockholders.  Section 102(b)(6) of the Delaware law allows the inclusion of a provision in the certificate of incorporation imposing personal liability on stockholder but provides “otherwise, the stockholder of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts”.  Nevada negates liability both in its constitution (Article 8, Section 3) and by statute (NRS 78.225).  For a discussion of these provisions, see Section 6.17[A] of Bishop and Zucker on Nevada Corporations and Limited Liability Companies.

A Case of Apophasis?

In contrast, California imposed proportionate liability on shareholders for nearly four score years until  those provisions were repealed in 1931.  See my article, Silver Standard,  Los Angeles Lawyer, November 2008.  Thus, the basis for the understanding that shareholders of California corporations aren’t personally liable for corporate debts appears to have its genesis in the abnegation of statutes and constitutional provisions affirmatively imposing liability on shareholders.

In closing, remember that this is a blog about ideas and issues, it is not legal advice.

 

Topics:  Articles of Incorporation, Debt, Personal Liability, Shareholders

Published In: Business Organization Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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