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Elective Shareholder Liability


Publication Date: 
December 31, 2012
Journal Article
Bibliography: Peter Conti-Brown, Elective Shareholder Liability, Rock Center for Corporate Governance at Stanford University Working Paper No. 97; Stanford Law and Economics Olin Working Paper No. 408; 64 Stanford Law Review 409 (2012).


This Article proposes a mechanism, called elective shareholder liability, that allows shareholders of systemically important financial institutions (SIFIs) to alter their corporate structure in order to resolve the continually vexing problems of moral hazard, too-big-to-fail (TBTF), and taxpayer bailouts. In the ongoing debate over the most effective ways to end TBTF - including what ultimately became Dodd-Frank and what will become Basel III - one prominent proposal introduced by respected financial economists was presented but has, so far, been defeated: increased capital adequacy requirements of at least 15%. Although the proposal would undoubtedly and drastically limit the likelihood of taxpayer bailouts, opponents have argued that the economic costs to banks and the rest of society were too great. Dodd-Frank opted instead for a regulatory and liquidation regime that, whatever its virtues, will not prevent future taxpayer bailouts, and may even make them more likely. Basel III takes a capital adequacy approach, but only goes half as far as the economists’ proposal would require.

Elective shareholder liability allows SIFI shareholders, according to their own internal cost-benefit analyses, the option of either changing their capital structure to include dramatically greater equity, consistent with the economists’ recommendations, or adding a bailout exception to the SIFIs’ limited shareholder liability. The second option would be structured as a governmental collection, similar to a tax assessment, for the recoupment of all bailout costs against the shareholders, assessed on a pro-rata basis. It would also include an up-front stay on collections to ensure that there are, in fact, taxpayer losses to be recouped, and to dampen government incentives for over-bailout, political manipulation, and crisis exacerbation. Elective shareholder liability would also give the government the authority to declare the shareholders’ use of the corporate form to evade liability null and void, and require that shareholders who litigate against collection and lose to pay the government’s litigation expenses. After explaining the structure and benefits of elective shareholder liability, the Article addresses more than a dozen potential objections. Close inspection of these objections, however, reveals that the overall case for elective shareholder liability is strong as a matter of history, law, and economics.