By definition, a shareholder is: One who owns shares of stock in a corporation or mutual fund (WebFinance, Inc. , 2012). A corporation’s shareholders own the corporation. Nevertheless, they are not agents of the corporation (i.e., they cannot bind the corporation to contracts), and the only management duty they have is the right to vote on matters such as the election of directors and the approval of fundamental changes in the corporation (Cheeseman, 2010, p. 578). The shareholder makes a capital investment necessary for a company to operate. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly. Therefore, the element of risk exists in becoming a shareholder. Benefits of protecting Shareholders
There are definite benefits to commerce in protecting its shareholders from personal liability. Many business entities rely on the capital raised to organize and operate businesses. If the shielding of shareholders did not exist, investors will fear personal liability as a result of a business that comes under legal actions and will not want to accept the risk of losing the capital they invest. Generally, the shareholders have only limited liability. That is, they are liable only to the extent of their capital contributions and do not have personal liability for the corporation’s debts and obligations (Cheeseman, 2010, p. 558). Business entities can incorporate terms in shareholder agreements that will exempt them from liabilities but leave the general partners responsible for their own actions. Most shareholders are not taking an active part in the management of a company; they will not want to assume responsibility that would lead to a personal liability.
A shareholder will be reluctant to invest if the fear of losing personal assets is at stake. Additionally, if the shareholder becomes liable for business practice violations, stakeholders could also be found liable. They results of this would be an unnecessary due diligence by both shareholders and stakeholders to mitigate their potential liabilities and increase the cost of products or services. [I urge you to note in your study of contracts that adhesion clauses in a contract are not usually enforced by the courts. Adhesion clauses in a contract are unbalanced in that it gives the party writing the contract greater benefits than to the weaker party to the contract. Further, courts don’t enforce contracts that excuse and free from liability those that draft the terms of the contract because they have greater bargaining power.] Individual personal liability for misdeeds or their entity
Commerce is better served if individuals of a business entity are held responsible for their actions. Impunity from liability within a business entity will only promote a higher incident rate of violations should partners, officers, or employees felt they were immune from responsibility. Although there is a perceived level of confidence in business ethics, a lack of accountability for an individual actively involved in a business has shown otherwise. In the aftermath of the Enron scandal in 2001, legislations requiring the accuracy of financial reporting for public companies were put in place. One piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders (Cohen & Lys, 2005).
The outcome of immunity from liability or ramifications for irresponsible actions by employees of a business could result in unsafe conditions, defective products or sub-standard services adversely affecting the financial position of the company and ultimately affecting the shareholders’ value. Individual liability should have safeguards to protect the individual from the action of others unless they are a party to a violation or illegal business practice. [Good comments in this paragraph. Don’t forget that officers controlling a company, corporation or other business entities, under current law, cannot escape liability for conduct that is illegal. Are current laws covering activities of individuals controlling business entities sufficient to hold them responsible if their activities harm the general public or shareholders? That is an ongoing question that is constantly be examined. Keep in mind that the “business judgment rule” is a fair one and at this time should not be amended.] Conclusion
The issues of personal liability are contingent upon the levels of active involvement individuals have with a business entity. Shareholders have an expectation that by making a capital investment they hope to profit through a company’s success. As a result they limit their responsibilities in the active management and usually will have the authority to appoint individuals with whom they have confidence can operate the business effectively and honestly. Shareholder liability should remain exempt so as to encourage their investment. In the case of the individuals who are a part of the business entity, it is important to enforce system of to prevent the individuals from willingly committing violations that could lead ultimately to a negative impact on the financials of a business.
Cheeseman, H. (2010). Business Organization and Ethics. In H. R. Cheeseman, Business Law: Legal Environment, Online Commerce, Business Ethics, and International Issues, Seventh Edition (p. 578). Upper Saddle River, NJ: Prentice Hall. Cohen, D. A., & Lys, D. A. (2005, February). Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods. Retrieved 16 2012, July, from Social Science Research Network: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=658782 WebFinance, Inc. . (2012). Shareholder. Retrieved July 16, 2012, from InvestorWords.com: http://www.investorwords.com/4527/shareholder.html