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


One of the core features of modern corporate law is affirmative and defensive partitioning of the corporation’s assets and the shareholders’ (private) assets. Defensive asset partitioning contains 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 this rule 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 wide variety of 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. After providing a historical perspective on limited liability the review essay turns to its relationship with incorporation. It then deals with the question why limited liability should be accepted at all, thus preparing the stage for a look at alternative approaches.

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  1. 1.

    Exemplary in all respects Kraakman et al. (2017).

  2. 2.

    For the US: Hansmann and Kraakman (2000), p 393. For Germany Kuntz (2016), pp 8, 477 et seq. On the basis of a general theory of ‘capital associations’ (Kapitalvereinigungen) and in historical perspective for antiquity Fleckner (2010), pp 49 et seq., 339 et seq. Not only corporate law contains this feature, but many other forms of organizational law as well. For the US see Hansmann and Kraakman (2000), for Germany Tröger (2008), p 1533.

  3. 3.

    Hansmann and Kraakman (2000), p 394; Fleckner (2010), pp 48, 295 et seq.; Kuntz (2016), pp 477 et seq.

  4. 4.

    For the US: Hansmann and Kraakman (2000), pp 428 et seq.; even though Hansmann and Kraakman deny this as a matter of first impression, they grant this claim to be correct for torts under the current system. For Germany Kuntz (2016), pp 478 et seq. In historical perspective Fleckner (2010), pp 295 et seq.

  5. 5.

    The passage on the joint stock company was introduced in the third edition of ‘An Inquiry into the Nature and Causes of the Wealth of Nations’: Smith (1784), Book V ch. I part III Art. I, vol. III, p 124 = Cannan-edition (1904), vol. 2, p 265; on Smith on the Joint Stock Company Fleckner (2016).

  6. 6.

    Ribstein (2009).

  7. 7.

    See Chrisman (2010).

  8. 8.

    The introduction (pp 1–18) begins with an overview of what the authors regard as features of incorporation, with limited liability just being one among others such as corporate personhood, before it discusses the importance of limited liability (pp 13–15), points at several exceptions to it (pp 16, 17), and lays out the plan of the work. In chapter 2 (pp 19–43), the authors outline the history of limited liability, not only in the US, but starting with ‘the ancient roots’ (p 21). Chapter 3 (pp 44–85) presents an explanation of why limited liability exists at all, based on a contractarian view of the corporation. Chapter 4 explains different veil-piercing standards in the US (pp 86–131), chapter 5 the applicable law with respect to veil piercing (pp. 132–144), chapter 6 examines veil piercing in statutory contexts (pp 145–180). After a shorter chapter 7 (pp 181–199) about doctrines related to veil piercing, the authors turn towards veil piercing in unincorporated entities (chapter 8, pp 200–233). Chapter 9 provides a comparative perspective on veil piercing (pp 234–278). In chapter 10 Bainbridge and Henderson rethink veil piercing and present their reform proposal (pp 379–301). Chapter 11 concludes (pp 302–304).

  9. 9.

    Bainbridge and Henderson (2016), p 19.

  10. 10.

    Bainbridge and Henderson (2016), p 22. Through a peculium, the pater familias (head of the family) or dominus (master of a slave) could dedicate an estate to personae alieno iuri subiectae (persons under the authority of another, e.g. sons and slaves). This allowed those who received the estate to hold an acquired asset on their own, a possibility otherwise denied to them under Roman law. By transferring assets on the son or slave, the person dedicating the estate could limit (at the time) his risk to the current value of the peculium, and thus in some way achieve limited liability. For details see Fleckner (2010), pp 217 et seq., 295 et seq.; Fleckner (2014); Fleckner (2017).

  11. 11.

    On both aspects Fleckner (2010), pp 217 et seq., 295 et seq.; Fleckner (2014); Fleckner (2017).

  12. 12.

    See (highly critical) Fleckner (2010); Fleckner (2017).

  13. 13.

    Fleckner (2010), pp 299 et seq.; Fleckner (2017), section III.3.(b).

  14. 14.

    Bainbridge and Henderson (2016), p 28.

  15. 15.

    Handlin and Handlin (1945), p 9 with fn. 46. Bainbridge and Henderson argue that according to the predominant view among government attorneys, by the end of the eighteenth century limited liability had become the default rule when a charter was silent (p 28).

  16. 16.

    Bainbridge and Henderson (2016), pp 19 et seq., on the basis of two contemporary sources.

  17. 17.

    Bainbridge and Henderson (2016), p 28. In the same vein e.g. Blumberg (1986), p 580; DuBois (1938), pp 95 et seq.

  18. 18.

    The Kenyon letter is cited in DuBois (1938). The other authors rely on this citation.

  19. 19.

    Russell v. Men of Devon, 2 T. R. 668, 672 (1788), 100 Eng. Rep. 359 (1788), a case that involved a public corporation. It is interesting to note that the decisive factor for the court was not the idea of limited liability in corporations, but precedent.

  20. 20.

    Even DuBois (1938), pp 150 et seq., fn. 67, cites and criticizes a commentary on the laws of Scotland expressing the opposite view as twisting legal history. DuBois, however, does only provide one other source besides Kenyon (l.c.). The other authors mentioned in n. 17 do not provide any additional source besides Kenyon (or DuBois as the indirect citation). See also the data presented by Handlin and Handlin (1945).

  21. 21.

    See above, n. 5.

  22. 22.

    Sitting of 7 August 1855, House of Lords Hansard Series 3 Vol. 139, p 1904, available online at (last checked 5 April 2018).

  23. 23.

    Handlin and Handlin (1945).

  24. 24.

    See Blackstone (1765), Book I, Chapter 18.

  25. 25.

    Mentioned by Bainbridge and Henderson (2016) on p 26.

  26. 26.

    Even after the French invasion had been defeated. To give just one example, the Grand Duchy of Baden transferred the code de commerce into its own law; see Schubert (1977), pp 193 et seq.

  27. 27.

    See Schubert (1977).

  28. 28.

    On German corporate law in the 19th century see Guinnane (2017); on German corporate law in the 20th century and the 1937 reform see Kuntz (2017b).

  29. 29.

    ‘Eine Handelsgesellschaft ist eine Aktiengesellschaft, wenn sich die sämtlichen Gesellschafter nur mit Einlagen betheiligen, ohne persönlich für die Verbindlichkeiten der Gesellschaft zu haften’, Amtliche Ausgabe (official edition), Munich 1862.

  30. 30.

    Bainbridge and Henderson (2016), pp 31 et seq. Additionally, readers interested in the origins of the American business corporation may want to consult the seminal article of Handlin and Handlin (1945).

  31. 31.

    See Handlin and Handlin (1945), p 4.

  32. 32.

    Handlin and Handlin (1945), p 7.

  33. 33.

    On the developments in the US, see Bainbridge and Henderson (2016), pp 31 et seq.

  34. 34.

    Bainbridge and Henderson (2016), pp 39 et seq.

  35. 35.

    E.g., Bainbridge and Henderson (2016), pp 9, 44 (first subheading); Blair (2013), p 442.

  36. 36.

    On this, see 3.2 below.

  37. 37.

    Loi no 2010-658 du 15 juin 2010 relative à l’entrepreneur individuel à responsabilité limitée, Journal officiel de la République française (JORF), no 0137 du 16 juin 2010, p 10984. According to its Art. 14(1), the law entered into force after the official publication of a regulation modifying insolvency law on 12 December 2010 (Ordonnance no 2010-1512 du 9 décembre 2010 portant adaptation du droit des entreprises en difficulté et des procédures de traitement des situations de surendettement à l’entrepreneur individuel à responsabilité limitée), published 10 December, JORF no. 0286 du 10 décembre 2010, p 21617.

  38. 38.

    Genossenschaftsgesetz, as amended and promulgated on 16 October 2006 (Bundesgesetzblatt I p 2230), as last amended by Art. 10 of the law of 10 May 2016 (Bundesgesetzblatt I p 1142).

  39. 39.

    Sec. 6 No. 3: ‘Die Satzung muss enthalten: Bestimmungen darüber, ob die Mitglieder für den Fall, dass die Gläubiger im Insolvenzverfahren über das Vermögen der Genossenschaft nicht befriedigt werden, Nachschüsse zur Insolvenzmasse unbeschränkt, beschränkt auf eine bestimmte Summe (Haftsumme) oder überhaupt nicht zu leisten haben; […].’.

  40. 40.

    Examples: For the US: § 15-201(a), § 15-202(d), (e) Delaware Uniform Partnership Act; for Germany § 124(1) German Commercial Code (Handelsgesetzbuch).

  41. 41.

    Bainbridge and Henderson (2016), p 68.

  42. 42.

    Bainbridge and Henderson (2016), p 69.

  43. 43.

    This is the argumentative strategy of Bainbridge and Henderson (2016), p 69.

  44. 44.

    Bainbridge and Henderson (2016), pp 69 et seq. On tort creditors’ interests, see Sect. 4.1.2 below.

  45. 45.

    Likewise in general, but not with respect to the conclusions drawn in the text above, Bainbridge and Henderson (2016), p 83.

  46. 46.

    Bainbridge and Henderson (2016), p 83.

  47. 47.

    For a critical view see Hayden and Bodie (2011); Smith (2016); Kuntz (2016), pp 26 et seq.

  48. 48.

    Sutherland v. Sutherland, 2009 WL 750287, 4 (Del.Ch. March 23, 2009), contrasting the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act, ‘where freedom of contract is the guiding and overriding principle’, with the Delaware General Corporation Law.

  49. 49.

    Bainbridge and Henderson (2016), p 56.

  50. 50.

    On the following Bainbridge and Henderson (2016), pp 63 et seq., with further sources.

  51. 51.

    Halpern et al. (1980), p 134; similar Bainbridge and Henderson (2016), pp 63 et seq., with further sources.

  52. 52.

    See n. 51.

  53. 53.

    Holderness (2009).

  54. 54.

    See R. Kalb and R. Yates, ‘Snap, Inc. Reportedly to IPO with Unprecedented Non-Voting Shares for Public’, (last checked 5 April 2018).

  55. 55.

    See Hansmann and Kraakman (1991) advocating a pro-rata liability rule to the benefit of tort creditors.

  56. 56.

    Bainbridge and Henderson (2016), p 63.

  57. 57.

    This risk is well known in the context of tort creditors and will be dealt with there.

  58. 58.

    Banks and other large creditors hand out loans in turn for collateral, trade creditors may protect themselves by retention of title (e.g. in Germany) or by a security interest pursuant to Art. 9 of the Uniform Commercial Code (US). Other creditors, such as employees, are protected by other means such as priority in bankruptcy or insolvency payments by the government.

  59. 59.

    Hansmann and Kraakman (1991); see also Hansmann and Kraakman (2000), p 431.

  60. 60.

    Hansmann and Kraakman (1991), p 1880.

  61. 61.

    Bainbridge and Henderson (2016), pp 71 et seq.

  62. 62.

    Bainbridge and Henderson (2016), pp 71 et seq.

  63. 63.

    Bainbridge and Henderson (2016), p 57.

  64. 64.

    The account offered by Bainbridge and Henderson (2016), p 75, could have been more nuanced in that regard.

  65. 65.

    Bainbridge and Henderson (2016), p 72.

  66. 66.

    See Gagliardi, Jr., v. Trifoods International, Inc., 683 A.2d 1049, 1052 (Del.Ch. 1996): ‘Shareholders don’t want (or shouldn’t rationally want) directors to be risk averse. Shareholders’ investment interests, across the full range of their diversified equity investments, will be maximized if corporate directors and managers honestly assess risk and reward and accept for the corporation the highest risk adjusted returns available that are above the firm’s cost of capital.’.

  67. 67.

    Bainbridge and Henderson (2016), pp 72 et seq.

  68. 68.

    See Bainbridge and Henderson (2016), p 78.

  69. 69.

    Bainbridge and Henderson (2016), pp 77 et seq.

  70. 70.

    See Bainbridge and Henderson (2016), p 78.

  71. 71.

    It is not quite clear why Bainbridge and Henderson (2016), p 79, qualify limited liability in the close corporation as a penalty default.

  72. 72.

    On concepts and applicable law in the US, related doctrines and comparative law Bainbridge and Henderson (2016), chapters 4–7 and 9.

  73. 73.

    On the laundry-list approach in the US, see Bainbridge and Henderson (2016), pp 105 et seq.

  74. 74.

    Easterbrook and Fischel (1985).

  75. 75.

    At least German courts, see Sect. below.

  76. 76.

    Bainbridge and Henderson (2016), p 279.

  77. 77.

    Bainbridge and Henderson (2016), p 282.

  78. 78.

    Bainbridge and Henderson (2016), p 283.

  79. 79.

    Bainbridge and Henderson (2016), p 284.

  80. 80.

    Bainbridge and Henderson (2016), p 287.

  81. 81.

    Bainbridge and Henderson (2016), p 289.

  82. 82.

    Bainbridge and Henderson (2016), pp 289 et seq.

  83. 83.

    On the (non-existent) relationship between separation of assets and incorporation, see Sect. 3.1 above.

  84. 84.

    With respect to German law, it is worth mentioning that the vast majority of German corporate law scholars considers cases like Autokran, Video and TBB, discussed by Bainbridge and Henderson (2016), on pp 264 et seq., to be obsolete.

  85. 85.

    Bundesgerichtshof, judgment of 17 September 2001, docket no. II ZR 178/99, Official Collection of Decisions of the German Federal Court of Justice (Amtliche Sammlung der Entscheidungen des Bundesgerichtshofs—BGHZ) 149, 10—‘Bremer Vulkan’. In fact, the court used an ‘intermediate’ concept from 2001 to 2007. This solution, however, is not in place anymore and is left out for the sake of brevity. Sec. 826 was brought into the limelight in the 2007 Trihotel judgment: Bundesgerichtshof, judgment of 16 July 2007, docket no. II ZR 3/04, BGHZ 173, p 246.

  86. 86.

    ‘Public policy’ refers to the German ‘gute Sitten’, which resembles the covenant of good faith and fair dealing. In the context of sec. 826, the requirement of a violation of public policy contains a heightened standard. Although any breach of the law is against public policy in a certain sense, this is not what is meant by sec. 826. There has to be more to the action in question. See Markesinis and Unberath (2002), pp 888 et seq.

  87. 87.

    Bundesgerichtshof, judgment of 16 July 2007, docket no. II ZR 3/04, BGHZ 173, p 246 (Trihotel); see Merkt and Spindler (2006).

  88. 88.

    For an overview, see Cahn (2016).

  89. 89.

    Bundesgerichtshof, judgment of 28 April 2008 - II ZR 264/06, BGHZ (for an explanation n. 85) 176, pp 204 et seq.

  90. 90.

    On this section, see Bainbridge and Henderson (2016), p 263 et seq.

  91. 91.

    For an overview, see Merkt and Spindler (2006), pp 172 et seq.

  92. 92.

    On balance sheet tests in Delaware corporate law with regard to solvency, see Stearn and Kandestin (2011), pp 175 et seq., who provide a good overview; on § 6.40 MBCA, see Hanks, Jr. (2011). For fraudulent transfer law in the US, see Stearn (2007). For a comparison of European approaches to US law, see Veil (2006).

  93. 93.

    On the existence of both tests (balance sheet and cash flow) in Delaware corporate law, see Stearn and Kandestin (2011).

  94. 94.

    Compare Bundesgerichtshof, judgment of July 16, 2007, docket no. II ZR 3/04, BGHZ 173, pp 246, 251 margin no. 14 et seq. (Trihotel). The change in the BGH’s jurisdiction was prepared in a seminal article, which exposed the gaps referred to in the text above and delineated a new way to deal with these problems, see Röhricht (2000).

  95. 95.

    See n. 85 above.

  96. 96.

    On the advantages of combining vague and precise clauses in contracts Bustos (2007).

  97. 97.

    A fact acknowledged by Bainbridge and Henderson (2016), p 287.

  98. 98.

    In the Trihotel judgment (n. 85).

  99. 99.

    Convincingly argued by Bainbridge and Henderson (2016), p 291.

  100. 100.

    Bainbridge and Henderson (2016), pp 293 et seq.

  101. 101.

    Bainbridge and Henderson (2016), pp 296 et seq.

  102. 102.

    On these conditions, see Bainbridge and Henderson (2016), pp 191 et seq.

  103. 103.

    Just to make it clear, Bainbridge and Henderson (2016) do see these and other problems (p 298).

  104. 104.

    Compare sec. 311 of the German Stock Corporation Act: ‘In the absence of a control agreement (“Beherrschungsvertrag”), the controlling entity may not exercise its influence in order to induce a controlled corporation (i.e. the subsidiary) […] to enter into a disadvantageous contract or to take any action leading to the controlled corporation’s detriment, unless compensation for any disadvantage suffered is provided for.’

  105. 105.

    For international criminal law on a broad comparative basis, this test with a set of criteria further delineating liability requirements is developed by Kuntz (2017a).

  106. 106.

    Touched on by Bainbridge and Henderson (2016) on p 297.

  107. 107.

    Bainbridge and Henderson (2016), p 208.

  108. 108.

    As long as they have not limited their liability.


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For many valuable comments and suggestions, the author is indebted to Andreas Engert, Andreas M. Fleckner, Wibke Heinecke, Alexander Hellgardt, Marie Kuntz, Alma Pekmezovic, Jens Richter and Lars Stegemann. The usual disclaimers apply.

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Correspondence to Thilo Kuntz.

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Review Essay on Stephen M. Bainbridge and M. Todd Henderson, Limited Liability: A Legal and Economic Analysis, Edward Elgar, Cheltenham (UK)/Northampton (US) 2016, 315 and XVII pp., ISBN: 978-1-78347-302-1.

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Kuntz, T. Asset Partitioning, Limited Liability and Veil Piercing: Review Essay on Bainbridge/Henderson, Limited Liability. Eur Bus Org Law Rev 19, 439–463 (2018).

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  • Limited liability
  • Veil piercing
  • Asset partitioning
  • German law
  • Existenzvernichtung
  • Piercing the veil
  • Peculium
  • Societas
  • Legal history