Companies and Capped Liabilities

Current legislation limits the amount of economic-related liabilities to be paid by a company on account of an oil spill to $75 million. A move to amend that legislation and raise the liability cap to $10 billion was blocked in the Senate because Big Petroleum, who is responsible for a recent spill, has given its word that it would cover the cost of all damages and cleanup costs deriving from a recent oil spill in an ecologically significant marine area that supports a thriving fisheries and recreation industry and is home to many endangered and threatened marine animals and waterfowl. Big Petroleum's chairman of the board made the statement after convening a special meeting of the board and studying videos of the damage taken by film crews.

It is estimated that the actual costs of cleanup and industry losses could even exceed the $10 billion proposed cap. Meanwhile, other oil companies involved in the oil spill have now gone to court invoking limits on their liability as provided by law.

As a stockholder in these companies, you are concerned about your investments in oil, as a dip in your stocks could ruin your retirement and that of other investors, including several pension plans that are heavily invested in oil. However, you are outraged that the companies are seeking to limit their liability as permitted by law because you think corporate citizenship demands these companies correct the damage from this disaster.

1. What is the justification behind the decision of the boards of directors of the oil companies seeking limitation on damages? Explain.

2. Is the board of directors of Big Petroleum committing a waste of corporate assets by its decision not to invoke the legal limitation of damages?