SALOMON V SALOMON & CO. LTD.

[1897] AC 22 – ITS IMPACT

ON MODERN LAWS ON CORPORATIONS – SELECTED STUDIES
FROM THE UK AND THE USA

Prepared by Group 9

Alibek Beskempirov
Kaisar Butin
Yelbatyr Islamkul
Rajib Dahal
Facts
■ Mr Aron Salomon made leather boots
■ Depression in the boot trade led to Mr. Salomon forming a limited
company to purchase his business
■ The company purchased Salomon's business for £39,000
■ Mr Salomon took 20,001 of the company's 20,007 shares
■ Salomon's business failed, defaulting on its interest payments on
the debentures
■ The company's liquidator contended that the floating charge should
not be honoured, and Salomon should be made responsible for the
company's debts.
Creditors’ arguments Mr. Salomon
■ They should have priority in the claim ■ He should be treated as a secure
creditor and paid ahead of unsecure
■ Want the amounts paid to Salomon
creditors
paid back
■ Argued for “separate corporate
■ Salomon’s debentures to be
personality” of “limited liability
cancelled
company”
■ Salomon had breached his fiduciary
duty for selling his business for an
excessive price
■ The formation of the company in this
was fraud against its unsecured
creditors
 High Court of House of
Court Appeal Lords
The case/claim of the There was nothing in the Act
creditors was valid about whether the
shareholders should be
independent of the majority
shareholder
Confirmed High Court's
decision, though on the
The company had a right of
grounds that Mr. Salomon
indemnity against Mr
had abused the privileges
Salomon Lord Halsbury LC: the statute
of incorporation and limited
liability "enacts nothing as to the extent
or degree of interest which may
be held by each of the seven
The liquidator amended the [shareholders] or as to the
counter claim, and an award proportion of interest or
was made for indemnity influence possessed by one or
the majority over the others."
The key parts of Lord Macnaghten’s
judgement
■ The shareholders are a body corporate "capable forthwith," to use the words of the
enactment, "of exercising all the functions of an incorporated company."
■ No common law partnership could register as a company limited by shares without
remaining subject to unlimited liability
■ The principal reasons to form private companies: to avoid the risk of bankruptcy, and the
increased facility afforded for borrowing money.
■ There is no evidence to support an imputation that Mr. Salomon acted fraudulently or
dishonestly.
■ The creditors had full notice that they were no longer dealing with an individual, and they
must be taken to have been cognisant of the memorandum and of the articles of
association.
Its impacts

■ It is at least implicit that before the decision in Salomon the separate legal entity
concept had not yet been fully recognized or developed, and that therefore until
Salomon was decided in 1897, it remained unclear to what extent, and in what
circumstances, a company was thought to be legally separate from its shareholders.
■ The Salomon principle has stood the test of time because it has meant that
corporations do have practical utility.
■ As a separate legal entity subject to limited liability and defined by share
transferability, perpetual existence, flexible financing methods, specialized
management, majority rule, and the other attributes or consequences of
incorporation, the corporation has many economically and socially beneficial
functions.
LEGAL CONSEQUENCES OF
INCORPORATION
■ Perpetual Succession and Existence
■ Limited Liability
■ Property
■ Right to Sue and be Sued
■ Transferable Shares ( transfer of shares freely )
ADVANTAGES OF LIMITED LIABILITY

■ Risk is minimized for the Investors

■ Management are freed up to take greater risk;
■ It allows the public price of shares to be easily determined;
■ It allows shareholders to put their personal assets beyond the reach of their
creditors
Departure from Salomon
■ VTB Capital PLC v Nutritek International Corporation ([2013] 2 AC 337) and Prest v
Petrodel Resources Ltd. ([2013] 2 AC 415) dealt with the separate legal personality
of a registered company and the circumstances in which it might be possible to
disregard the separate personality of a company by ‘piercing the corporate veil’ or
looking beyond an individual company’s ownership of assets or bearing of liabilities.
■ In Prest, Court observed the narrow operation of the ‘piercing the corporate veil’
doctrine, in the sense of the courts disregarding the separate personality of the
company was “limited”. – The case arose out of the divorce proceedings
■ In Gencor ACP Ltd v Dalby [2000] 2 B.C.L.C. 734 where a director had diverted a
secret profit to a company he controlled. Rimer J. thought that he was piercing the
veil when he held the director liable for the profit received by the company………
■ Supreme Court substantially restated the English company law position in relation to
piercing of the corporate veil.
■ Principle of “Concealment” and “evasion” were introduced
Salomon – distinguished & departed

■ In Spreag v Paeson Pty Ltd. (1990) a subsidiary which held virtually no assets made
a number of misleading and deceptive statements regarding a product it advertised
and sold that were in contravention of the Trade Practices Act, 1974
■ Court held that holding/parent company should be liable to customers. Court
applied the agency principle “at least by analogy”
■ Willingness on the part of the courts to depart from a rigid and inflexible application
of the principle in Salomon in the corporate group context
Need to depart?
■ Particular concern has been its application in circumstances where tort victims are unable to
claim compensation because a tortfeasor subsidiary company is insufficiently capitalized to
meet the full extent of its tort liabilities
■ Companies are known to avoid liability for the subsidiary’s debts by strategically drawing
corporate boundaries within a group to quarantine actual or potential tort liabilities within an
under-capitalized subsidiary
■ “a person is under an existing legal obligation or liability or subject to an existing legal
restriction which he deliberately evades or whose enforcement he deliberately frustrates by
interposing a company under his control”.
■ ……broader principle that the corporate veil might be pierced only to prevent the abuse of
corporate legal personality….
■ The application of the Principle therefore requires a very strict test, i.e. clear evidence of
under-capitalization, mingling of spheres or fraud, so as to ensure that the Principle remains
the exception.
Applicability of Salomon – lifting of
corporate veil rejected
■ The Gramophone and Typewriter Ltd v Stanley [1906] 2 KB 856 (Walton J) – If
English Co. owns all the shares of German Co., Can English Co. be taxed for profits
made by German Co.? – Court held, “NO”.
■ Doe v. Unocal, 395 F.3d 932 (9th Cir. 2002) – from US California Court – Case on
human rights violations in Burma.
– The legal position in California was:
■ plaintiffs must show both that the parent and subsidiary share a unity of interest
and control, such that the subsidiary corporation is essentially the "alter ego" of the
parent, and that, absent piercing, some form of "injustice" will result.
■ The court rejected plaintiff’s claim to make parent liable for subsidiaries’ actions.
How and when to lift the corporate veil?

■ The general rule and the typical stance of the court, is that the corporate veil should
be preserved and that the Salomon principle should be respected.
■ This means that, generally speaking, the law operates to insulate directors and
shareholders from the liabilities accumulated by the company in the outside world.
■ Even in circumstances where one shareholder controls all, or virtually all, the shares
in a company, the Salomon principle will serve to uphold the legal personality of the
company and the “veil of incorporation" will not be lifted so as to attribute the rights
or liabilities of a company to that individual.
Legal position and exceptions in the USA
■ The position in the USA is also unchanged with respect to use of Salomon v.
Salomon.
■ In United States v Bestfoods et al.(US Supreme Court, 1998), the US Supreme Court
reiterated that the active participation in, and control over, the operations of a
subsidiary could not, without more, render a parent liable for the acts of its
subsidiary.
■ Corporate veil should only be pierced when the corporate form was being abused for
wrongful purposes
■ In America the Sarbanes-Oxley act (2002) and the Dodd-Frank act (2010) forced
companies to appoint more independent directors and disclose more information
about compensation.
■ Issues such as mass torts (gas leak disasters), environmental damage etc. may not
get Justice if veil is not pierced.
Thank You (for, at least, trying to listen to us!)