The rule in Salomon v Salomon

1. Discuss the proposition that the rule in Salomon v Salomon & Co Ltd [1897] AC 223, although legally and doctrinally correct, does not always reflect the reality of the division of powers and influence between the board of directors and the general meeting. Specifically, consider how, in the case of either (“quasi-partnership”) small private companies or quoted public companies, the influence of the shareholders is larger than acknowledged in Salomon.
1. In the case Salomon v Salomon & Co Ltd the decision that House of Lords had take verify the accuracy of Gooley's surveillance that the separate legal entity doctrine was a “two-edged sword”. At a general stage, it was a good decision. By establishing divide legal entities, Salomon's case gifted the company with all the necessary characteristics with which make the power of capitalism. At a certain level, however, was a bad decision. By extending the benefits of integration in small private enterprises, Salomon's case has launched a fraud and evasion of legal obligations.

In more concrete level, on the other hand, the decision of the House of Lords in the case Salomon v Salomon & Co Ltd was a good decision. Professor Kahn-Freund go so far as to describe as "calamitous”. Salomon's case created an independent legal existence of a registered company, the principle of the greatest importance to the company law. In the other hand, if applied inflexibly, as was in the case of Salomon, it can shield parties unfairly, to the detriment of persons dealing with companies.
In emphasizing the independent nature of corporate personality, the House of Lords has legalized the use of corporate form of sole traders and small partnerships. The Law Lords concluded that when placed in a manner required by law, the company is a new legal entity separate from its shareholders, even when there is only a bare compliance with the law and all or virtually all of the issued shares of the Company held by an individual. Moreover, the Court held that it was possible for traders not just to limit their liability for the capital invested in the business, but also to elude any serious danger for most of this by signing bonds rather than shares.
The principle is that the creditors of the limited company should consider the capital, limited funding, and that only. Limited liability discourages shareholders from monitoring and control of commercial operations of their company. Creditors of the company to bear the risks associated with dealing with limited companies. At issue is whether it is true that limited liability should work to reduce the size of the capital. Different types of creditors have different abilities to protect themselves from these dangers. While banks and comparable financial creditors easily defeat these risks, the same can be said for trade creditors, employees and tort creditors. The workers are even more insecure position. In bleak contrast to trade finance and creditors, workers have no opportunity to get security or to diversify the risk of insolvency of their employer's business. Moreover, most workers have little information on the financial situation of the employer.
The query of whether the negative aspects of the decision in the case of Salomon outweigh the good left unanswered because it is better too broad.
2. Summarise the facts and decision in Adams v Cape Industries [1990] Ch 433, and critically evaluate the decision in the light of previous case law on the doctrine of incorporation in the context of corporate groups.
2. The Adams v Cape Industries plc is a complex case. Until 1979, Cape Industries plc, an English company, mining and marketing asbestos. Worldwide affiliate marketing was another English company, called Capasco. Verde was also the United States marketing subsidiary incorporated under the name NAAC. In 1974 in Texas, the number of people sued Cape, Capasco, NAAC and others for personal injuries resulting from the installation of asbestos in a factory. Verde protested at the time that the court of Texas had no authority over him, but in the end will settle the action. In 1978, NAAC was closed by the Cape and other subsidiaries were shaped with the express reason of reorganizing the business in the United States to minimize the presence of the Cape is, on tax and other obligations. Between 1978 and 1979, a new series of similar actions were commenced and default judgments entered against Cape and Capasco. In 1979 Cape sold asbestos mining and marketing business and therefore had no assets in the United States. Adams called for the execution of the default of United States in England. The main issue was whether Cape was present within the jurisdiction of the United States, through its subsidiaries, or somehow had been submitted to the jurisdiction of the United States. According to the Court of Appeal that could happen if lifted the veil of incorporation, or to address the group Cape as a single entity, or find its subsidiaries was a mere facade or agents for Cape.
The court ruled that in cases where the courts had previously seen a group as “single economic unit ", thus the legal specificity of each company in the group. This omission to maintaining business personality is qualified by the fact that first there must be some lack of clarity on the statute or document that allows the court to face a group as a sole entity. The court concluded that, except that in turn the development of specific statutes or contracts, the court is not free to ignore the principle of the case Salomon v Salomon & Co Ltd merely because it considers that fairness so requires. Our legislation, for better or worse, know the creation of subsidiaries, which though in one sense the creatures of their parent firms, however, under the general law fall to be treated as separate legal entities with all rights and responsibilities that normally join to separate legal entities. The Court of Appeal acknowledged the "mere façade” concealing the true facts, as a well-established exception to the principle of Salomon. The Court of Appeal examined the motives of Cape in structuring United States business through various subsidiaries. The Commission found that although Cape motive was to try to minimize its presence in the United States on tax and other liabilities (and that this could make the company morally culpable) there is nothing wrong with this law.
3. Shareholders' agreements have become increasingly important tools in protecting shareholders' interests in limited companies, particularly during periods of radical change. Describe the typical content of a shareholders' agreement drawn up at the request of venture capitalists as a condition of their promised funding, and explain how the confidentiality of this agreement may be maintained in the light of Companies Act 2006 s29.
3. Shareholders' agreement is an agreement between the shareholders of a company. Also these agreements are only conventions. The shareholders are used because of problems associated with other means of protection of minorities. Foss v Harbottle is vital. The principle of majority means that the wishes of venture capital can be overridden if a minority stake (as usually). It also means that if a mistake has been made for the company, is the company to sue. Enterprise funds usually invest in small companies where directors are the same people are the shareholders. If there was violation of the duties of directors, will be for the company to sue - but the shareholders will not want to sue, so they would approve.
The shareholders have the articles. These are statutory contract under Companies Act [2006] Section 33. But you cannot charge directly, members can only enforce their rights through the company. It is also a public document. They can also be changed by special resolution, is not the consent of the capitalist firm, if less than 25%. There are also some things you cannot put there because the company cannot fetter the discretion of the court considered it, then the argument of service.
For example, some things may be in the shareholders' contract is a confidentiality agreement is a sample of a confidentiality agreement between the parties to the agreement before the discussion of draft agreements on how the company managed, not has the consent of the venture capital and / or not create a different kind of company has the consent of venture capital without the consent of venture capital and / or will not create a different kind of company has the consent of the business capital, payment of dividends, or not to grant security guarantees do not provide the consent of the principal and there is no competition clause so that other shareholders can not only walk-off.
There are also some risks that may be related to the position of the shareholders' agreement in a position in some countries. One of the risks which may take place in few countries is by shareholders' agreement for a partnership, which may have adverse tax consequences, or result in liability related to its shareholders in a bankruptcy, under English law, a shareholders' agreement is often suggested as an inference of a "quasi-partnership", which entitles disappointed partners to certain shareholder remedies. A second risk may cause problems to the shareholders is when the shareholders' agreement is inconsistent with the constitutional documents, the effectiveness of the arrangement intended by the parties may be damaged. Another risk is in certain circumstances in some cases, a shareholders' agreement can be put forward as evidence of conspiracy and / or monopolistic practices.


  • Dr C. Wild, Dr S. Weinstein and Dr J. Bisacre (2009), Smith & Keenan's Company Law, (14th edition), Longman.
  • D. French, S. Mayson and C. Ryan (2008), Mayson, French and Ryan on Company Law, (25th edition), Oxford University Press, Oxford.
  • French D. (2008), Blackstone's Statues on Company Law 2008-2009, (12th edition), Oxford University Press, Oxford.
  • Brenda Hannigan (2009), Company Law, (2nd edition), Oxford University Press, Oxford.
  • Gary Scanlan (2007), Companies Act 2006: a guide to the new law, The Law Society.
  • Gonzalo Villalta Puig (2000), Murdoch University Electronic Journal of Law, E-Law, “A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine”, Available at: [], Accessed at: [09/11/09].
  • Corentin Kerhuel (2009), Legavox, Coursework in English Company Law, Available at: [], Accessed at: [10/11/09].

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1 comment:

  1. The Court of Appeal looked into Cape's motivations for structuring its business in the United States through various subsidiaries.


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