A very popular CASE Salomon v. Salomon & Co. [1897] A.C. 22 (H.L.)
Salomon v. Salomon & Co. (1896), [1897] A.C. 22 (H.L.) is a foundational decision of the House of Lords in the area of company law. The effect of the Lords’ unanimous ruling was to firmly uphold the concept of a corporation as an independent legal entity, as set out in the Companies Act 1862.
Contents
- 1 Background
- 2 The appeal
- 3 The Lords
- 4 Post-Salomon developments
- 5 Criticism of the decision
Background
Aron Salomon was a successful leather merchant who specialized in manufacturing leather boots. For many years he ran his business as a sole proprietor. By 1892, his sons had become interested in taking part in the business. Salomon decided to incorporate his business as a Limited Liability Company, Salomon & Co. Ltd.
At the time the legal requirement for incorporation was that at least seven persons subscribe as members of a company i.e. as shareholders. The shareholders were Mr. Salomon, his wife, daughter and four sons. Two of his sons became directors; Mr. Salomon himself was managing director. Mr. Salomon owned 20,001 of the company’s 20,007 shares – the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost £39,000, of which £10,000 was a debt to him. He was thus simultaneously the company’s principal shareholder and its principal creditor.
The appeal
The Court of Appeal also ruled against Mr. Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability, which the Legislature had intended only to confer on “independent bona fide shareholders, who had a mind and will of their own and were not mere puppets”. The lord justices of appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability.
The Lords
The House of Lords unanimously overturned this decision, rejecting the arguments from agency and fraud. They held that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders. Lord Halsbury stated that the statute “enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others.”
Lord Halsbury remarked that – even if he were to accept the proposition that judges were at liberty to insert words to manifest the intention they wished to impute to the Legislature – he was unable to discover what affirmative proposition the Court....
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