Corporate Personhood and Liability 1897
Corporate Personhood and Liability 1897
Trustees of Dartmouth College v. Woodward, Salomon v. A. Salomon & Co., Hardinge Stanley Giffard, 1st Earl of Halsbury (1823–1921)
The juridical entity, a body that exists solely because of the law, is one of the law’s numerous fictions. A corporation, for example, can negotiate, possess property, sue, and be sued purely on the basis of the legislation that constituted it. (In Trustees of Dartmouth College v. Woodward, the Supreme Court declared that corporations had the same contract rights as natural individuals.)
Many firms functioned as partnerships prior to the formation of corporations. However, joint and several responsibility posed a problem: each member was responsible for the partnership’s whole debts and responsibilities, and the partnership may be held accountable for a partner’s personal debts.
Citation: A.C. 22, [1896] UKHL 1 (1897).
(Even if a single shareholder owns practically all of a business’s stock, the corporation must be distinguished from that person.)
Problems Involved
- Whether the Salomon & Co. Ltd. was a company at all?
- Whether in truth the artificial creation of the legislation, i.e., the company, had been validly created in the instant case?
- Whether Salomon was liable for the debts of the company?
Facts in a nutshell
Aron Salomon has been a successful leather dealer for a number of years. Salomon & Co. Ltd., with Salomon, his wife, his daughter, and his four sons as members and Salomon as Managing Director, was created in 1892 to transform it into a limited company.
Salomon’s firm was bought for £ 39,000 by the company. The price was paid in cash, £ 10,000 in debentures with a charge over all of the company’s assets, £ 20,000 in fully paid up £ 1 shares, and £ 10,000 in debentures with a charge over all of the company’s assets. Members subscribed for seven shares in cash, resulting with Salomon holding 20,001 of the 20,007 shares issued, with each of the other six shares held by a member of his family. The firm quickly ran into problems, and barely a year later, the company’s debenture holder (Salomon having sold his shares to another individual) appointed a Receiver, and the company was forced to liquidate.
Assets have a realisable value of £6,000; liabilities have a realisable value of £10,000 for Debentures and £7,000 for Unsecured Debts.
After paying out the debenture holders, the unsecured creditors would be left with nothing. The liquidator filed an action against Salomon, holding him accountable to indemnify the business against its trade obligations.
Argument
Salomon & Co. Ltd. was formed under the Act, but the Liquidator said it never had an independent existence. Salomon owned all but six of the company’s shares, making it a one-man show. Salomon became the ultimate master due to the large majority of shares. The corporation was a farce and a scam since it was run completely for and by him.
Judgement
The House of Lords decided that in order to answer the question, one must examine the Act itself, without adding to or subtracting from its provisions. The statute must be the exclusive source of guidance. In this situation, the Act specified that any seven or more individuals who are connected for a legitimate purpose may create a company with or without limited liability by submitting their names to a memorandum of association and otherwise complying with the Act’s registration procedures.
“No subscriber shall accept less than one share,” according to the Act. It was never questioned that the company’s shares were held by seven genuine live people. The court determined that the corporation was properly incorporated and was a real company since it met all of the Act’s requirements.
The House of Lords rejected the Liquidator’s claim that all of the shares were purchased by Salomon and his family members and that the company was nothing more than a one-man show, holding that the Act’s provisions did not require that the persons subscribing be related to each other or that holding a single share was insufficient qualification for membership. A creditor of the firm is unconcerned whether the capital of the company is owned in equal shares by seven people with the right to an equal share of earnings, or if it is nearly entirely owned by one person who receives virtually all of the profits.
If one individual owns the majority of the firm’s capital, the company retains its identity. The corporation as a legal entity is not the same as the subscribers. The House of Lords went on to say that the Act made no mention of the subscribers being independent, or that they should have a significant stake in the project, or that they should have their own mind and will.
“The company is at law a different person altogether from the subscribers…and though it may be that the business is exactly the same as it was before incorporation, and the same persons are managers, and the same hands receive the profits, the company is not in law agent of the subscribers or trustee for them,” says Lord Macnaghten. The subscribers, as members, are not responsible in any way save to the extent and in the manner set forth in the Act.
Salomon was declared not personally accountable for the corporation’s obligations by the House of Lords. The sole concern, according to Lord Halsbury, was whether the corporation had been formed legally; the court had no authority to add to the statute’s criteria. “Once legally formed, the company must be considered like any other autonomous person, with its own set of rights and duties.”
SEE ALSO:
Wall Street Regulation (1933);
The Sarbanes-Oxley Act (2002).
SOURCES:
Corporate Personhood and Liability 1897