The Saloman Principle

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DRAFT

Chapter 2. The Salomon principle

Introduction In the previous chapter we considered how the modern company grew of out of the law on unincorporated associations, how it used ideas long identified with town corporations created by Royal Charter, how it evolved from the joint stock company, and how shareholders in companies were granted limited liability by statute. One key element of the modern company, however, remained outstanding: the principle of separate corporate personality which was created by the House of Lords in Salomon v A Salomon & Co Ltd (1897). We will refer to this principle as “the Salomon principle”. We will begin with a close reading of the Salomon litigation. The Salomon litigation The history of Aron Salomon Aron Salomon manufactured boots on Whitechapel High Street in London’s East End.

The decision at first instance: Broderip v Salomon

The decision of the Court of Appeal

The decision of the House of Lords: Salomon v A Salomon & Co Ltd

Conclusions on the Salomon litigation

In 1897, in a remarkable piece of judicial intervention in the economic life of the country, it was considered convenient to permit the company to have its own legal personality. 1

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Saloman v. A. Saloman & Co. Ltd [1897] A.C. 22.

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This was a development which was described by Prof. Kahn-Freund as being a “calamitous decision”.2 The effect of the Salomon litigation on company law

The central technical-legal question surrounding the modern nature of the company is this: how did the company come to possess the traits of distinct legal personality which it enjoys today? The answer to that question is simple at one level: the decision of the House of Lords in Saloman tells us that companies have such distinct personality. That answer is perfectly correct, so far as it goes. One thing that should strike any reader of that decision, however, is the evident certainty among the members of the House of Lords that they were right. Their lordships’ speeches make little reference to any pre-existing caselaw nor to any contemporary ideas or sources. Given the determination of the Court of Appeal in Smith v. Anderson only eighteen years previously that the company remained a species of trust, one would have expected a more explicit discussion of the causes of this reversal in judicial policy. An alternative analysis (alternative, that is, from any of the judges in the Saloman litigation) would have been to say that the company is a cypher for the personality of Saloman and not at all a distinct person. This perception of companies as merely avatars behind which real people carried on their activities has a provenance in the common law. In a decision of Lord Pollexfen C.J. in 1684, his lordship had criticised the joint stock company as being the “invisible merchant that no one knows where to find … [which] in judgment of law has neither soul nor conscience and yet forsooth are traders”.3 Between the seventeenth century and the late nineteenth century there had been a profound judicial reconsideration of the desirability of the company. Companies were seen as being persons and therefore occupying a lifeworld of their own outwith the lifeworlds of the members, employees, creditors. The decision in Saloman was built on a logic which was itself built on an ideology of the company as a sentient, if artificial, economic actor.

Lifting the corporate veil

The lodestar of company law has remained the integrity of the separate personality of the company: the corporate veil will only be lifted in the most extreme of circumstances. 4 The result is a lack of clarity in the precise legal rights of the shareholders and their inter-action with the board of directors.

Benefits and problems flowing from the Salomon principle

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Kahn-Freund (1944) 7 MLR 54. (1684) Sandy’s Case, from Cobbett, State Trials, X, 371, quoted in Cooke op cit., 65.

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The benefits of the principle The main benefit which...
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