Lecture 2 Origins of Scp

8/14/2019 Lecture 2 Origins of Scp

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Separate corporate personalityMeaning and origin


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Broderip v Salomon (1895) 2 Ch 323

Liquidator had contended that the co. was afraud on the creditors and should be set aside

and moneys removed from Salomon Or, that co. should be indemnified by Salomon

the amount of outstanding debts and have noother claim until creditors paid.


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Vaughan Williams Rejected the contention that the valuation

was a fraud but.

He took the whole of the profits, and his

intention was to take the whole of the profits

without running the risk of the debts and expenses.one must consider the

position of the unsecured creditor


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The company was the mere nominee of MrSalomons and it does not seem to me to make the

slightest difference whether the nominee is acompany or a person; and therefore I wish, if Ican, to deal with this case exactly on the basis thatI should do if the nominee, instead of being a

company, had been some servant of agent of MrSalomon to whom he had purported to sell hisbusiness.


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to allow a man who carries on businessunder another name to set up a debenture

in priority to the claims of the creditors ofthe company would have the effect ofdefeating and delaying his creditors.There must be an implied agreement by himto indemnify the company

It is clear that the relationship of principaland agent existed between Mr Salomon andthe company


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Court of Appeal (1895)Appeal by Mr Salomon against an order toindemnify the company Salomon Ltd againstthe unsecured debts and liabilities incurred inthe name of the company whilst it carried onbusiness.


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Lindley LJ:The legislature contemplated theencouragement of trade by enabling a

comparatively small number of persons-namely, not less than seven- to carry onbusiness with a limited joint stock or capital,and without the risk of liability beyond the

loss of such joint stock or capital. But thelegislature never contemplated an extension oflimited liability to sole traders or to a fewernumber than seven


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Lopes LJ.

The incorporation of the company was perfect- themachinery by which it was formed was in everyrespect perfect, every detail had been observed: butthe business was, in truth and in fact, the business ofAron Salomon

It would be lamentable if a scheme like this couldnot be defeated


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Salomon v Salomon (1897) **House of LordsLord HerchellQu- Co. Agent carrying on business on behalf of

Mr Salomon?

a company may in every case be said to carry onbusiness for and on behalf of its shareholders; but

this certainly does not in point of law constitute therelation of principal and agent between them orrender the shareholders liable to indemnify thecompany against the debts which it incurs


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Creditors interest?Division of ownership of shares irrelevant if theconditions of the Act have been complied with.

How does it concern the creditors where the capital of thecompany is owned by seven persons in equal shares,with the right to an equal share of the profits, orwhether it is almost entirely owned by one person,who practically takes the whole of the profits? The

creditor has notice that he is dealing with a companythe liability of the members of which is limited, andthe register of the shareholders informs him how theshares are held, and that they are substantially inthe hands of one person, if this be the fact..


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Lord Halsbury.

It seems to me impossible to dispute that once the

company is legally incorporated it must be treatedlike any other independent person with its rights andliabilities appropriate to itself, and that the motivesof those who took part in the formation of thecompany are absolutely irrelevant in discussing

what those rights and liabilities are.

HOUSE OF LORDS UNANIMOUS INUPHOLDING ARON SALOMONS APPEAL


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Origins of separateness Contextual and historical analysis refutes legal

doctrine that incorporation is the source ofseparate corporate personality.

Historically incorporated companies were notoriginally conceived as existing as completelyseparate from its members

eighteenth and early nineteenth century casesincorporation did create an entity but not one thatwas conceived as completely separate frommembers

entities composed of those members merged intoone legally distinguishable body.


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Evidence Linguistic

Until late nineteenth century, cases referred to

the company as they. Indivisible from theindividuals not it an autonomous legal being.

Section 3 of the 1856 Act stated that:

Seven or more persons may form themselvesinto an incorporated company,

1862 Act (section 6) the wordsform themselveswere omitted.


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Members property interest not divisible from the companies interest

throughout the eighteenth and early nineteenth

centuries, the term share was used in its naturalsense, namely as an appreciable part of a wholeundertaking


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Samuel Williston (1888) old law a share was an equitable interest in the

whole undertaking. SH were in equity co-

owners Child v Hudsons Bay Co (1723),

Lord Macclesfield the corporation held itsassets as a trustee for the shareholders, who were

in equity co-owners.


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Share realty or personalty according to thenature of company assets

if the shareholders have in equity the same

interest which the corporation has at law, ashare will be real estate or personalty,according as the corporate property is real orpersonal.

Fraudulent transfer of shares were upheld forbona fide purchaser for value because shareswere equitable not legal rights


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Shareholders connected in equity to the debts ofthe company. Their obligation was part of the

companys assets ie Naylor v Brown (1673)


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Held true for all companies incorporated companies: the legal interest in the

property was vested in the corporation

unincorporated companies, constituted throughdeeds of settlement, the legal title was vested intrustees.

Both held the propertyon trustfor their

shareholders.


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Reconceptualisation of members

property interests (the share).

In the course of the middle part of the nineteenthcentury, the legal nature of the share

underwent a change.

It began to be understood as a piece of personalproperty, distinct from the property of the

company


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Bligh v Brent (1837). 2 Y. & C. 268

Could shares be bequeathed in a will not

executed? Issue depended on whether shares were realty or

personalty

Shares in Chelsea Waterworks, assets ofcompany real estate.

BARON ALDERSON:


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BARON ALDERSON:

It is of the greatest importance to look carefully at the nature

of the property originally entrusted, and that of the body towhose management it is entrusted: the powers that body hasover it, and the purposes for which these powers are given.The property is money- the subscriptions of individualcorporators. In order to make it profitable, it is entrusted to a

corporation who have an unlimited power of converting part ofit into land, part of it into goods; and of disposing of each fromtime to time; and the purpose of all this is the obtaining of aclear surplus from the use and disposal of this capital for theindividual contributors.


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It is this surplus profit alone which is divisibleamong the original incorporators.

The land and chattels are only the instruments(and those varying and temporary instruments),whereby the joint stock of money is made to

produce profit.


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Crucially, Alderson

Distinguished between a claim against theproduct of the assets, and a claim against the assetsthemselves and recognised that the typical investor

was interested in the end product of the productionprocess (profit) rather than in the process itself.

By investing in the company they gave up the right

to recover their investment directly and could onlyrecover it by transferring the shares or by theliquidation of the company.


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The case of an unincorporated company

Sparling v Parker (1840)

A share was not a right attached toan interest in land ..share transferableonly for money


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However.....A.B.DuBois No general law

Corporations determined by individual charter

Bligh v Brent- wording of charter made assets theright to lay piping, land assets purchased later.

Refers to company as they

Gradual process of separation


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why was the character of sharesreconceptualised? Capital hungry nature of first infrastructure and

then industry

Overcoming barriers that inhibited thecirculation of capital and the need to overcomethem

i. developed law

Ii. developed market


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Capital needs Up until the middle of the nineteenth century,

British capitalism was characterised by high

profits and labour intensive methods. Money for reinvestment was generated

internally, profits were ploughed back into thebusiness.

The dominant legal form taken by business wasthe partnership.


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(cont) Increased mechanization required substantial

capital investment,

Joint stock company, facilitated investment. Increasingly became the dominant legal form

taken by business.

Railway development had already taken thecapital route and incorporated under privateActs (Bubble Act)


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1770-1850-----manufacture/ labour intensive---discipline/long hours low pay-----high profits butobjective limitations-----internal plough back

Partnership form

1850 --> machinofacture---capital intensive-----need to raise capital to remain competitive

Joint Stock Company Form


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Conditions under which the share could becomedistinct and separate from the activities of the

company. A piece of property.

1. Law enabling the freely transferable share.

2. A developed market in shares.


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The Law: Transferabiltiy and limitedliability Transferability

Bubble Act prohibited free transferability,

Deed of Settlement companies contained restrictions.(although of diminishing

consequence)

1723-1808 no prosecutions (life imprisonment)


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Companies Act 1867

Reduced capital

30,000,000, which has been invested in theshares of limited liability companies, isrendered practically unmarketable inconsequence of the impossibility of reducingthe denomination of the shares

1867 Select Committee on the LimitedLiability Acts, City banker W.Newmarch


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Limited Liability Act 1855

1844 Act- liability continues three years

after transfer- 1844-56, 994 co.s registered 1856-62, 2,479

registered

Encouraged small non managerial investor

Today synonymous with companies


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HA Shannon Not significant effect on business activity

Between 1856-83 only 6% maintained an

ongoing trading record. Limited liability associated with sharp practice


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Law and markets Originally, titles to revenue were categorised in common law

as choses in action and covered bills, notes, cheques andgovernment stock .They were conceptualised as rights,personal to the parties bound by the obligation.

non assignable and incapable of being independent forms ofproperty.

Developed markets for titles to revenue, had been rapidlydeveloping thoughout the eighteenth century,

they permitted money to preserve its flexibility and liquidity.


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Shares as choses in action( EarlyC18th)

Shares on stock are in their Nature Choses in

Action and are not assignable or transferable bythe common-law; perhaps in equity they may

Tied to asset

Treasury commissioners on the incorporation byroyal charter of the Bank of Ireland (1721)


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Railway shares Created a market in shares

Issued in small denominations

Sold in local markets and popularised London Stock Exchange reorganised rooms and

brokers around share sales

Facilitated concept of share as a transferableasset


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The Railway: growth and capitalisation 1832- 166 miles of steam operated railway 1838- 742 miles

1844- 2,200 miles 1848- 5,000 miles

Share and loan capital raised on railway companies

1830-1.82 million 1837- 37.54 million 1844- 79.59 million 1849- 230 million


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Law, market and capital the joint stock company share emerged as a new

form of right to revenue

investment in shares appeared to be separatefrom investment in industry.

new economic form of the share determinedjudicial understanding of its legal nature.


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Doctrine of separate personality Doctrine expressed the real state of things Circulating in different markets, with a value

distinct from the assets - a tradable piece ofproperty owned in law and equity, the share wasseparate from the company

Thus the shareholders interest was separate fromthe company

Thus the company was independent, a separate legalbeing The doctrine describes the space between owner and

corporation

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Key. M= investment

C= purchases of investment, raw materials,

labour, land P= production

C1= products made for sale in P

M1= money made from sale of products,expectation that M1 will be greater than M


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1. Early Capitalism- Partnerships.M ------>C------------------>P--------->C1------------->M1

Collectively held Collectively shared

2. Credit system enabling market developmentI(Interest)

(M-------+M--------->C--------->P----------C1-----------M1

PE (Profits ofindustry)

2. Later developments- Joint Stock Companies.

M------------->M1Money, in the form of shares, appears to create profitsindependently.

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Governance implications(term 2)M-C-P-C1-M1 Investor or money capitalist are

one person-partnership.

M-M1 Increased capital demands, company formfacilitates investment. Investors widely drawnand unconcerned with the running of thecompany.

C----P------C1 process distinct from investors

(owners)Empirically encapsulated in BERLE & MEANSThe Modern Corporation and Private Property(1932)


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Implications for limited liabilitydebate?

C-P-C1 process- unlimited liability

M-M1 process- limited liability


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Problems with limited liability?Salomon: A calamitous decision?

Kahn-freund the company has become a meansof evading liabilities and concealing the real

interests behind the business (1944) Immoralto have a claim to profit without a responsibilityfor debts?

But enables the investment of large numbers of

non controlling investors to contribute to thedevelopment of industry?


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Manne(1967). Limited liability enables anefficient capital market as enables small

investment. Unlimited liability would makethese equally liable as controlling investors.Creditors aware an cost the possibility ofinsolvency

But Landers (1975) transfers the cost of businessfailure form shareholders to creditors withoutcompensation


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Posner (1967) Lender of limited liability companies are paid

higher interest rates which compensate.

Lenders assess risk, including default. Unlimited liability would be costly as it wouldinvolved monitoring the personal wealth ofinvestors

May involve increased and costly participation byinvestors Share value easier to quantify if detached from

corporate liabilities


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Conclusion: Separation and LimitedLiability

Development of share-origins of SCP- accounts forprotection of investor via limited liability

A fact of a developed market. Concepts intertwined. C-P-C1 process- unlimited liability M-M1 process- limited liability Creates faceless entities with no responsibilities- no

soul to damn, no body to kick- but some

exceptions especially for small company Real issue of accountability? Responsibility lies not

with outsider/passive shareholders but with theentity.

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Lecture 2 Origins of Scp