FULL Company Law Exam Revision Notes

Here are full and totally FREE company law exam revision notes that were prepared by an undergraduate law student at a top UK university. Please feel free to use these notes to supplement your revision for company law exams!

SECTION ONE Economic forms and their origins and functions

1. A brief history of company law, business forms and economic growth.
2. The emergence of the doctrine of separate corporate personality and the freely marketable share. (Seminar wk 2)
3. Separate corporate personality: consequences, groups of companies, and piercing the corporate veil. (Seminar wk 3)
4. Building Societies and corporatisation. (Seminar wk 4)

Doctrine of Separate Corporate Personality

People’s Pleasure Park v Rohleder 1908: Bought land subject to a number of covenants restricting transfer to ‘colored persons’. Johnson incorporated a company to hold the title. ‘People’s Pleasure Park Company’- owned entirely by coloured persons- company for the amusement of coloured persons. The court held that a corporation was incapable of having a colour, company was a legal being distinct and separate from its owners and incorporators. Company was not coloured, it was not restricted from holding property- in law the company and not Johnson was the owner of the property.

Company may be registered as a limited liability company and members may enjoy limited liability. Company’s liabilities are the legal responsibility of the company and the members will not be liable for the company’s debts. No personal liability will arise for the members in addition to the full  price of investment in the economy more generally. Limited liability can pose a problem for the creditors of an insolvent company without sufficient assets to repay its debts. The distinct legal personality of the company means that creditors cannot turn to the owners of the company for recompense.

Salomon v Salomon Co Ltd:

Important because:

1 applied the judicial understanding of separate corporate personality, which had previously been applied to large concerns alone, to a small private company which was a business of one man.

2 Speeches articulated in detail the nature and consequences of incorporation so that it is a case invariably cited in cases concerning the separateness of an incorporated company.

Incorporated company- legal being distinct and separate from its members regardless of its size.

Broderip v Salmon 1895: Aron Salomon carried on a business as a boot manufacturer, government contractor and a leather manufacturer. 1892 Mr. Salomon registered his business as a limited company under the 1862 Companies Act. Purchase money of business- under £40,000. Nominal capital of company was £40,000 in 40,000 £1 shares. Memorandum of Association subscribed by Aron Salomon, his wife, his daughter and his 4 sons who held one share each. When the company defaulted on payment of interest due on the debentures, Mr Broderip initiated proceedings to enforce the debentures. The judge at first instance held that Salomon Co Ltd was not a legal entity distinct from Aron Salomon. Vaughan Williams: ‘Mr salomon 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’,. Vaughan William went on to say that “The company was the mere nominee of Mr Salomon’s and it does not seem to me to make the slightest difference whether the nominee is a company or a person; and therefore I wish, if I can, to deal with this case exactly on the basis that I should do if the nominee, instead of being a company, had been some servant of agent of Mr Salomon to whom he had purported to sell his business.” … “ to allow a man who carries on business under another name to set up a debenture in priority to the claims of the creditors of the company would have the effect of defeating and delaying his creditors. There must be an implied agreement by him to indemnify the company”…“It is clear that the relationship of principal and agent existed between Mr Salomon and the company”

Lindley LJ: “The legislature contemplated the encouragement of trade by enabling a comparatively small number of persons- namely, not less than seven- to carry on business with a limited joint stock or capital, and without the risk of liability beyond the loss of such joint stock or capital. But the legislature never contemplated an extension of limited liability to sole traders or to a fewer number than seven”

“Although in the present case there were, and are, seven members , yet it is manifest that six of them are members simply in order to enable the seventh to carry on business with limited liability. The object of the arrangement is to do the very thing which the  legislature intended not to be done; and, ingenious as the scheme is, it cannot have the effect desired so  long as the law remains unaltered”

Lopes LJ: “The incorporation of the company was perfect- the machinery by which it was formed was in every respect perfect, every detail had been observed: but the business was, in truth and in fact, the business of Aron Salomon”

“It would be lamentable if a scheme like this could not be defeated”

In 1897 the House of Lords dismissed the rationale and decisions of the lower courts, finding no reason why Salomon Co Ltd should not be treated as a legal entity, distinct form Aron Salomon and therefore responsible for its own debts.

Salomon v A Salomon & Co Ltd 1897:

Lord Herchell Qu- Co. Agent carrying on business on behalf of Mr Salomon? “a company may in every case be said to carry on business for and on behalf of its shareholders; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs”

How “does it concern the creditors where the capital of the company is owned by seven persons in equal shares, with the right to an equal share of the profits, or whether 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 company the liability of the members of which is limited, and the register of the shareholders informs him how the shares are held, and that they are substantially in the hands of one person, if this be the fact”.

Lord Halsbury: “It seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the formation of the company are absolutely irrelevant in discussing what those rights and liabilities are”.

Henceforth one-man companies would enjoy separate legal personality.

Lee v Lee’s Air Farming Ltd 1961: widow of a sole director and shareholder of a limited company was able to claim compensation on the grounds that her husband had been an employee of his company.

Macaura v Northern Assurance Co Ltd 1925: sole director and shareholder of a limited company was unable to claim for fire damage to the company’s property on his own personal insurance. In this case the court held that a claim could only be made on the company’s own insurance as a shareholder had no ‘insurable interest’ in the company’s assets.

In deciding the case in this way the court was following the principles laid down in Salomon to the letter. The company was a separate legal being which required its own insurance, the company was not something that Macaura could own.  This approach conflicts with company law’s additional insistence that shareholders are indeed the owners of the company.  Shareholders are the owners but owners only of title to dividend and residual voting rights- which indeed company law does. Company law does not stop at this level of ownership and instead promotes the interests of shareholders above all other parties connected with the company on the basis that they, and they alone, are the owners of the company per se. Company law also maintains that shareholders own the very thing which the doctrine states cannot be owned, Thus the ideology of shareholder ownership sits uncomfortably with logic of the doctrine of separate legal personality but it does allow company law to both promote investor interests and give them the protection of limited liability.

Historical Emergence of the Doctrine of Separate Corporate Personality:

Historically judiciary recognised the separateness of the company from its members when factually the company existed separately from the shareholder and not before. In general, company was a large business whose shareholders acted as outside investors and did not hold a managerial position in the company, the judiciary tended to construe members’ interests as being distinct from the interests of the company. This was true of the large charter companies in the seventeenth and eighteenth centuries and it became true of large industrial companies incorporated under the Companies Acts.

1987 article, 'The conceptual foundations of modern company law', Ireland. In this article authors examine its origins from a modern Marxist socio-legal perspective. Briefly, the capital-hungry economy of the 19th century was sustained by the sale of freely transferrable marketised shares. Shareholders became holders of titles to revenue which were disconnected from the assets of the company because this facilitated an increase in the supply of capital to the company. The company by implication was construed as being disentangled and separate from shareholders per se.

In the above article Ireland et al shows how the historical reconceptualisation of the shareholders’ interests in the company, expressed in changes in the legal understanding of the nature of the share, resulted in a correlating reconceptualisation of the nature of the company. As the share became a definite and tradable piece of property the judiciary began to speak of the company as being a thing characterised by separateness. The company, the authors argue, ceased to be a body composed of people and instead became a thing in itself, emptied of and distinct from its members. Although traditionally, company law views the separateness of the company as arising from the legal act of incorporation, historically incorporation sis not result in separation. ‘An examination of the eighteenth and early nineteenth century cases and texts makes it clear that incorporation did not at any time entail such a separation. Incorporation did create an entity, the incorporated company, which was legally distinguishable from the people composing it, but there was not suggestion that the entity was completely separate from its members.

1 Ireland et al cite Myers v Perigal: judge stated that ‘the company carried on their concerns through the agency of their directors, and were empowered to invest their capital’. This use of ‘they’ pronoun, is because of the different judicial interpretation of the notion and consequence of incorporation which was quite different from any post-salomon understanding. Judges use the pronoun ‘they’ because the corporation was understood to be a group of persons, not an independent entity ‘it’. Linguistic- Until late nineteenth century, cases referred to the company as ‘they’. Indivisible from the individuals not ‘it’ an autonomous legal being.Section 3 of the 1856 Act stated that:“Seven or more persons may form themselves into an incorporated company”, 1862 Act (section 6) the words form themselves were omitted.

2 legal nature of shareholding in 18 and early 19th century companies. The modern ordinary shareholder would generally expect a right to vote at company meetings, they would expect dividends if dividends were declared, and would enjoy any surplus assets after the company had been wound up and all creditors and preference shareholders had been repaid. In contrast to this model, shares in the earlier period were understood to be property right in the assets of the company, a share within the ordinary meaning of the word. So that while the company might hold the title to company assets in the manner of a trustee, shareholders held the equitable interest. ‘To possess a share in a joint stock company implied ownership of a share of the totality of the company’s assets. Legally, shares in incorporated, joint stock companies, were divided as equitable interests in the property of the company’. Child v Hudson Bay 1723. Because shares were equitable interests in company assets, their legal nature depended on the nature of those assets. Shares in a company possessed mainly of real estate were understood to be realty, and so if the assets were not real estate, the shares were construed as personalty. Lord Macclesfield in 1723, Child v Hudson Bay: ‘legal interest of all the stock [assets] was in the company, who are the trustees for the several members’.

Shift in judicial understanding of the share was evidenced in Bligh v Brent 1837: the court held the shares in a company to be personalty rather than realty. The plaintiff argued that shares should pass to him as they were realty and in law these shares could only be passed under the testator’s will to its beneficiaries and their representatives if they were personalty. According to Ireland, the court held that shares  were personalty regardless of the nature of company assets because a shareholder’s interest was in the profit only. Alderton B construed the interest of the shareholders to be in the profits alone, their interest and claim was not uponthe assets but the surplus that those assets produced. Assets as distinct from profits from assets were formulated as two different forms of property, the company owning the former, the shareholders the latter. Alderton’s view had extended to all companies by 1850s and cite Sir John Romilly in 1861, Poole v Middleton: shares in joint stock companies were effectively independent property, and Bacon CJ in 1871 stating that shares were no longer personal actionable rights but were instead freehold property. Increasing tendency by the judiciary to construe shares of all kinds of companies, large, small, incorporated or unincorporated to be personalty, and disconnected from the tangible assets of the company.

They conclude that when a share was transformed into an independent piece of property, the company was capable of being conceptualised as separate, a thing which owned its own assets and held responsibility for its own debts: ‘the company was no longer a plural entity, a “they”, people merged into one body; it was now a singular entity, an “it”, an object emptied of people. Both the company and the share had been reified.’

Samuel Williston, ‘History of the law of business corporations before 1800’ 1888.  Williston proposes that under ‘old law’ a share was an equitable interest in the whole concern, cites Lord Macclesfield as authority for proposition that in pre 1800 law the corporation held its assets as a trustee for the shareholders, who were in “equity co-owners”. In evidencing this connection between shareholders’ interests and the company’s he looks at cases involving staute of Mortmain and Frauds, and of transfers involving real estate. ‘if the shareholders have in equity the same interest which the corporation has at law, a share will be real estate or personalty, according as the corporate property is real or persoanl’. If the company property was real estate than the company share would be subject to the laws relating to real estate, in respect of transfers and tax. He cites, a case involving the shares of the New River Company where it was held that the shares were realty because the company assets were real estate.  Williston assesses a group of cases involving fraudulent or mistaken transfer of shares in order to prove his proposition on the basis that if the shareholder’s interest were legal, then such a transfer would not affect their rights. However, if the shareholder’s interests were merely equitable, then a bona fide purchaser fro value would acquire title following a transfer made without the shareholder’s consent.  Original shareholder would be compensated accordingly but would not be able to regain the shares.  In 1740 Ashby v Blackwell and the Million Bank: the court upheld the transfer, made without the knowledge of the original shareholders, stating that the shareholder was entitled to relief only. [Share realty or personalty according to the nature of company assets ‘if the shareholders have in equity the same interest which the corporation has at law, a share will be real estate or personalty, according as the corporate property is real or personal’. Fraudulent transfer of shares were upheld for bona fide purchaser for value because shares were equitable not legal rights].

Williston states that unless there were very specific reasons not to do so, shareholders were held to be connected (in equity), to the obligations which the corporation owed to the outside world. This obligation was treated in law as part of a company’s assets and they could be enforced through equity. Dr Salmon v The Hamborough Company, court upheld the plaintiff creditor’s claim to have the company’s debts paid by its members. If the company could not pay, payment would be enforced against ‘every member of the said company as is to be contributory to the public charge, as shall be sufficient to satisfy the sum decreed to the plaintiff’. In 1673 case, judge stated that ‘if losses must fall upon the creditors, such losses should be borne by those who were members of the company, who best knew their estates and credit, and not by strangers who were drawn in to trust the company upon the credit and countenance it had from such particular members’, Lord Nottingham in Naylor v Brown 1673. [Shareholders connected in equity to the debts of the company. Their obligation was part of the company’s assets ie Naylor v Brown (1673)]. The significance of the common law rule on a member’s liability for a company’s debts is that it indicates  the common understanding that the company and the members had a property interest in the same assets, and therefore similar liabilities if those assets became deficits. In England, the separation of the shareholder from the company’s liability was achieved legislatively and was not the result of judicial recognition of the shareholder’s separation from the company’s assets and debts- Limited Liability Act 1855.

In the course of the middle part of the nineteenth century, the legal nature of the share underwent a change. It began to be understood as a piece of personal property, distinct from the property of the company. Williston goes on to argue that modern view of the nature of the share was established in England in Bligh v Brent: the P’s assertion that that the interest of trust was co-extensive with the legal interest of the trustee was, entirely in line with the many authorities counsel cited.  Ireland said that this decision reflected the changing economy and function of a company share. That is, the shares in this company were declared to be personalty because shares generally had been legally reconceptualised as tradable property and were no longer understood to be equitable interests in the whole undertaking.  The reconceptualisation in law was a direct result of shares becoming tradable pieces of property. Bligh v Brent reflected a judicial appreciation of this development. From thereon, they argued shares were understood to be personalty, regardless of the nature of the company’s assets. The court in determining the property nature of share- outcome was based upon a combination of the terms of the incorporating Act or charters, and a bias towards the assumption that ‘in every joint stock company, the shareholder has an estate of the same nature as the company’. These 2 elements given different weigh in different cases. In Ex Parte The Vauxhall Bridge Company although he incorporating act said that shares in the company should be treated as personal estate, the court ignored this and based its decision on the nature of the company’s assets. Shortly after this case, the opposite decision was reached in another case where the court held that it was the express wording of the Act which determined the nature of shares (Lancaster Canal Company). Furthermore in Bligh v Brent 'if we look at the wording of the charter, the language is much more suitable to personal than to real estate'. Bligh v Brent: “It is of the greatest importance to look carefully at the nature of the property originally entrusted,  and that of the body to whose management it is entrusted: the powers that body has over it, and the purposes for which these powers are given. The property is money- the subscriptions of individual corporators. In order to make it profitable, it is entrusted to a corporation who have an unlimited power of converting part of it into land, part of it into goods; and of disposing of each from time to time; and the purpose of all this is the obtaining of a clear surplus from the use and disposal of this capital for the individual contributors.”…“It is this surplus profit alone which is divisible among 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.” Crucially, Alderson Distinguished between a claim against the product of the assets, and a claim against the assets themselves and recognised that the typical investor was interested in the end product of the production process (profit) rather than in the process itself. By investing in the company they gave up the right to recover their investment directly and could only recover it by transferring the shares or by the liquidation of the company. Sparling v Parker (1840) A share was not a right attached to “an interest in land ……..share transferable only for money”.

No general law, Corporations determined by individual charter, Bligh v Brent- wording of charter made assets the right to lay piping, land assets purchased later. Refers to company as ‘they’, Gradual process of separation.  AB DuBois, The English Business Company after the Bubble Act 1720-1800, 1938. Lack of generality is largely attributable to the effect of the Bubble Act. Frequent use of the pronoun ‘they’ in respect of companies by legal and other authorities but interprets this differently from Williston and Ireland. He argues that the 18th century was characterised by a paucity of legal imagination. 18th century lawyers  simply failed to develop legal principles and instead dealth with issues relating to corporations in a pragmatic, case-by-case basis. ‘In those rare instances where generalisation was thought necessary, the lawyer continued piously to repeat the platitudes developed in earlier centuries and distilled in concentrated form by Lord Coke. The use of old learning was quite uncritical, and indeed the manner of repetition is so unvarying and mechanical that one is led to doubt whether any thought whatever was expended upon the philosophical conceptions underlying legal doctrine’. DuBois attributes to the overwhelming effect of the Bubble Act of 1720. Act individualised every corporation, making each a business which possessed powers and characteristics that were entirely constructed by its charter. Charter Corporations, therefore were not bonded  by a general law which applied to and connected them all. Instead, they were individual arrangements between the incorporators and the state, privileges granted by the state for a short period of time. He maintains that ‘whatever fragment of coherent theory existed relating to the business corporation was centered in that relatively frequently appearing phrase “the corporation is the creature of the state”’.