Company Entity and Enterprise Group
1. Salomon Principle (Salomon v Salomon, can be a secured creditor)
a. Separate Legal Personality:
i. Company is at law a different person altogether from the
subscribers/shareholders
ii. A person can be main shareholder/sole director and an employee (Lee
v Lee’s Air Farming)
b. Limited Liability:
i. Shareholders’ liability is limited only to the extent of their subscription
in the company’s shares, so, any amount due under their terms of
investment when in debt
ii. Can own its own property and shareholders have no proprietary rights
(Macaura)
iii. Can take legal action and be sued (Foss)
iv. Perpetual succession (company keeps living)
v. Rationales (Easterbrook and Fischel):
o Diversification:
a. Decrease need to monitor
b. Risk management
c. Cost to raise capital not as high
o Monitoring other shareholders:
a. Lower costs
b. Personal wealth
o Additional information:
a. Shares have one market price
b. Less cost/resources analysing to check if fair/right price
o Optimal investment decisions:
a. Positive net value (profitable projected earnings)
b. Ventures, e.g. developing products
c. Social loss otherwise
vi. Externalisation of Risk (Easterbrook and Fischel):
o Limited liability increases probability that there will be
insufficient assets to pay creditors’ claims
vii. Absolute limited liability (Easterbrook and Fischel):
o Would mean parent can form a subsidiary with minimal
capitalisation to engage in risky activities
o The more undercapitalised the entity, the greater the
incentive to partake in risky activity
2. Main Rationale:
a. Growth of businesses and economy:
i. Otherwise, entrepreneurial activity would be too risky
ii. Unwilling/disincentive to risk personal wealth
3. Enterprise/Corporate Group
a. Enterprise group = two or more enterprises interconnected by control or
significant ownership
b. Issues
1
1. Salomon Principle (Salomon v Salomon, can be a secured creditor)
a. Separate Legal Personality:
i. Company is at law a different person altogether from the
subscribers/shareholders
ii. A person can be main shareholder/sole director and an employee (Lee
v Lee’s Air Farming)
b. Limited Liability:
i. Shareholders’ liability is limited only to the extent of their subscription
in the company’s shares, so, any amount due under their terms of
investment when in debt
ii. Can own its own property and shareholders have no proprietary rights
(Macaura)
iii. Can take legal action and be sued (Foss)
iv. Perpetual succession (company keeps living)
v. Rationales (Easterbrook and Fischel):
o Diversification:
a. Decrease need to monitor
b. Risk management
c. Cost to raise capital not as high
o Monitoring other shareholders:
a. Lower costs
b. Personal wealth
o Additional information:
a. Shares have one market price
b. Less cost/resources analysing to check if fair/right price
o Optimal investment decisions:
a. Positive net value (profitable projected earnings)
b. Ventures, e.g. developing products
c. Social loss otherwise
vi. Externalisation of Risk (Easterbrook and Fischel):
o Limited liability increases probability that there will be
insufficient assets to pay creditors’ claims
vii. Absolute limited liability (Easterbrook and Fischel):
o Would mean parent can form a subsidiary with minimal
capitalisation to engage in risky activities
o The more undercapitalised the entity, the greater the
incentive to partake in risky activity
2. Main Rationale:
a. Growth of businesses and economy:
i. Otherwise, entrepreneurial activity would be too risky
ii. Unwilling/disincentive to risk personal wealth
3. Enterprise/Corporate Group
a. Enterprise group = two or more enterprises interconnected by control or
significant ownership
b. Issues
1
