The common law
had sought to evolve the more ancient structure of partnerships
, which allowed a pool of capital but kept the partners personally liable for the debt
of the partnership. A company
did not hold shareholders
liable for the debts of the company.
At the turn of the century, England's Companies Act was almost forty years old. And it had a quirk: for incorporation, the company had to have seven members (in those days, and still today in England, shareholders of a corporation were referred to as members of a company).
Aron Salomon had a going concern. His leather and boot seller business, operating as a sole proprietorship, was doing well.
But he thought to convert the business to a corporation and had A. Salomon & Company, Limited incorporated in 1892 and to which he sold the business. He held 20,000 shares but the register of members also included one share to each of his wife, daughter and four sons.
As luck would have it, the business started to fail soon after it was sold to the new corporation. Salomon tried to salvage things by giving the company a further influx of £1,000, which he secured by debenture. Still, the company became insolvent and was ordered to be liquidated. Aron Salomon swept his debenture funds back up but some £7,773 remained owing by A. Salomon & Company, Limited to unsecured creditors. These creditors had been longstanding clients first of Aron Salomon's sole proprietorship and then with the successor business, A. Salomon & Company, Limited. They cried foul and sued Aron Salomon, personally, for the £7,773.
He replied that he did not owe the creditors any money; perhaps A. Salomon & Company, Limited did: a separate legal person. Shareholders are not responsible for the debts of the company, he argued.
The unsecured creditors told the court this was all too convenient; that this was a mom and pop shell company and was really just another version of Aron Salomon, the man. They called A. Salomon & Company, Limited a one man company, hoping to influence the court to remove the legal barrier against the personal liability of the primary shareholder in such a case.
A cold chill went down the spine of many a solicitor as a multitude of businessmen had availed themselves of the 1862 statute and registered their businesses, although in fact, they continued to be the driving force behind it, albeit strictly under the auspices of the Companies Act, as shareholder and director and officer.
Bond Street came to a standstill the day the first court sided with the unsecured creditors, declaring that A. Salomon & Company, Limited was a "mere alias ... mere nominee and agent" of Aron Salomon and that the latter, on that basis, had to indemnify the company against the creditors.
On appeal, the second court also agreed with the creditors finding that the creation of A. Salomon & Company, Limited ran contrary to the intent of the 1862 statute.
Off went the barristers, briefs under arm and white legal wigs pinned to their receding hairlines, to the august House of Lords which, in 1897, set the world right again.
Justice Harkell harkened back to the formative days of corporate law:
"The very object of the creation of the company and the transfer to it of the business is, that whereas the liability of the partners for debts incurred was without limit, the liability of the members for the debts incurred by the company shall be limited."
In the result, the court stated, it made no difference whether Salomon had seven or more shareholders, or how many shares he owed in comparison with the other six. The one or the many were no less shielded from personal liability for the debts of the company.
After A. Salomon v A. Salomon & Company, Limited, the popularity of corporate organizations picked up where it had left off and the law of corporations continued its sharp progression to the pinnacle of the world of modern trade in goods and services.
The case is still part of company law 101 and taught as a religion in law schools to impress upon the students the independent legal person of a corporation as distinct from the shareholders, be they one or thousands.
- Duhaime, Lloyd, Timetable of World Legal History
- McGuinness, Kevin, Canadian Business Corporations Law, 2nd Ed. (Toronto: LexisNexis, 2007), pages 34-35
- Salomon v A. Salomon & Company, Limited,  2 Ch. 328
- Salomon v A. Salomon & Company, Limited, 1897 A.C. 22
: image is a mockup of an 1890 office only and not a true representation of Aron Salomon or his company.