Disregarding the Salomon Principle: An Empirical Analysis, 1885-2014

Disregarding the Salomon Principle: An Empirical Analysis, 1885-2014

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Much of modern Britain’s corporate economy hinges on the principle established by the House of Lords in Salomon v Salomon [1897] that a corporation is a separate legal entity. From this Salomon principle flows a protective investment structure for shareholders and corporate groups with an array of liability and tax shielding possibilities. But the Salomon principle is not inviolable, and the judiciary sometimes will disregard the corporate entity and lift its “veil” of incorporation. The stakes are high for determining the scope of such extraordinary relief: too wide a rationale for corporate disregard and the protective investment effect of the Salomon principle is eroded, whereas too narrow a rationale and injustice may occur. Unfortunately, this judicial high wire act has not gone well. For over a century British courts have struggled to negotiate a sensible approach to corporate disregard. Scholars have fared no better, as their attempts to devise a coherent explanation, much less a clear justification, for disregarding the corporate entity have fallen on stony ground.

Empirical analysis can facilitate our understanding of this mercurial and troubled area of the law. After examining British cases from 1885 up to and including 2014, we have created a final dataset of 216 decisions. Overall British courts disregard the corporate form 37.04% of the time, which approximates the 38.46% rate in Australia but is substantially lower than the 48.51% rate in the United States.[1][1] Our data depict that the Salomon principle was intact right into the late 1960s, but since then, the number of corporate disregard cases has exploded, and those claims have found increased levels of success. We find that British courts do appear to adjudicate corporate disregard in ways that comport with established intuitions, such as a higher rate of success in claims grounded in Tort rather than Contract. But there is compelling, disturbing evidence that government agencies can disregard companies virtually at will, and that the English Court of Appeal has been the venue where the corporate disregard rate has increased the most. We also suggest that certain individual judges have been particularly influential in shaping the corporate disregard doctrine. In sum our study suggests that recent attempts by certain Supreme Court Justices in Prest v Petrodel [2013] to try to establish, once again, a narrow and sensible basis for corporate disregard may not be well-tailored to address the complex doctrine’s problematic application within the United Kingdom.

[1][1] P. Oh, Veil-Piercing, 89 Tex. L. Rev. 81, 84 (2010).

Professor Alan Dignam
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