lee v lee air farming ltd.

Mr Lee was a pilot who operated a crop dusting business. Mr Lee formed the corporation, Lee's Air Farming Ltd. Its main business was aerial spraying. He was the director and owned most of the shares(he held 2999 of the company's 3000 shares). As director of the corporation, he hired himself as an employee of the corporation. As one of the administrative tasks in setting up the company, he acted as its agent in setting up insurance, including workers' compensation insurance. The corporation's plane crashed while Mr Lee was flying it as part of his work, and he was killed on the job.

His widow, the plaintiff, attempted to collect what was rightfully due to a widow of a man killed on the job. The actual defendant was the insurance company.
The main question in the case was whether a person could be both a director and major shareholder of a corporation, on the one hand, and also an employee of the corporation, on the other.

Previous cases, beginning with the Salomon case, had confirmed that a corporation has an existence separate and apart from its shareholders and directors. The exceptions to that principle are gathered under the rubric, 'Piercing the Corporate Veil.' Where a corporation is a mere sham, the law can cut through the veil of corporate legitimacy, and reach into it for the shareholders and directors.
The Lee's Air Farming case confirmed the Salomon principle. Lee's Air Farming Ltd. was not a mere sham. It was a legitimate corporation, established for legitimate purposes, and had carried on a legitimate business. His employment by the corporation was well-documented, through government records of tax deductions, workmens' compensation contributions, etc., and was not something his widow had attempted to piece together after the fact of his death. There was no reason in law why a person could not perform corporate functions and employee functions within the same corporation. it was held that Lee was a separate person distinct from that company hence compensation was due to the widow.

fun with dick and jane

"Fun With Dick and Jane" is a remake of the 1977 comedy starring Jane Fonda and George Segal, true to its storyline. Those who do not learn from history are doomed to remake it. This proves true in this comedy starring Jim Carrey as Dick and Tea Leoni as Jane. Dick is an executive of a mega corporation (think Enron), who is promoted to vice president in charge of communications, just in time to be its spokesman on live cable news as the corporation's stocks melts down to pennies a share. Jane, on the morning of his promotion quit her job. After the embarrassing meltdown on national TV, Dick is left jobless, and so is his wife.

What turned out to be a glorious affluence turned sour. They have to sell their possessions to get by. After running out of possessions, they then turn to robbery - first convenience stores and head shops, later private homes and banks - and while that pays the bills and their kid's birthday party, Dick is brewing a brilliant scheme. Namely, revenge on his old boss Jack McAllister (Alec Baldwin), the corporate shark who tanked the company, Globodyne.

McAllister has already looted whatever assets ever existed in the company, leaving with hundreds of millions while his employees face a financial meltdown. This is a typical turnout of the corporation being a separate legal entity. The fact that the company is an entirely separate entity, the directors do not have legal obligations to bail out the company or reduce their pay to help the company survive. While the helpless ex-employees are out there slaving their way through daily survival, McAllister enjoys his looted luxuries with no remorse. Come to think of it, there's the Salomon principle to be blamed for the frauds and criminal activities. Without it, none of this fiasco would have ever happened. The fallouts of Enron and WorldCom would not have taken place. Perhaps this is a time to start re-evaluating the principle so that directors would not be exempted from the meltdown of their corporations.

salomon principle - a blessing or otherwise?

The case of Salomon v Salomon & Co. Ltd has become a landmark law in setting the principle that a corporation is a separate legal entity. The unanimous ruling of the house of the Lords firmly upholds the doctrine of corporate personality. From then onwards, corporations are being treated as a distinct 'person', separated from and independent of the persons who formed it, who invest money in it, and who direct and manage its operations. It follows that the rights and duties of a corporation are not the rights and duties of its directors or members who are, most of the time, obscured by a corporate veil surrounding the company.

The fact that the corporation is a separate legal entity in its own right has birthed many criticisms. What was supposed to be granted as a privilege for legal and business convenience, has turned into a way to commit fraudulent activities and get away with it. The increase of companies going into a state of bankruptcy, workers getting laid off and the poor keep getting poorer are somehow a produce of directors and owners exploiting the Salomon principle. They have billions of dollars stacked away in bank accounts, enough to sustain their succeeding generations of heirs, while the companies are left for doom. This is due to the fact that corporations may have incurred huge losses, but the assets of the directors are to be left untouched as they do not represent the corporation.

Professor Kahn-Freund described the decision of the House of Lords in the case as "calamitious" and called for the abolition of private companies. In his article in the Modern Law Review, he mentioned that the impact on the society by a failing economy and corporations and uses two main approaches whilst at this; first that the interests of the community itself in the distribution, investment of profits of the concern, the prevention of fraudulent transactions affecting the community at large and the measure of publicity should be taken into consideration. The second by the abuse of the principle of a corporate entity and undermining of the company’s capital as a ‘guarantee fund’ by the issue of shares and buy outs in exchange for over valued assets.

The conniving minds of the directors caused the downfall of Fannie and Freddie Mac in the U.S, and now the whole world economy. Such a problem does not call for a legal remedy, but an economic one. Any slight possibility of looking at a legal solution, will be countered by the decision in Salomon.

There is therefore still a debate as to whether the Salomon principle should be applied in a modern legal environment, with directors manipulating the principle for their own good use. Many have referred to this principle as a 'double edged sword', endowing companies with the attributes to be a powerhouse of capitalism yet promoting fraud and the evasion of legal obligations. So what is the final verdict? Yay or nay to the Salomon principle?

Reference:
A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine
Wikipedia
The Social Blog

holdings and subsidiary

A subsidiary, in business matters, is an entity that is controlled by a separate higher entity[citation needed]. The controlled entity is called a company, corporation, or limited liability company; and in some cases can be a government or state-owned enterprise, and the controlling entity is called its parent (or the parent company). The reason for this distinction is that a lone company cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary. Contrary to popular belief,[by whom?] a parent company does not have to be the larger or "more powerful" entity;[citation needed] it is possible for the parent company to be smaller than a subsidiary,[citation needed] or the parent may be larger than some or all of its subsidiaries (if it has more than one).[citation needed] The parent and the subsidiary do not necessarily have to operate in the same locations, or operate the same businesses, but it is also possible that they could conceivably be competitors in the marketplace. (Hewlett Packard is the parent company of Compaq, but both compete against each other in the sale of desktop computers.) Also, because a parent company and a subsidiary are separate entities, it is entirely possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment and/or under investigation, while the other is not.

The most common way that control of a subsidiary, is achieved is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary, and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways that control can come about, and the exact rules both as to what control is needed, and how it is achieved, can be complex (see below). A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. A parent and all its subsidiaries together are called a "group", although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership.

Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it.

excerpt from wikipedia

There are many companies which decide to have subsidiary companies. For example,

i) KFC Holdings (Malaysia) Berhad

ii) Telekom Malaysia Berhad

iii)Berjaya Corporation Berhad

iv) Unilever

v) Fraser & Neave Holdings Berhad