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Shareholders seldom become actively involved in the management of the company,
leaving it in the hands of the managers and directors of the company. 38 The existence
of limited liability makes it possible for shareholders to diversify their investments
and risks. 39 Varying their investments and acting passively becomes a rational
strategy for shareholders, because they will benefit should the company succeed and
if the company fails, their personal wealth will be protected. 40 This action has the
potential of minimising the operating costs or transaction costs. 41 However, the
argument of separation of ownership and control may not be available to all types of
companies and is more prevalent in large public corporations.
In private companies, particularly in family-run companies, there is rarely any
distinction between ownership and management. In this type of company, the
shareholders are also the directors of the company and, in certain cases, the majority
shareholder is the sole director. The Salomon case is an example of this, in which Mr.
Salomon had total control of the management of the company. Shareholders in this
family business or other small private companies, thus, could not diversify their
investment and it is likely that they had put all their risks in one basket.
38 See Adolf A Berle and Gardiner C Means The Modern Corporation and Private Property (The
Macmillan Company, New York, 1932); Adolf A Berle and Gardiner C Means The Modern
Corporation and Private Property (Revised ed, Harcourt, Brace & World, New York, 1968) at 312-
313; Ross Grantham and Charles Rickett Company and Securities Law Commentary and Law
(Brookers Ltd, Wellington, 2002) at 54-55; Brian Cheffins Company Law: Theory, Structure and
Operation (Clarendon Press,Oxford, 1997) 31-41; John Parkinson Corporate Power and
Responsibility (Clarendon Press, Oxford, 1993) at 54-56 and at 97-132.
39 Paul Halpern Michael Trebilcock and Stuart Turnbull “ An Economic Analysis of Limited Liability
in Corporation Law” (1980) 30 Uni. Toronto L.J 117 at 139-142; Frank H Easterbrook and Daniel
R. Fischel “The Corporate Contract” (1989) 89 Columbia LR 1416 at 1426-1434; Frank H
Easterbrook and Daniel R. Fischel “Limited Liability and the Corporation” (1985) 52 Uni. Chi
L.Rev 89 at 103-109 [“Limited Liability”]; Ian M Ramsay above n29 at 535-537; Eugene F Fama
“ Agency Problems and the Theory of the Firm” (1980) 88 J. Polit. Economy 288 at 290-292.
40 Ibid; Edwin M Dodd :For Whom are Corporate Managers Trustees?” (1932) 45 Harv LR 1145 at
1153.
41 Ibid.
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