In 1899, the Court of Appeal in England determined the case of Apthorpe v Peter Schoenhofen Brewing Co, which involved an English company trying to evade a restriction against foreign companies owning property in the State of Illinois.¹ The court held that this arrangement constituted a sham and pierced the corporate veil, making the parent company liable for the subsidiary's obligations, while also establishing the "head and brains" rule and allowing courts to look through a company's formal structure and examine its control and direction.²

In this case, the important issue was whether the English parent company was liable to pay income tax for conducting business in the United States. The parent company argued that, applying the Salomon principle, the English and American companies were distinct legal entities, and any activities undertaken by the subsidiary in the United States could not be attributed to the parent.³ However, Smith L.J. rejected this argument and focused on the factual question of whether the English parent was "carrying on" business in the U.S.A. His judgment was that the "head and brains" of the operations in the United States belonged to the officers of the English parent. The Salomon case was not seen as relevant to the facts by the panel.⁴

The origin of the head and brains rule in the Court of Appeal's decision in Schoenhofen is a subject of academic interest.⁵ The doctrine was derived from an earlier decision by the Court of Appeal in San Paulo (Brazilian) Railway Co v Carter [1895],⁶ which Lord Smith explicitly adopted in the Schoenhofen case. However, the San Paulo case differed from the later Schoenhofen and St Louis cases in that it concerned a single company that conducted all of its activities within a foreign jurisdiction but was ultimately administered and authorized from an English office. Moreover, the San Paulo case was decided prior to the House of Lords' Salomon decision, which had a significant impact on the legal consequences of separate corporate personality.⁷

References

1. Apthrope v Peter Schoenhofen Brewing Co. Ltd (1899) 4 TC 41
2. Marc Moore, "A temple built on faulty foundations": piercing the corporate veil and the legacy of Salomon v Salomon J.B.L.180-203 (March, 2006), accessed 30 May 2023
3. Ibid
4. Ibid
5. Apthrope v Peter Schoenhofen Brewing Co. Ltd (1899) 4 TC 41
6. San Paulo (Brazilian) Railway Company Ltd v Carter (Surveyor of Taxes) [1895] UKHL TC_3_407
7. Ibid