CHAPTER XV

HOLDING COMPANY ORGANIZATION

WHEN the Standard Oil Trust was dissolved (1892) it sought refuge in a community of interest. The Sugar Trust, however, took (1891) the more difficult step of entering into a complete consolidation of interests of the most important plants. The Cotton Oil Trust (1889) followed a halfway course in that it adopted a kind of incomplete consolidation which depended upon the holding of stock in various subsidiary companies. Now the position taken by the Standard Oil organization soon became untenable, for men were not slow to see that it involved an evasion of the law, and accordingly in 1897 the attorneygeneral of Ohio filed a bill of information in contempt, as a lawyer would say, against the Standard Oil Company in the Ohio Supreme Court. In the following year he also brought suit to have forfeited the charter of a subsidiary, the Buckeye Pipe Line. The situation was growing decidedly warm for the oil interests and something had to be done. Immediately they began to liquidate at a lively rate the old trust certificates which, it will be remembered, had been left outstanding in the hands of small holders, and early in 1899 under legal advice they took steps to reorganize the Standard Oil Company of New Jersey with the idea of turning the controlling stock holdings over to it. This meant the adoption of a form of organization similar to that of the Cotton Oil Company.

In pursuance of this plan, the old charter of the Standard Oil Company of New Jersey was amended so as to authorize it to do anything that the various subsidiaries could do; the capitalization was increased by $100,000,000 of common stock, to be exchanged for the stocks of the subcompanies; the liquidating trustees were made directors, constituting a majority

of the board; and by-laws which were virtually those of the trust were adopted. Its own previously outstanding stock was made preferred stock and exchanged for the new common stock, and the same course was followed with the stocks of the other nineteen main companies. Thus the reorganized Standard Oil Company of New Jersey in 1899 became the direct holder of the stocks of 20 main companies and of some 23 subsidiary companies whose stocks had been transferred to it by the trustees in 1892; and indirectly, through the 20 companies, it had controlling interests in 40 odd companies subsidiary to them. In all cases of any importance a controlling interest was held, frequently running as high as 99 per cent. This, then, was not a mere community of interest, for it rested on a stronger basis than friendship or a loose interholding of stocks; nor was it complete consolidation or merger, for it maintained the separate formal existence of the constituent companies; it was a securities holding corporation - a "holding company."

Definition and General Nature. A holding company is a form of business organization (established through partial or temporary consolidation) which is created for the purpose of combining other corporations by owning a controlling amount of their stock. It necessarily involves the creation or the prior existence of a corporation which has power to hold the stock of other corporations, which corporation proceeds to acquire such stocks by exchanging its own securities for them, or by other means of purchase. The controlled corporations are nominally independent and operate under their own names, but they are or can be effectively managed by the officers of the holding company, whose directors vote their stocks, or a controlling part thereof, and so elect their directors. In this way, the combined plants are firmly bound together. The holding company is organized just as any other corporation, but its purpose - at least its chief purpose is merely to hold the stocks of other and subsidiary companies. "The attitude of these combinations is that of a stockholder in many corporations which seeks to manipulate them so as to promote its own private interest." Although they are rather tedious and may be skipped by the

cursory reader, the following paragraphs from the charter of the greatest holding company in the world, the United States Steel Corporation, will serve to emphasize this aspect of the matter. In addition to other authorized purposes are the following:

"To acquire by purchase, subscription or otherwise, and to hold or to dispose of, stocks, bonds, or any other obligations of any corporation formed for, or then or theretofore engaged in or pursuing, any one or more of the kinds of business, purposes, objects or operations above indicated, or owning or holding any property of any kind herein mentioned; or of any corporation owning or holding the stocks or the obligations of any such corporation.

"To hold for investment, or otherwise to use, sell or dispose of, any stock, bonds or other obligations of any such corporation; to aid in any manner any corporation whose stock, bonds or other obligations are held or are in any manner guaranteed by the company, and to do any other acts or things for the preservation, protection, improvement or enhancement of the value of any such stock, bonds or other obligations, or to do any acts or things designed for any such purpose; and, while the owner of any such stock, bonds or other obligations, to exercise all the rights, powers and privileges of ownership thereof, and to exercise any and all voting power thereon.

"The business or purpose of the company is from time to time to do any one or more of the acts and things herein set forth; and it may conduct its business in other States and in the Territories and in foreign countries, and it may have one office or more than one office, and keep the books of the company outside of the State of New Jersey, except as otherwise may be provided by law; and may hold, purchase, mortgage and convey real and personal property either in or out of the State of New Jersey.

"Without in any particular limiting any of the objects and powers of the corporation, it is hereby expressly declared and provided that the corporation shall have power to issue bonds and other obligations, in payment for property purchased or acquired by it, or for any other object in or about its business; to mortgage or pledge any stock, bonds or other obligations, or any property which may be acquired by it, to secure any bonds or other obligations by it issued or incurred; to guarantee any dividends or bonds or contracts or other obligations; to make and perform contracts of any kind and description; . . .”

The balance sheet of a typical holding company, like that of

the trust, would show as assets merely the stocks of other companies and such office property and the like as might be necessary to conduct the central direction of those companies. For example, the balance sheet of the Rock Island Company on June 30, 1909, stood as follows:

Its own income account contains nothing but a statement of the surplus of the preceding year and "expenses and taxes" of a little over $17,000; but in the combined income account of itself and a subholding company it appears that the entire income consists of dividend installments on the stock of a controlled operating company, while the expenses are made up of interest payments on securities issued in payment for such stock.

What is the difference, then, between the holding company and the trust, one wonders. Economically speaking, there is very little difference indeed. The chief difference exists in their standing in the courts. To change a trust to a holding company, a process already illustrated by the history of the Standard Oil Company, it is only necessary (1) to substitute the stock of the holding company for the certificates of the trust, (2) to substitute the board of directors of a corporation for a board of trustees, and (3) to substitute a permanent transfer of stock or ownership for the trust relationship. At the present time, the law of holding companies is being made and it may be that the courts will more and more refuse to draw a distinction between the two forms, but as yet it may be said that the incorporation of the combination and the absence of the trust relationship make an important difference in the eyes of the law. In the formation of a trust, the stockholders of the constituent

companies surrendered their stock to be held in trust for them by trustees. Thus they became the "beneficiaries" of a trust agreement. These stockholders, while they might retain an interest in their shares, at the same time surrendered control over them and abandoned the management of their plants. Holding companies are formed by the exchange of stock in one company for stock in another, which exchange is in the nature of an outright sale; and this sale is made by the stockholders of the combined companies to a legally authorized corporation. Moreover, in the trust agreement a confederated relationship was involved, in which the parties maintained a nominally separate existence, whereas the holding company is a nominally responsible corporation, buying stock in the open market and doing that which the State has authorized it to do. Formally, this makes considerable difference between the two kinds of combination organization. Formally, the combination trust is an agreement between an association of individual trustees and a group of corporations which by implication give up their autonomy and so act ultra vires: it involves dealings between corporations which result in partnerships between them. Formally, the holding company is a duly certified corporation, authorized to deal in the stocks of other companies and to hold them; and its dealings are entirely with the individual stockholders of the controlled corporations. Formally, the one is illegal; the other is legal. When it comes to the question of purpose or intent or result, the answer, as we shall see, is dif

Origin and Development. But the thought occurs to one, if the holding company is legal and yet can be used to accomplish the same results as the trust, why was it not resorted to sooner? Why was the trust form ever used? Why did not all the trusts become holding companies at once? The simple answer is that the holding-company idea was not and is not legal as a general principle in business organization. Of course, it depends upon the right of one corporation to hold the stocks of other corporations, and at common law no such right was established. Pennsylvania even went so far as positively to