CHAPTER XVI COMPLETE CONSOLIDATION: AMALGAMATION AND MERGER JUST prior to the great holding-company epoch which began about 1899 and reached its climax between that date and 1904, a number of important consolidations of a different type arose, complete consolidations. This form was not new, but its application to the huge combinations of that time was a new development, for it then played a brief part in the "trust movement." Just what is a complete consolidation, and how does it differ from the securities-holding type? Definition and General Nature. — Noyes in his standard work on Intercorporate Relations (§ 310) sets it over against the holding company in the following terms: "As a part of a plan for combining competing corporate interests, a purchasing corporation is organized, with a share capital sufficiently large for the purpose, which purchases the properties plants, stock in trade, good will of the several corporations, and issues its own stock in payment therefore. . . . The purchasing corporation, as the result of this process, becomes the absolute owner of the properties of all the corporations, and may continue or suspend the business theretofore carried on by them, and otherwise manage the affairs without restriction or supervision except by the State and its own stockholders." This statement is in accord with and serves to amplify the definition of complete consolidation to be adopted here, which is that it is a form of business organization which is established by the outright purchase of the properties of constituent organizations and the merging or amalgamating of such properties into a single business unit. In a word, complete consolidation is combina tion through sale. It is a union in which the parts are fused and lose their identity, at least for operating purposes. The following steps will be found in the ordinary consolidation. First, the directors of the constituent companies get together and make an agreement as to the capitalization of the consolidated corporation and the method of exchanging its securities for the stock or properties of the constituents. Next, this agreement is submitted to the members of the constituent companies for the purpose of securing their assent. Then, if, at properly called and conducted meetings, the majorities required in such cases favor the step, a certificate or articles of consolidation, together with copies of the agreements of the stockholders, are filed with the Secretary of State of the appropriate commonwealth. Statutory authority is always necessary to make valid a complete consolidation by merging or amalgamating business units, and mere provision for it in a certificate of incorporation is not enough. Such authority may come through the enabling acts under which the constituent companies were organized or incorporated, through legislation at the time of the consolidation, or through a sanction by law of an existing but illegal consolidation. As a matter of fact, nearly all general corporation laws to a greater or less extent permit consolidation for lawful purposes. The assent of the stockholders of all constituent companies is required, and where the statutes provide for consolidation a favorable majority of from two thirds to three fourths of the shareholders is generally prescribed, but otherwise the assent must be unanimous. Payment is generally made in the securities of the consolidated corporation, but the members of the constituent companies cannot be made to accept stock instead of cash unless, perhaps, the certificates of their corporations so provide. The difference between the form of organization thus described and the holding company is fairly obvious. The holding company retains the separate existence of the combined organizations and controls them by voting their stocks. Nor can it formally act for them independent of their directors. It is at most a partial or temporary consolidation. Of course its constituent units must be corporations or joint-stock concerns, and the relationship is between their stockholders and the holding corporation. The complete consolidation, however, wipes the separate existence of constituent elements off the slate and they become one with it. It would be a contradiction of terms to say that it controls them, for they are not! These elements need not be corporations, as the consolidated corporation does not depend upon stockholding. Moreover, the properties being fused, there is no occasion for separate existences and the relation established necessarily involves the organizations concerned as well as their individual members. Where, as is generally the case, the constituent elements are corporations, the relation lies between the corporations as such, and not, as in holding companies, between the stockholders as individuals and a corporation which combines their organizations indirectly through combining their stocks. While the pure holding company merely holds stocks and does not engage directly in the management of the constituent plants, the complete consolidation is, at least nominally, above all an operating unit. From a legal point of view, it is important to draw a distinction between consolidation and sale. Is any sale of its property by one business organization to another a consolidation? Generally speaking, yes; but at law, as well as in economic significance, no; for, as the best considered cases have held, a mere sale terminates the interest of one of the parties in the property which is transferred, whereas a consolidation results in a union of interests in the property and so is more than a sale. If the stockholders of the vendor corporation retain an interest in the united properties, it is evidence of combination, and laws against combination may apply. To illustrate consolidations which involve mere sales, mergers which arise in the course of the normal expansion of a business may be mentioned; for they are not the result of a plan to combine competing concerns to the end that the margin between price and expense may be raised. Such consolidations will have no trouble with the law. On the other hand, stand those consolidations which are the result of a desire to combine all the plants supplying a given market, and here the results upon public well-being will determine legality. Closely associated with this classification is the distinction between those consolidations which occur gradually over a period of years of steady growth, and those which spring up all at once, showing evidence of intent to combine. But the classification to be emphasized here is that which distinguishes between the "merger" and the "amalgamation." A merger is a consolidation in which one business organization is absorbed by another that retains its own existence. Amalgamation, however, results from the creation of a new corporation by the coalescence and virtual disappearance of a group of business organizations. Perhaps the most common case of merger is found in the absorption of branches and extensions by the main line of a railway system; for in such cases the branches cease to exist as separate organizations, while the main railway company continues on with little or no change; but, now, if two systems, the A and the B lines, were to combine under the name of the C line, and cease to exist as system A and system B, the consolidation would be amalgamation. Thus in 1910 the Gulf & Chicago Railway Company was consolidated with the Mobile, Jackson & Kansas City Railway Company to form the New Orleans, Mobile & Chicago Railroad Company by their amalgamation. The use of the term "merger" in the sense here employed is fairly well established; and, while the term "amalgamation" has been more loosely used, its clear significance makes it the logical means of designating the coalescence just illustrated. Such is the usage in England. In a very general sense complete consolidation is as old as business organization, but as a characteristic feature of the combination movement of the second half of the nineteenth century it has a more special significance. In this special sense it is a corporate consolidation, and it seeks the same object sought by the trust form. The tendency in the earlier days of the combination movement was strongly towards the federation of nominally independent business units. Entrepreneurs were R loath to surrender the autonomy of their organizations, and the business world had not yet become trained in the game of combination. Perhaps, also, competition had not become severe enough to act as an effective driving force. However that may be, consolidation built on a large scale and directed toward the restriction of competition was relatively rare. Then, between 1890 and 1900, after the trusts had been ruled out and before holding companies became the style, there was an epoch of complete or nearly complete consolidation, notably in the iron and steel industry, the railway business, and also in sugar, paper, and cotton oil. The application of the anti-trust act to the looser forms of agreement combination went so far as to drive business organization into corporate combination; but, as already stated, the holding corporation won favor over the complete consolidation as being more facile and more in harmony with the desire to retain the names and separate organizations of the subsidiary concerns. In 1904, however, the Northern Securities Company was declared illegal, and it became evident that even corporate combinations, if in restraint of trade, could not be carried on safely under the holding-company form. This decision undoubtedly somewhat checked the holding-company movement, and at the same time it seems to have given a new impetus to complete consolidation; for the belief arose that by dissolving the constituent companies and owning their properties combinations would become less readily assailable in the courts. Since the more recent decrees of 1911 dissolving the Standard Oil and American Tobacco holding companies, the possibilities of merger and amalgamation have been further canvassed.1 Throughout the development thus briefly sketched one purpose runs, the purpose of business men to regulate competition whether in trade conditions or prices to the end that the margin between price and expense might be raised or maintained. On the other hand, down to 1911 the statute law, as construed 1 The fact that these later decisions by strong implication provide for reasonable restraints of trade, however, holds out some hope for the continued use of securities holding along the old lines. |