determine the success of an applicant for a loan not only at one bank but at all banks to which he has access. On the other hand, interference by any form of legislation now proposed may cause difficulties and disadvantage to the business public in situations which do not contain any of the evils which it is said should be prevented. In view of the complex questions which arise and the necessity that any legislation on the subject be certain in its purposes and definite in the results it will cause, the committee suggests that legislation on the subject await careful inquiry by a competent body such as the Federal Reserve Board. General Statement Regarding Interlocking of Directors As has been maicated above under separate subjects of this part of the report, particularly in the questions suggested regarding relations of railroads and their bankers, there are several torms which legislation may take with reference to interlocking of directors among corporations which according to public policy should be independent in their management. There may be outright prohibition, as in the provisions of the House bill, perhaps with some exceptions, for example, exceptions stated in terms of size, in order that the harshness of the general prohibition may be somewhat mitigated. There may also be a general prohibition with power in an administrative body to declare that in particular cases there is no detriment to the public interest, and thus save these cases from the penalties of illegality. And it is possible that without immediately affecting existing situations a statute might declare that there was illegality when the facts showed a detriment to the public interest, giving to a commission power to determine the fact whether or not there was in a given situation detriment to the public interest and to issue its order of prohibition if it came to an affirmative conclusion. Methods of legislation IX Corporate Ownership of Stock The subject of a corporation owning stock of a competitor corporation or of several corporations which are competitors inter se the President mentioned as a part of the larger subject of interlocking among competitive businesses, saying "We are agreed, I take it, that holding companies should be prohibited," and passing on to a query about control through common ownership of stock. The whole passage is quoted above at page 8. The Senate and the House bills are alike in dealing with two situations, (1) where a corporation buys stock in a competitor corporation and (2) where a corporation buys stock in two or more corporations which are competitors among themselves. In the latter instance only is the purchasing corporation usually called a "holding company." The bills are also alike in making such a purchase of stock illegal only if the result is to lessen competition in a substantial degree. There is dissimilarity, however, in that the House bill would leave the question of lessened competition to the courts whereas the Senate bill makes it a subject for administrative determination by the interstate trade commission or the Interstate Commerce Commission, as the nature of the corporations may determine. In this connection the Senate bill contains the only proposal in the bills under consideration which may be said to respond to the President's implied recommendation that the interstate trade commission should give advice concerning the legality of proposed plans. Holding companies organized after the enactment of the bill could place their purposes before the commission (the President's statement Contents of bills See page 19 Test of legality Advice in advance See page 27 Interstate Commerce Commission in the case of railroads) and upon obtaining approval would be free from prosecution for illegality unless the commission subsequently reversed its decision. It must be borne in mind, however, that the Senate bill expressly prevents an approval by the interstate trade commission or the Interstate Commerce Commission from having effect in proceedings brought under the Sherman Act. Sherman Act Situations exempted Subsidiaries Both Senate and House bills expressly remove from their prohibition ownership of stock which is used solely as an investment. The House bill goes further, (1) allowing any corporation to hold stock in subsidiary corporations formed for "the actual carrying on of (its) immediate lawful business or the natural and legitimate branches or extensions thereof," and (2) permitting a railroad corporation to own stock in branch lines which are "feeders" and not competitors Railroads of the main line. THE COMMITTEE RECOMMENDS THAT CORPORATE OWNERSHIP OF STOCK DIRECTLY OR INDIRECTLY OF COMPETITOR CORPORATIONS SHOULD BE PRO. HIBITED IF ELIMINATION* OF COMPETITION AMONG THE CORPORATIONS IN QUESTION WOULD CONSTITUTE A VIOLATION OF THE SHERMAN ACT, EXCEPT IN SUCH INSTANCES AS THE INTERSTATE TRADE COMMISSION (OR THE INTERSTATE COMMERCE COMMISSION IN THE CASE OF RAILROADS) MAY DETERMINE ARE NOT DETRIMENTAL TO THE PUBLIC INTEREST. As in the case of interlocking of directors any proposal for legislation regarding corporate ownership of stock should be so formulated as accurately to reach a situation which is contrary to public policy and to affect no other. Inclusion of a test referred directly to the Sherman Act gives to the recommendation definiteness of expression and of result. At the same time this test and the provision for a finding by a commission that the facts in a particular case do not involve detriment to the public interest will permit legitimate corporate ownership of stock in situations where modern conditions leave no practical business alternative. For example, the laws of some foreign nations are such that an American manufacturing corporation must organize a selling corporation to do business in each of these countries. It happens, too, that the laws of some States do not permit a corporation organized under the laws of another State to hold real estate, and a local corporation becomes a necessity. The laws of some States by placing discriminating burdens on corporations of other States that do business within their borders in practice compel the creation of a local corporation. These are but instances of situations in which corporate ownership of stock in other corporations is a prerequisite for doing business upon an equitable competitive basis. X Regulation of Stock Issues Recommendation of Committee Offense under the Sher Necessary stock holding No statement by President "Watering" of stock by business and industrial corporations is the subject Stock watering of a provision in the Senate bill. In the address of January 20 the President referred to interlocking of competitive corporations through common ownership of stock, but he made no suggestion for legislation that would regulate the conditions under which stocks and bonds could be issued. The Senate bill, however, declares that no corporation, except banks and banking institutions, engaged in or affecting commerce which Congress has power to regulate under the Constitution can in the future issue stock unless it is paid for in full at par *Note:-One member of the committee thinks that interlocking should not be prohibited unless mere lessening of competition would constitute violation of the Sherman Act. Senate bill See page 28 |