CHAPTER III

THE TRUSTEE DEVICE

The first resort to the trustee device or the "trust,' as it will be called to distinguish it from the modern trust, was by the Standard Oil Company. Prior to 1879 Mr. John D. Rockefeller and his associates had acquired a large number of oil concerns in the interest of the Standard Oil Company, but the shares of these concerns (instead of being held directly by the Standard Oil Company) had been registered in many cases in the names of various individuals who held them for the benefit of the company. In order to centralize more fully the control of these properties, it was decided in 1879 to organize the Standard Oil "trust."

The "trust" agreement as revised in January, 1882, included about forty companies, controlling from 90 to 95 per cent of the refining capacity of the country. It provided for nine trustees, among whom were Messrs. John D. Rockefeller, William Rockefeller, H. M. Flagler, and John Archbold. The trustees received from each of the parties to the agreement an assignment of their stock with voting power, and in return therefor gave "trust certificates" representing the valuation of the properties. The trustees did not become the owners of the stocks deposited with them; they simply held them in trust for the owners of the trust certificates. It should be noted, however, that these stocks were held by the trustees for the joint account rather than for the individual account of the certificate holders; a stockholder in any one company lost by the trust agreement his title to the stock of that particular company, and secured instead a proportionate

1 Brief for the United States in Standard Oil Company v. United States (no. 725), vol. I, p. 48. A copy of the agreement is in the Report of the Commissioner of Corporations on the Petroleum Industry, part I, pp. 361–

370.

interest in all the stocks and property held by the trustees.1 The trustees together owned 466,280 of the trust certificates out of a total of 700,000; and four of them held a majority of the trust certificates. They were thus able to elect the officers and directors of each of the constituent companies, and to manage the properties in complete harmony.

The trustees under this agreement were given powers substantially similar to those possessed by the directors of an ordinary holding company. They were to collect the interest and dividends on the securities held in trust, and to redistribute such portion thereof as they saw fit among the holders of the trust certificates. They were authorized to use any surplus trust funds to purchase the bonds and stocks of other companies engaged in the oil business, and to hold these securities for the benefit of the trust certificates. The centralized control provided for in the agreement made it possible for the trustees to dismantle those refineries that were poorly located, and to build new works at strategic points. Obviously it made no difference to the former owners of a given plant whether or not that plant was operated, since they received a certain percentage of the profits earned by all the companies. The trust agreement, further, made provision for the admission of new companies and individuals; for the formation, whenever advisable, of a Standard Oil Company in any state in the country. The duration of the agreement was to be for a period of twenty-one years after the death of the last surviving trustee, but provision was made for the termination of the agreement within one year of its execution upon the approval of nine-tenths of the certificates (in value), and within ten years upon the approval of two-thirds of the certificates.

The success of the Standard Oil "trust" invited imitation. In 1884 there was formed the American Cotton Oil "trust "; and in 1885 the National Linseed Oil "trust. The cotton oil

2

1 This consideration proved to be highly important when the "trust" was dissolved in 1892. See p. 25.

2 Conant, Publications of the American Statistical Association, 7, p. 208 (March, 1901).

"trust" included some seventy mills, located for the most part in the South, engaged in manufacturing and refining cotton seed oil. Its form of organization was precisely like that of the Standard. However, it soon met with difficulties on all sides, and in 1889 was reorganized as the American Cotton Oil Company. In 1887 a "trust" was organized in the whisky business. From 1882 to 1887 some eighty distillers had maintained a precarious existence through pools. These pools, however, had proven unsatisfactory; it had not been possible to maintain them. Accordingly the leading distillers decided to establish a more compact organization modelled on the Standard Oil trust agreement of 1882. This was accomplished in May, 1887.2 The Distillers and Cattle Feeders' Trust, as the new organization was called, comprised about eighty companies, located mainly in New York, Ohio, Indiana, Illinois, Wisconsin, Missouri, and Nebraska, manufacturing from 85 to 90 per cent of the total output of alcohol and spirits. There were nine trustees, who issued trust certificates in exchange for the shares of the corporations entering the "trust." Inasmuch as the trustees held a majority of the stock of every corporation, they were able to elect the directors and officers, and thus to control the management. This in turn enabled them to control the market, for instead of exporting the surplus at a loss, as had been done by the earlier pools, it was now possible to limit the output to the demand. It also lay within the power of the trustees to close up the poorest distilleries; and they did close some sixty-eight of them, the output being concentrated in the best equipped plants, with a consequent saving in the cost of production.

Another group resorting to the trustee device was the sugar refiners. During the seventies and eighties competition in the sugar refining industry had been quite keen; between 1867 and 1887 some thirty-six refineries had been closed. By 1887 there

1 Andrews, Quarterly Journal of Economics, 3, p. 129. A copy of the agreement is in House Report no. 4165, 50th Cong., 2nd Sess., pp. 57 seq. See ibid., pp. 64, 72, 91; and Jenks, Political Science Quarterly, 4, pp. 305-308.

Cf. Jones, Quarterly Journal of Economics, 34, p. 505.

were left only twenty-six refineries, operated by twenty-three companies. The concerns that survived this period of severe competition were those that resorted to large-scale production, with its resulting economies. In August, 1887, seventeen of these companies, owning twenty refineries, and possessing among them approximately 78 per cent of the refining capacity, entered into a trust agreement to become effective October 1, 1887.1

In its main provisions this agreement was substantially like the trust agreements already described. Eleven trustees constituted a Board, known as the Sugar Refineries Company, and distributed trust certificates ($50,000,000) to the shareholders of the corporations in return for the securities held by them. The trustees thereupon caused themselves or their representatives to be elected directors of the separate corporations, and were thus able to manage the affairs of all in unison. It was provided that 15 per cent of the certificates allotted to the several companies should be left with the Board, and that these and any part of the $50,000,000 of certificates not allotted might be employed by the Board for the acquisition of other refineries or for certain other purposes. A unique feature of the sugar trust deed was a provision that no trustee should be interested directly or indirectly in the purchase or sale of sugar, whether for the purpose of speculation or otherwise, without the consent of a majority of the Board. Of the twenty refineries acquired by the Sugar Refineries Company twelve were soon dismantled, and the other eight were consolidated into four.

2

In this same year (1887) there was organized the National Lead Trust and the Cordage "trust."3 The latter, known as the National Cordage Association, controlled at this time only 30 per cent of the country's output of rope and cordage; it was

1 Original Petition in United States v. American Sugar Refining Company, pp. 38-40, 166. For a copy of the trust agreement, see ibid., exh. A.

2 Conant, Publications of the American Statistical Association, 7, p. 209 (March, 1901).

Dewing, Corporate Promotions and Reorganizations, pp. 116-117,

120-121.

not until 1891 that it attained a monopolistic position in the industry.

The organization of these "trusts" was followed by a general outcry against monopolies. How fully the attention of the pub lic had been called to the establishment of the "trusts," and what its reaction was, is shown by the numerous laws forbidding combinations and trusts enacted by the state legislatures from 1889 to 1893,1 and by the passage by the National Congress in 1890 of the Sherman Anti-trust Act, which prohibited every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, and every monopoly or attempt to monopolize. And as it soon proved, the "trusts" were particularly vulnerable, much more so than the pools. The pools, it is true, were unlawful, but they were secret agreements, and therefore were to some extent free from attack. The Addyston Pipe and Steel Company is the most conspicuous instance of a pool dissolved by legal process, and the evidence here was obtained only because a disgruntled stenographer painstakingly accumulated it. The trust agreements of the eighties, however, were tangible matters of record. There was a formal transfer by the stockholders of their legal title to the stock of the constituent companies, as a consideration for which they received trust certificates. The rights of the members were clearly defined in the trust agreement. The fact could not be concealed that these companies, whose corporate existence had been preserved, had almost completely sacrificed their independence.

Hardly had the "trusts" been created when legal proceedings were instituted against them. The state of Louisiana attacked the cotton oil "trust"; the state of Nebraska, the whisky "trust"; "the state of New York, the sugar "trust"; and the

1 At least six states-Kansas, Maine, Michigan, North Carolina, Tennessee, and Texas-passed such laws in 1889.

2 See p. 312 for the decision of the Supreme Court of Nebraska; and p. 316 for the decision of the Supreme Court of Illinois declaring illegal both the whisky "trust" of 1887 and the corporation that succeeded in 1890 to its business.