state of Ohio, the oil "trust.' The action against the sugar "trust" came in 1888. In that year the Attorney General of New York State brought suit under the common law against the North River Sugar Refining Company, a New York corporation, praying that the charter of the company be vacated and the company dissolved. In a decision rendered in June, 1890, the Circuit Court of Appeals decided against the company.1 The court held that the North River Sugar Refining Company, in entering the "trust," had given over the control of its affairs to an irresponsible board, and that such delegation of its essential corporate powers was a perversion of the privileges conferred by the company's charter. Furthermore, the court held that the company had helped to create a trust which, in substance and effect, was a partnership of separate corporations, and for corporations to enter a partnership was illegal. The company's charter, therefore, was taken away, and its corporate existence terminated.

The Standard Oil "trust" agreement was likewise condemned by the courts. In May, 1890, the Attorney General of Ohio filed a petition against the Standard Oil Company of Ohio, charging that the company had violated the laws of the state by placing the control of its affairs in the hands of trustees, nearly all of whom were nonresidents of the state. Great pressure was brought to bear on the Attorney General to induce him to discontinue the suit, but without success. The decision of the Supreme Court was rendered in March, 1892.2 As in New York State, the "trust" arrangement was declared illegal, though the Ohio court put more emphasis on the creation of a monopoly. The court said: "the observance [of this agreement] must subject the defendant [the Standard Oil Company of Ohio] to a control inconsistent with its character as a corporation. . . . The law requires that a corporation should be controlled and managed by its directors in the interests of its own stockholders, and confor

1 121 N. Y. Reports 582-626. The decision is described in more detail on p. 313.

2 49

Ohio State Reports 137-189. For a fuller discussion of this decision, see p. 314.

mable to the purpose for which it was created by the laws of its state. By this agreement, indirectly, it is true, but none the less effectually, the defendant is controlled and managed by the Standard Oil Trust, an association with its principal place of business in New York City, and organized for a purpose contrary to the policy of our laws. Its object was to establish a virtual monopoly of the business of producing petroleum, and of manufacturing, refining and dealing in it and all its products, throughout the entire country, and by which it might not merely control the production, but the price at its pleasure. All such associations are contrary to the policy of our state and void." The court did not order the dissolution of the Standard Oil Company, as urged in the petition, but simply commanded it to cease its connection with the "trust."

Any expectation that the decision of the Supreme Court of Ohio would put an end to the oil monopoly proved to be unfounded when the nature of the dissolution became apparent. On March 21, 1892, at a meeting of the trust certificate holders, a resolution terminating the "trust" was adopted.1 At this time the stocks of eighty-four companies were held by the Standard Oil trustees. On April 1 the stocks of sixty-four of these corporations were transferred to some one of the remaining twenty. This left the stocks of twenty companies in the hands of the trustees, and these they proceeded to distribute among the holders of the trust certificates. There were outstanding at this time $97,250,000 trust certificates. The trustees, who became liquidating trustees, divided the stock of each of the twenty companies into 972,500 parts. They then offered to give to each trust certificate holder in exchange for each share 1/972,500 part of the stock of each one of the twenty corporations. The only ones who accepted this offer were the trustees (themselves the largest certificate holders) and the members of their families and their immediate associates. The smaller trust certificate holders were discouraged from liquidating by the fact that they would have received only fractional

1 On the dissolution scheme see Brief for the United States in Standard Oil Company v. United States (no. 725), vol. I, pp. 56-58, 60-61, 70, 72.

shares in the twenty companies, and these companies declined to pay dividends on fractional shares. Dividends continued to be paid, however, on the trust certificates when not liquidated. The nine trustees, therefore, became the holders of the majority of the stocks of the twenty companies, and as liquidating trustees they also held the stocks not exchanged for trust certificates. This dissolution obviously was nominal; it effected no real change in the situation. In fact, Mr. Archbold admitted before the Industrial Commission that the companies worked together after the dissolution as harmoniously as before.1

It was apparent that the Standard interests had not attempted to obey the court's order, but had stooped to a mere subterfuge. A new suit, therefore, was instituted in 1897 against the Standard Oil Company for failure to obey the court's decree of March, 1892. This suit dragged along until December, 1900, when it was dismissed. Meanwhile the Standard Oil Company had reorganized as a holding company.2

1I, p. 574.

2 See p. 56.

CHAPTER IV

THE MODERN TRUST MOVEMENT

The decisions of the New York and Ohio courts in 1890 and 1892, respectively, showed that even without the prohibitions of the Sherman Anti-trust Act the "trust," so far as the law was concerned, was not a permissible form of business organization. The Standard Oil interests, it is true, avoided collision with the law for a time by the development of a community of interest, but this loose form of organization proved satisfactory mainly because there already existed among the members an unusual degree of mutual confidence and good will. It appeared, therefore, that unless some new expedient for restraining competition could be hit upon, the manufacturers insistent upon holding competition in check must needs resort once more to pooling agreements. Yet this was even less desirable than before from the manufacturers' standpoint, since the Sherman Antitrust law had been passed in 1890. This act made pools, when effecting a restraint of trade, not only unenforceable, as under the common law, but actually illegal; and their existence would therefore have to be kept secret. By what means then were the manufacturers to secure relief?

The new expedient to restrain competition was the modern trust. The trust was effected in one of two ways: either by means of a security holding corporation, that is, a company owning all or part of the securities of other companies; or by means of a property holding corporation, that is, a company owning outright the plants and other property of the companies to be united in the trust.

First. The holding corporation is a type of business organization employed to combine a group of corporations by owning all or a majority of the stock. The holding company, whether a newly created corporation or one already in existence, must

possess legislative authority to hold the stocks of other corporations. Armed with such authority it proceeds to purchase, either with cash or with its own securities, a majority at least of the shares of the companies which it plans to combine. The controlled companies maintain their separate existence, they have their separate officers and managers, and they are nominally independent; yet inasmuch as the holding company elects their directors, it can effectively control their management and operate their properties in accordance with a unified plan.

The holding corporation was thus after all but a modification of the illegal "trust" which it was designed to supersede. As Professor Meade has pointed out,' the only important changes effected were: the substitution of the shares of the holding company for the certificates of the old "trust"; the substitution of the relation of owner for the relation of trustee; and the substitution of a board of directors for a board of trustees. It would appear therefore that from the point of view of legal principle the new arrangement was quite as unlawful as the old.

What then, it may be asked, was to be gained by adopting the new form of organization? The possible gain was two-fold. From a legal point of view the holding company might prove less vulnerable. The old "trust" was an agreement between a body of trustees and a group of corporations, which, through the action of a majority of their stockholders, surrendered their independence, and in so doing exceeded their corporate powers. The holding company, however, was authorized by law to hold the securities of other companies. As a device for restraining competition it had not yet been declared illegal, and there was at least the possibility that it might successfully withstand an attack upon its validity. Yet even if ultimately its fate did prove to be that of the "trust," a second gain was possible. The organization of the holding company insured a temporary respite from competition, and presumably the profits thus realized would be retained by the corporation or its stockholders, and would not need to be returned to the consumers from whom

1 Trust Finance, p. 36.