they had come. Barring heavy penalties for the employment of an illegal device, there was much to gain in the organization of a holding company trust and little to lose.

If the holding company as a means of eliminating competition presented such attractive possibilities, why was it not adopted earlier? The reason is that no express legislative sanction existed for the creation of a holding company.1 The power to buy and sell the stocks of other corporations, like all other corporate powers, is one derived from legislative authority; and during the period when "trusts" were being formed (1879-1887) no state had passed a general law specifically granting this privilege. Such few holding companies as existed had been created under special laws. One of the first holding companies of any consequence to be authorized was the Pennsylvania Company, chartered in the interest of the Pennsylvania Railroad Company in 1870, and empowered "to make purchases and sales for investments in the bonds and securities of other companies." The reason for this special enactment was to permit the Pennsylvania Railroad to centralize the control of certain lines that were closely affiliated with it.2

An arrangement of somewhat the same sort was made use of by the Philadelphia and Reading Railway in the early seventies. This railway was anxious to possess anthracite coal properties in order to insure an ample coal traffic for the future. Under its charter, however, it had no authority to own coal lands. It therefore had incorporated in its interest the Laurel Run Improvement Company, which was authorized by its charter to buy coal lands and to mine coal. The charter further provided that the stock of this mining company might be acquired by any Pennsylvania railroad or mining company. Thereupon the Philadelphia and Reading Railway proceeded to buy all the coal company's stock, and thus indirectly it secured the power to act as a holding company in this particular instance.3

Save for some such exceptional cases as these, the holding by

Noyes on Intercorporate Relations (second edition), secs. 5, 264 ff. 2 See Annual Report of the Pennsylvania Railroad, 1871, p. 19. 3 Jones, The Anthracite Coal Combination in the United States, p. 30.

one corporation of stock in another corporation was not legal,— or at least had not been so held by the courts. And in view of the popular hostility towards trusts, which resulted in a wave of anti-trust legislation after 1889, it was hardly to be expected that any state would go out of its way to extend assistance to those who were searching for a new device to legalize their operations. The unexpected, however, came to pass. It was the state of New Jersey that came to the rescue.

Whether or not the legislators realized the full significance of their action,' the state of New Jersey amended its corporation law in May, 1889, and provided that the directors of any company organized under the act of 1875 might purchase "the stock of any company or companies owning, mining, manufacturing or producing materials, or other property necessary for their business," and issue its own stock in payment therefor.2 Four years later, in 1893, the doors were thrown completely open to the creation of holding companies by the enactment of a provision that any corporation might purchase and hold the securities of any other corporation no matter in what state incorporated, and might, while the owner, exercise all the rights of ownership. No operating duties were required of the holding company; its duties were simply the ownership of stock, the election of officers and directors, the receipt of dividends from the constituent companies, and the payment of these dividends in whole or in part to its own stockholders.

1 The charge has been made that some of the trusts "are a product of legislation obtained by their own lawyers and legislative agents, put quietly through under the cover of the anti-trust agitation, while the public, led by the newspapers, were looking somewhere else." Whitney, former Assistant Attorney General of the United States, Publications of American Economic Association, 3rd series, vol. 6, part II, p. 4 (Papers and Proceedings).

2 Dill, The Statute and Case Law of the State of New Jersey relating to Business Companies (1910), p. 80.

3 Dill, op. cit., p. 8o. The section in full read: "Any corporation may purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of the shares of the capital stock of, or any bonds, securities, or evidences of indebtedness created by any other corporation or corporations of this or any other state, and while owner of such stock may exercise all the rights, powers and privileges of ownership, including the right to vote thereon."

The example set by New Jersey was soon followed by other states determined to prevent New Jersey from securing a monopoly of incorporation fees and other fees and taxes. Among the numerous states that revised their general corporation laws to permit the creation of holding companies were Delaware, Maine, West Virginia, and New York, these states being conspicuous for the "liberal" character of their legislation.1

One of the first companies to avail itself of the New Jersey legislation was the American Cotton Oil "Trust." Fearing lest the "trust" should prove illegal, it reorganized in New Jersey in October, 1889, as the American Cotton Oil Company, a holding company possessing the stocks of sixteen constituent concerns.2 The American Cotton Oil Company also operated a large refinery in New Jersey on its own account, but it was primarily a holding company.

In spite of the advantages of the holding company plan, however, few concerns availed themselves at once of the opportunity thereby afforded of organizing a trust. Thus, the Standard Oil "trust," though declared illegal in 1892 and obliged to reorganize, did not seek refuge in New Jersey, but relied instead on the community of interest plan. That more New Jersey holding companies were not formed is partly explained by the unsatisfactory state of business during the early life of the law, the period from 1893 to 1897 being one of severe industrial depression, when the flotation of new issues of securities would have proved difficult; and partly by the fact that use was made of the other method of forming a modern trust, namely, the property owning corporation.

Second. Most of the trusts or attempted trusts organized in the years immediately following the court decisions declaring the "trusts" or "trust" agreements illegal, took the form, not of a security holding company, but a property holding company. This second type of trust came into being in at least three

'The statutes of the different states authorizing corporations to acquire stock in other corporations are given in Noyes on Intercorporate Relations (second edition), sec. 271.

2 Industrial Commission, XIII, p. 680.

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different ways: (1) by means of a consolidation or merger; (2) by means of purchase and sale; and (3) by means of exchange of property for stock.1

(1) Consolidation or merger may be defined as the union in one corporate body of two or more existing corporations. In effecting a consolidation the property and business of one or more companies is turned over to the consolidated company, whether or no this be a newly created corporation or one already existing.3 By the act of consolidation the separate companies completely lose their identity, unless indeed their existence is maintained for some special purpose, such as the adjustment of claims. The

1 In common usage the terms "purchase" and "sale are applied to the acquisition by one corporation of the property of others in exchange for its stock (see Noyes on Intercorporate Relations, second edition, sec. 319); and it may be, therefore, that our classification of property owning trusts is more minute than is necessary.

2 Some legal authorities make a distinction between a consolidation and a merger. Thus, Thompson, Law of Private Corporations (second edition) says, "there seems to be a recognized difference between 'consolidation' and 'merger'" (sec. 6035). "Consolidation takes place where two or more existing corporations are consolidated into a single corporation, and the existence of the uniting corporations is terminated and the consolidated company succeeds in a general way to the rights and franchises and acquires the property and assumes the obligations and liabilities of all the constituent companies" (sec. 6035). A merger, on the other hand, "exists where one of the constituent companies remains in being, absorbing or merging in itself all the other companies" (sec. 6037). But in Judicial and Statutory Definitions of Words and Phrases, 1914, p. 908, we are told that the terms consolidation and merger are not always used with strict accuracy. As one authority puts it (ibid., 1904, p. 1452), the term consolidation is an elastic one, and may include a union of two or more corporations into a new one with a different name, with or without extinguishing the constituent corporations, or the merging of two or more corporations into one existing corporation under the name of the latter. See also Noyes on Intercorporate Relations (second edition), secs. 7-8. For our purposes there is nothing in particular to be gained by determining whether the property of the companies combined has been turned over to a new corporation or has been acquired by an already existing corporation; and we shall therefore use the words consolidation and merger interchangeably.

3 See footnote above.

Thompson on Corporations (second edition), sec. 6041.

consolidation thus represents the complete fusion of two separate businesses.

A consolidation is ultra vires unless authorized by legislative authority; and the legislature may withhold its consent entirely, or it may permit consolidation upon such conditions as it chooses to impose.1 Legislative approval of consolidation may be given in various ways. The legislature may provide for consolidation under a general corporation law; and most states through such laws now permit the formation of consolidations for lawful purposes. It may grant the constituent companies charters permitting consolidation under certain conditions. It may even give its approval after the fact by the recognition of the consolidated corporation; and such legislative recognition is equivalent to legislative ratification. When the corporations to be consolidated are creatures of different states the approval of each separate state, by general law or otherwise, is necessary to make the consolidation, valid.3

Yet even if the legislature has given its assent, no corporation can consolidate with another without the consent of the stockholders. If the charter of a company gives it authority to consolidate, or if any general law in force at the time when the company was chartered permits consolidation, only the consent of a majority of the shareholders is required; otherwise the consent of all the shareholders is necessary. A dissenting stockholder in the latter case can not be compelled to give his assent, and his consent can not be implied.

When the consent of the legislature and of the stockholders has been secured, the process of effecting a consolidation, as already pointed out, is for the separate companies to transfer their property and assets to the consolidated company, whereupon they become extinguished. The consolidated company is thus an operating unit, in contrast with the

1 Thompson on Corporations (second edition), secs. 6043, 6045.

2 Noyes on Intercorporate Relations (second edition), sec. 20.

3 Ibid., sec. 100.

4 Morawetz on Private Corporations, sec. 951.

5 Unless one of them becomes the consolidated company.