holding company, which ordinarily is not an operating unit at all.1

(2) Purchase and sale. "It is an elementary principle of corporation law that a corporation, subject to the limitations of its charter and constitutional and statutory prohibitions, has inherent power to acquire and hold any property, real or personal, reasonably useful or convenient in carrying on the business for which it was organized" 2 A private corporationbut not a quasi-public corporation, such as a railroad-may even dispose of its entire property with the unanimous consent of the stockholders, providing the purpose is not unlawful nor fraudulent. If within the powers expressly granted to it, it may accept stock in other corporations in payment for the property sold. If the corporation whose property is to be disposed of is a losing one, the consent of only a majority of the stockholders suffices; and this is also true in the case of a prosperous corporation, when the sale of its entire assets is made for legitimate business reasons.3 Though some trusts were organized through sales to them of corporate property, it is hardly necessary to point out that such sales, if made for an unlawful purpose, were ultra vires of the corporation.

It is necessary to distinguish between a sale and a consolidation. In a sale the vendor parts solely with its property, for which it receives a quid pro quo. The vendor may then proceed to buy further property, if it desires. But in a consolidation the vendor not only parts with its property, but also with the legal right to own or acquire property. Obviously the vendor could not receive any consideration for the transfer; for the act of consolidation involves its extinguishment. The fact that the consolidated company makes payment, not to the vendor corporation, but to its stockholders, characterizes the transaction as a consolidation rather than a purchase; if the trans

1 For an excellent statement of the law relating to consolidation of corporations, see Noyes on Intercorporate Relations (second edition), secs. 7–107. 2 Noyes on Intercorporate Relations (second edition), sec. 108. the subject of sales of corporate property, see ibid., secs. 108–117. See Warren, Harvard Law Review, 30, p. 358.

On

action were merely a purchase and sale, the company acquiring property would pay the vendor corporation, which would then settle with its stockholders.

(3) Exchange of property for stock.1 A private corporation may not only sell its entire assets, as just explained, but it may also exchange its assets for any other property that it is empowered to acquire. If the vendor corporation has power to hold stock in another corporation, it may transfer its property to the proposed trust, and receive its stock in exchange. Such an exchange differs from a sale in this respect, inter alia, that a sale of the entire property, when incident to dissolution, may be accomplished on occasion through a majority vote; whereas an exchange of the entire property for stock requires the unanimous consent of the stockholders; the majority cannot force the minority into a new company against its will.

The stock received in the process of exchange belongs, of course, to the corporation that has transferred its property. But the corporation, with the unanimous consent of its stockholders, may enter into an agreement that the stock, instead of being delivered to it, shall be distributed among its stockholders pro rata. Such an agreement is the equivalent of a liquidation of the company's business by unanimous consent, but in the absence of statutory provisions to the contrary is a valid arrangement.

On some occasions property owning trusts were formed through the use of the holding company as an intermediary stage. The holding company having acquired a majority or all of the stock of the constituent companies was obviously in a position, particularly if it had acquired all of the stock, to cause the underlying property to be conveyed to it, and the separate companies to be dissolved. Upon the completion of these transactions the trust owned, not stocks, representing the title to plants, but the plants themselves.

The formation of a trust through the exchange of its stock for the property of the companies to be united would appear to have been provided for at an early date by the same New Jersey law

1 On this subject see Noyes on Intercorporate Relations (second edition), secs. 118-129a.

to which reference has already been made.1 By an amendment to section 55 of its general incorporation law of 1875 the state of New Jersey in 1889 authorized the directors of any company incorporated under the act to purchase mines, manufactories, and other property necessary for their business, and to issue stock in payment therefor.2 Apparently New Jersey was not influenced by the popular clamor against trusts, and did not propose to stop at halfway measures of protection.

3

The American Tobacco Company, incorporated in New Jersey in 1890, illustrates a property owning trust, as distinct from a holding company trust. This company, among the first of the modern trusts, exchanged its capital stock directly for the plants, business, brands, and good will of five cigarette companies. The Continental Tobacco Company (the plug tobacco trust), organized in New Jersey in 1898, was the same type of trust, as was also the second American Tobacco Company, organized in 1904 for the purpose of uniting a number of tobacco concerns (including the original American Tobacco Company and the Continental Company) that had been held together since 1901 through the Consolidated Tobacco Company (a holding company).

4

The American Sugar Refining Company, incorporated in New Jersey in 1891, is another early property owning trust.5 The Sugar Refineries Company (the "trust") having been declared illegal, the trust certificates, by agreement among all the parties, were exchanged for the shares of the American Sugar Refining Company. Through the acquisition of these trust certificates, the American Sugar Refining Company

1 See p. 30.

2 See the General Law of the State of New Jersey concerning Corporations, approved April 7, 1875, together with Acts Amendatory thereto in force July 1, 1889, p. 34.

3 Report of the Commissioner of Corporations on the Tobacco Industry, part I, p. 65.

4 Report of the Commissioner of Corporations on the Tobacco Industry, part I, pp. 99-100.

5 Original Petition in United States v. American Sugar Refining Company,

pp. 47-50.

secured control over all the stock of the various corporations formerly controlled by the trustees. It was thus temporarily a holding company. The next step was to have the several corporations convey to it their entire property, whereupon they were dissolved. The result was to make the American Sugar Refining Company the actual owner of all the property previously held in trust by the trustees under the Sugar Refineries Company deed.

In passing, the relative merits of holding company trusts and property owning trusts from the standpoint of trust managers may be briefly reviewed.1 The chief advantages of the holding company are: (1) it makes possible the creation of a centralized administration, and yet at the same time maintains the individuality of the constituent companies, together with the good will attaching to their business; (2) through the incorporation of individual concerns in the separate states, it is able more easily to comply with the laws of the various states, such as, for example, a law that foreign corporations may not hold real estate; and (3) it is easy to form, because it is necessary to acquire only a majority of the stock of the separate companies.

On the other hand, it is open to serious objections: (1) the perpetuation of the individual concerns whose stock is acquired results in the creation of a complex business and financial structure, a set of wheels within wheels, that does not conduce to the maximum operating and financial efficiency; and (2) in case all the stock of the constituent concerns is not acquired, the control of the business through the ownership of only a part of the stock separates control from ownership in large measure, and is thus likely to give rise to the manipulation of accounts, and to the sacrifice of one set of stockholders in the interests of another, with resulting dissatisfaction and friction.

The advantages of a trust that owns the property outright are: (1) it provides a unified operating unit with a resulting concentration of power and responsibility-under this type of trust it is possible to dispense with a lot of individual companies, each 1 For an excellent discussion at greater length, see Haney, Business Organization and Combination (1915), chs. 15-16.

having its own officials and organization, and to substitute therefor a single concern dominated by singleness of purpose; and (2) by uniting all the property in one concern it makes the interests of each the interests of all, and thus eliminates that "milking" of one group by another which occurs not uncommonly under the holding company device. The disadvantages are: (1) it sacrifices the independence of the separate concerns, and thus their franchises and firm names; (2) it can not accommodate itself so readily to local conditions; and (3) it is more difficult to form, because of charter and statutory restrictions. Nevertheless, as we shall see, trusts more generally took this form rather than the holding company form.

The general character of the trust movement has been indicated. There remains to consider its extent.

The extent of the movement toward combination can be statistically stated with a fair degree of precision, and several such compilations are available.1 A similar statistical study of the trust movement, however, can not be made by an independent investigator; to secure the requisite data in fullness requires the resources and authority of a governmental agency. To discover and enumerate all the combinations of a certain size (say capitalization) is easy; but to determine in each instance whether the combination realized monopoly control (that is, was a trust) is quite another matter. The attempt to make such a computation is rendered more difficult by the fact that a combination at its organization may not possess monopolistic powers, but subsequently may acquire them. The National Cordage Company is a case in point. It has seemed best, therefore, to indicate the extent of the trust movement by using the statistics for the combination movement, with a caution against a too literal interpretation of the figures as bearing on the trust movement.

An excellent statistical study of the industrial combinations formed in the United States through 1900 has been made by Mr.

1 See, for example, Conant, Publications of the American Statistical Association, 7, pp. 208-217 (March, 1901); U. S. Census, 1900, vol. 7, pp. LXXXVI seq.; and Moody, The Truth about the Trusts, pp. 453 seq.