To overcome these deficiencies, a new legal device was created: the trust, a perversion of the ancient device by which trustees held property in the interest of either individuals or institutions. Under a trust agreement, the stockholders of several operating companies formerly in competition turned over their shares to a group of trustees and received “certificates of trust” in exchange. The trustees, therefore, had voting control of the operating companies, and the former stockholders received dividends on their trust certificates. This device was so successful as a means of centralizing control of an entire industry and so profitable to the owners of stock that trusts were formed in the 1880s and early 1890s to control the output of kerosene, sugar, whiskey, cottonseed oil, linseed oil, lead, salt, rubber boots and gloves, and other products (recall Economic Reasoning Proposition 4, institutions matter). But the trust had one serious defect: Agreements were a matter of public record. Once their purpose was clearly understood, such a clamor arose that both state and federal legislation was passed outlawing them, and some trusts were dissolved by successful common-law suits in the state courts.
Alert corporate lawyers, however, thought of another way of linking managerial and financial structures. Occasionally, special corporate charters had permitted a company to own the securities of another company, such provisions having been inserted to allow horizontal expansion. In 1889, the New Jersey legislature revised its general incorporation statutes to allow any corporation so desiring to hold the securities of one or more subsidiary corporations. When trusts were declared illegal in several states, many of them simply obtained charters in New Jersey as “holding companies.”92 The prime objective of centralizing control while leaving individual companies free to operate under their several charters, therefore, could be achieved by a relatively simple device. Theoretically, the holding company had to own more than 50 percent of the voting stock of its several subsidiaries to have control. In practice, especially as shares became widely dispersed, control could be maintained with a far smaller percentage of the voting stock. The holding company was here to stay, although it would have to resist the onslaughts of Justice Department attorneys from time to time.
World History
