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Subject Area: Law
Topic: The American Revolution and Constitution

§ 111.: Industrial and corporate trusts, as combinations in restraint of trade.— - Christopher G. Tiedeman, A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1 [1900]

Edition used:

A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint (St. Louis: The F.H. Thomas Law Book Co., 1900). Vol. 1.

Part of: A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, 2 vols.

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§ 111.

Industrial and corporate trusts, as combinations in restraint of trade.—

It does not take a very keen observer to note that, for the past fifteen or twenty years, the tendency to the establishment of all-powerful and all-controlling combinations of capital, in the prosecution of all kinds of business, has been increasing year by year in this country. This is an undoubted economic phenomenon of the modern world and nowhere is it more manifest or stronger than it is in the United States. The rapid accumulation of vast fortunes has inspired some of their possessors with the desire for the acquisition of power through the control of industries of such great extension and scope, that they may earn the appellation of kings instead of princes of industry. If this economic tendency were left unchecked, either by economic conditions or law, the full fruition of it would be a menace to the liberty of the individual, and to the stability of the American States as popular governments, so great that the fear of the people of England, of the danger which threatened them from the dream of Thelusson that the provisions of his will would make his posterity one of the powerful families of England,1 would seem in comparison to take on the form of opera bouffe.

The first distinct manifestation of this growing tendency to the formation of large combinations of capital is the rapid increase of industrial corporations, so that the United States exceeds all other countries in the number and variety of private corporations, and in the amount of their aggregate capital. But for many financial reasons, the size of an industrial corporation is necessarily limited; and it is a common thing to find a number of corporations, having large capital, in the same business or industry, competing with each other, and forcing the price of commodities and services down so low that the returns on the capital invested grow less and less, until the rival corporations find themselves unable to declare any dividends at all. Contracts or agreements, entered into by these competing corporations, to maintain a certain scale of prices, and to raise or lower prices in concert, and in obedience to the rulings of the association, have not always proved effectual in suppressing ruinous competition; because, as we have seen in preceding sections, such contracts are in restraint of trade, and therefore non-enforceable in the courts. A financial genius in the United States proposed that, to secure absolute uniformity in the management and conduct of a business by a number of rival corporations, all the stockholders of the several corporations should transfer to a board of trustees their respective holdings of stock in the different corporations and receive back from the trustees trust certificates, representing their rights in the stock certificates. Under the terms of the deed of trust, the trustees, who thus appeared as the voting stockholders in each one of the corporations, would conduct the business of all of them as one business and in accordance with the plans and principles of action, which had been decided upon by the trustees. And the profits of the joint business of these corporations would be distributed among the stockholders pro rata on their trust certificates. Under such an ingenious scheme, there was no difficulty in enforcing obedience to the command of the association on the part of the corporations, which composed the combination; for the trustees, as the holders of a controlling interest in the stock of each one of the corporations, could secure, in the corporate meetings of each one, corporate adoption of the policy which had been formulated by the trustees.

Thus was established a form of combination in restraint of trade, which was limited only by the amount of capital which was invested in the joint enterprise and which did not need the special sanction of the law, or its intervention by judicial process, in order to enforce the decrees of the combination upon all its members. Nor would it appear that such a trust, apart from the motive of its creation, differed in legal character from the thousand and one active trusts, whose legality has never been questioned.

If, in the creation of such a trust, the parties thereto had violated any rule of law, it must be in some secondary matter, and not directly. For independently of modern statutes, which will be considered in the next section, no combination of capital with monopolistic intent is so far declared illegal as to subject the participants therein to any criminal or civil liability. The most that the common law did in discouraging such combinations was to ignore them, and deny the aid of judicial process in enforcing the agreements on the members of the combination. And the need of judicial process had been obviated by these creators of the industrial trust.

The original industrial trust was the Standard Oil Trust. Possibly, the next great trust to be formed was the American Sugar Trust. Since then a large number of so-called trusts have been formed, viz.: Milk, rubber, cotton-seed oil, butchers’, glass, furniture, etc. But it needs to be stated in this connection that the phrase “industrial trust” has been made to serve in the popular mind, as well as in legislative enactments, as a general term, to include all sorts and conditions of combinations of capital in restraint of trade, wherever the motive of the combination is shown to be the establishment of a virtual monopoly in any particular industry, it matters not what form the combination may take, and whether the combination involved the creation of a trust or not. I desire to have it plainly understood that what I have to say in the present section has reference only to those combinations in restraint of trade, in which the object of the combination is attained by the application of the ordinary law of trusts to the particular conditions of industrial competition and the corporate rights and powers, under the general law of corporations. In view of the fact that many of these so-called trusts have been formed and have been declared to be illegal, since the enactment of statutes, which have provided for the avoidance and punishment of all combinations in restraint of trade, care must be observed in applying the propositions here set forth in the present section, to any but the Standard Oil and the Sugar Trust. To make still clearer the sense in which the term “industrial trust” is here employed, I will define it, using the language of Mr. Charles W. Baker, found in his book “Monopolies and the People:” “A trust is a combination to restrain competition among producers, formed by placing the various producing properties (mills, factories, etc.) in the hands of a board of trustees, who are empowered to direct the operations of production and sale, as if the properties were all under a single ownership and management.”1

If a number of individuals or partnerships or of individuals and partnerships, all engaged in the prosecution of the same business, were to transfer their businesses, plants and capital to two or more trustees, who were charged with the joint management of the business and property of all the parties to the trust deed, so as to secure the exclusive control of the business, such a trust would clearly come within the provisions of the law of trust, and would be legal and operative, as long as the purpose of the trust was not declared by statute to be an actionable wrong. And if the parties to the Standard Oil and Sugar Trusts had been individuals or partnerships, the judgments, pronouncing their dissolution, would not have been delivered; for such trusts when composed of individuals, were, prior to the enactment of anti-trust statutes, lawful combinations, so far as the parties thereto were not liable to any criminal or civil action on account of their participation therein; while they were illegal restraints upon trade, in that the courts would not aid them in enforcing any executory agreements of the trust. But these trusts were composed of stockholders of competing corporations, engaged in the same business, and that fact gave the courts the opportunity to destroy the trusts by destroying the corporations, whose stockholders composed the trusts. The courts of New York and Ohio held that the corporations which composed the trusts, through the joint actions of their respective stockholders, had exceeded their corporate powers, by transferring the complete control of their respective properties and businesses to a board of trustees, to such a degree that their charters became subject to forfeiture.1

In a recent case in New York, a gas company of the city of Buffalo, entered into a contract to issue its own stock in exchange for all the stock of a competing company. This was done to put an end to the ruinous competition between them. It was held by the Appellate Division of the Supreme Court that this contract did not involve the creation of a monopoly, in contravention of Section 7 of the corporation law.1 But did not the competing company’s stockholders violate the rule of the sugar trust case by transferring their stock to the first gas company, and receiving the latter’s stock in exchange? Did not this primary corporation take the stock assigned as trustees, in the absence of a technical consolidation of the two companies?

The most striking evidence of the persistency of the economic demand for large combinations of capital in one business under one management, and the consequent establishment of virtual monopolies, is the various methods pursued by the trusts, whose dissolution was forced by these adverse judgments of the courts. The affairs of the Standard Oil Trust were placed in the hands of receivers for final settlement and winding up of its business. These receivers issued trust certificates, transferred them as they were sold and bought, and otherwise conducted this immense business, as if there had been no decree of dissolution; and, although some years had elapsed, the receivers were no nearer the conclusion of their business than they were immediately after their appointment; until, in the year 1899, the activity of the Ohio courts, in forcing the trust to a settlement of its affairs, compelled the capitalists interested to follow the example of the sugar trust, as explained in subsequent paragraphs of the present section, and to form one huge corporation, under the laws of New Jersey, combining all the interests and plants of the old trust under one corporate management.

The Chicago Gas Trust was formed into a duly incorporated company, one of the objects of whose incorporation, as was stated in the certificate of incorporation, was “to purchase and hold or sell the capital stock, or purchase or lease, or operate the property, plant, good-will, rights and franchises of any gas works, or gas company or companies,” and the Supreme Court of Illinois has held the incorporation to be illegal.1

It would seem that the corporation law would be equally violated, if, for the purpose of effecting a large combination of capital in a particular industry and the consequent creation of a virtual monopoly therein, a corporation were to enter upon the general policy of leasing the plants and other property of a rival corporation. And this has been the conclusion of the courts.1 Indeed, the strength of the demand for restrictions upon the creation of virtual monopolies is not more strikingly demonstrated than in the proposition laid down by a number of our courts, that, while a private corporation, whose business is not affected with a public interest, without express authority from the legislature, may sell all its property and plant to another corporation, and the sale be in every way valid;2 it is not so, if the business is affected with a public interest, which is interpreted to mean that the business is such in its proportions and its control over some article of necessity, that a grievous monopoly may thereby be created. In such a case, it has been held to be unlawful for a corporation, without express legislative authority, to make a complete transfer of its plant, property and franchises.3 But it has been held in a recent case that the mere fact, that a linseed oil company had been purchasing a large number of oil mills and plants throughout the country, and was doing an extensive business, would not constitute a violation of the anti-trust laws.1

As long as the corporation law is not changed, the only successful method of circumventing the judicial antagonism of large trade combinations and virtual monopolies, is that which was adopted by the American Sugar Trust, viz.: the corporate consolidation of all the corporations which had composed the trust. As long as the corporation law of the State does not limit the capital and volume of business of a corporation, the consolidation of two or more corporations into one is clearly legal, even though the object of the consolidation be to suppress competition and to establish a virtual monopoly; except where the mere purpose of suppressing competition by lawful means is prohibited by the anti-trust statutes.2

[1]Thelusson v. Woodford, 1 B. & P. N. R. 396; s. c. 4 Ves. 227. Thelusson provided in his will that all his estate, principal and income, should be held intact for the purpose of accumulation, until the death of all his heirs, living at his death, and upon the death of the survivor of these heirs, the property was to be given to certain descendants described in the will. This will, and the litigation growing out of it, created such a sensation that Parliament passed a statute, which prohibited the accumulation of income and profits for a longer period than the life of the grantor, and twenty-one years thereafter or the minority of the beneficiary. See Tiedeman on Real Property, § 545.

[1]In the report of a committee of the legislature of New York, a trust is defined as a combination “to destroy competition and to restrain trade through the stockholders therein combining with other corporations or stockholders to form a joint-stock company of corporations and placing all powers in the hands of trustees.” So far as this definition includes any other combinations than those which are accomplished by the establishment of a trust, it includes more than what is properly described as an industrial trust.

[1]In People v. North River Sugar Refining Co., 121 N. Y. 582, in pronouncing the act of a corporation in joining the trust as ultra vires, the court said: “It is quite clear that the effect of the defendant’s action was to divest itself of the essential and vital elements of its franchise by placing them in trust; to accept from the State the gift of corporate life, only to disregard the conditions upon which it was given; to receive its powers and privileges merely to put them in pawn; and to give away to an irresponsible board its entire independence and self-control. It has helped to create an anomalous trust, which is, in substance and effect, a partnership of twenty separate corporations. It is a violation of law for corporations to enter into a partnership. The vital characteristics of the corporations are of necessity drowned in the paramount authority of the partnership.” The articles of agreement of the Sugar Trust are published in full in this case. In the case of the State v. Standard Oil Co., 49 Ohio St. 137, in which the articles of agreement of the oil trust are to be found printed in full, the court said: “That the nature of the agreement is such as to preclude the defendant from becoming a party to it, is, we think, too clear to require much consideration by us. In the first place, whether the agreement should be regarded as amounting to a partnership between the several companies, limited partnerships, and individuals who are parties to it, it is clear that its observance must subject the defendant to a control inconsistent with its character as a corporation. Under the agreement, all but seven of the shares of the capital stock of the company have been transferred by the real owners to the trustees of the trust, who hold them in trust for such owners; and being enjoined by the terms of the agreement to endeavor to have the ‘affairs’ of the several companies conducted in a manner most conducive to the interests of the holders of the trust certificates issued by the trust, the trustees have the right, in virtue of their apparent legal ownership and by the terms of the agreement, to select such directors of the company as they may see fit; nay more, may in fact select themselves. The law requires that a corporation should be controlled and managed by its directors in the interests of its own stockholders, and conformably 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 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.” See, also, to the same effect, National Harrow Co. v. Hench, 83· F. 36; 27 C. C. A. 349; Mallory v. Hanaur Oil Works, 86 Tenn. 602; and, in the case of the Distillers’ and Cattle Feeders’ Trust, State v. Nebraska Distilling Co., 29 Neb. 700; Bishop v. Am. Preservers Co., 157 Ill. 284; Am. Fire Ins. Co. v. State, 75 Miss. 24.

[1]Rafferty v. Baffalo City Gas Co., 56 N. Y. S. 288; 37 App. Div. 618.

[1]People v. Chicago Gas Trust Co., 130 Ill. 268. The court said: “Of what avail is it that any number of gas companies may be formed under the general incorporation law, if a giant trust company can be clothed with the power of buying up and holding the stock and property of such companies, and, through the control thereby attained, can direct all their operations and weld them into one huge combination? The several privileges or franchises intended to be exercised by a number of companies are thus vested exclusively in a single corporation. To create one corporation for the express purpose of enabling it to control all the corporations engaged in a certain kind of business, and particularly a business of a public character, is not only opposed to the public policy of the State, but it is in contravention of the spirit, if not the letter, of the constitution. That the exercise of the power attempted to be conferred upon the appellee company must result in the creation of a monopoly, results from the very nature of the power itself. If the privilege of purchasing and holding all the shares of the stock in all the gas companies of Chicago can be lawfully conferred upon appellee under the general incorporation act, it can be lawfully conferred upon any other corporation formed for the purpose of buying and holding all the shares of stock of said gas companies. The design of that act was, that any number of corporations might be organized to engage in the same business, if it should be deemed desirable. But the business now under consideration could hardly be exercised by two or three corporations. Suppose that, after the appellee had purchased and become the holder of the majority of shares of stock of the four companies in Chicago, another corporation had been organized with the same object in view—that is to say, for the purpose of purchasing and holding a majority of the shares of the stock of the gas companies in Chicago, there being only four of such companies—what would there be for the corporation last formed to do? It could not carry out the object of its creation, because the stock it was formed to buy was already owned by an existing corporation. Hence, to grant to the appellee the privilege of purchasing and holding the capital stock of any gas company in Chicago, is to grant to it a privilege which is exclusive in its character. It is making use of the general incorporation law to secure a special privilege, immunity or franchise; it is obtaining a special charter under the cover and through the machinery of that law, for a purpose forbidden by the constitution. To create one corporation, that it may destroy the energies of all other corporations of a given kind, and suck their life-blood out of them, is not a ‘lawful purpose.’ ” See, also, to the same effect, adopting the same argument, Distilling & Cattle-Feeding Co. v. People, 156 Ill. 448; National Harrow Co. v. Hench, 76 F. 667. It seems to be a well-settled proposition of American corporation law, that it is ultra vires for an ordinary corporation, without express authority, to purchase and hold the stock of other corporations. Franklin Co. v. Lewiston Sav. Bank, 68 Me. 43; Pierson v. McCurdy, 33 Hun, 520; Central R. R. Co. v. Penn. Ry. Co., 31 N. J. Eq. 475; Central R. R. Co. v. Collins, 40 Ga. 582; Buckeye Marble & Freestone Co. v. Harvey, 92 Tenn. 115; New Orleans F. & H. S. T. Co. v. Ocean Dry Dock Co., 28 La. Ann. 173; Franklin Bank v. Commercial Bank, 36 Ohio St. 350; Valley Ry. Co. v. Lake Erie Iron Co., 46 Ohio St. 44. But see Booth v. Robinson, 55 Md. 433; National Bank of Jefferson v. Tex. Investment Co., 74 Tex. 421. And see the very recent case of Rafferty v. Buffalo City Gas Co., 56 N. Y. S. 288; 37 App. Div. 618.

[1]Stockton v. Central R. R. Co. of N. J., 50 N. J. Eq. 52; s. c. 489. In this case the railroad company had leased all its rights, property, and franchises, including forty auxiliary roads, which were leased or otherwise controlled by it, to a foreign railroad corporation for 999 years, which had, by the acquisition of the control of other railroads, been developed into a huge combination of railroads, which furnished the carrying accommodations for the coal regions of Pennsylvania. The lease was held to be in restraint of trade, and equity would restrain the enforcement of the lease. See, also, Anheuser-Busch Brewing Association v. Houck, 88 Tex. 184; American Strawboard Co. v. Peoria Strawboard Co., 65 Ill. App. 502.

[2]Bi-spool Sewing Machine Co. v. Acme Mfg. Co., 153 Mass. 404; Holmes & Griggs Mfg. Co. v. Holmes & Wessell Metal Co., 127 N. Y. 252; Ardesco Oil Co. v. North Am. Oil, etc., Co., 66 Pa. St. 375.

[3]See Penn. Ry. Co. v. St. Louis, A. & T. H. R. R. Co., 118 U. S. 290, 630; Chicago Gaslight & Coke Co. v. People’s Gaslight & Coke Co., 121 Ill. 530; Fietsam v. Hay, 122 Ill. 293; Small v. Minneapolis Electro-Matrix Co., 45 Minn. 264; State v. Nebraska Distilling Co., 29 Neb. 700.

[1]Coquard v. National Linseed Oil Co., 171 Ill. 480. See, to same effect, Trenton Potteries Co. v. Olyphant (N. J. Eq. ’99), 43 A. 723, modifying decree in s. c. 56 N. J. Eq. 680. See Cravens v. Carter-Crume Co., 92 Fed. 479; 34 C. C. A. 479.

[2]As to which, see post, next section.