3. Trade associations.—Trade associations, altho established for the ostensible purpose of exchanging useful information, improving the industry and en couraging the elimination of trade abuses, sometimes cover up trade agreements which would, if expressed openly in writing, render the member companies and their officers subject to indictment under the Federal Anti-Trust Laws. To avoid any appearance of illegal agreement, nothing is ever openly said or re corded that would indicate concerted action by agree ment. Price and trade practices are discussed in pri vate meetings, and common action is taken, based upon gentlemen's understanding, which is usually observed as closely as a written agreement.
After the subject has been discussed in meeting, various members will state what they intend to do. At the close of a conference, for instance, one member will say, "It is my intention to raise prices to such and such a figure and hold them there until the first of December."' Other members will express the same intention, and it is fully understood that prices have thus been fixed. And yet no agreement has been entered into. Legally the members have merely ex pressed individual intentions and have not bound themselves to any concerted action.
4. Holding company.—The holding company is a corporation whose principal object is to acquire and hold the securities of other companies for the pur pose of securing the economies and profits of com bination. Companies which hold the securities of other corporations merely for investment, and not primarily for control, may more properly be called investment companies. Savings banks, finance com panies, and the investment companies of England are in this class. The prime purpose of such investment companies is to secure profits thru the dividends and increasing values of the securities held. Savings banks and insurance companies best illustrate this type.
Finance companies are well illustrated in this coun try by the Electrical Securities Corporation and the Electric Bond and Share Company, the stocks of which are owned by the General Electric Company. It is the object of these two corporations to assist in the financing of new companies which purchase equip ment from the General Electric Company. It is not their aim to effect a consolidation of competing in terests, but rather to get new business for the Gen eral Electric Company and incidentally obtain the underwriting profits from new companies which they finance.
5. Advantages of the holding company.—The holding company has distinct advantages over any other form of combination. It may be chartered in New Jersey, Maine, or some other state where ex tensive corporate powers may be had at minimum cost. Until New Jersey passed an act in 1889 per mitting corporations to be chartered with the specific power to hold stocks of other companies, none of the states permitted this form of combination. Since then, numerous states have, by general law, author ized holding companies to be incorporated. Corpo rate charter fees and taxes look very attractive to the state treasuries.
The holding company has numerous advantages in affecting combinations. As a separate corporation, independent of competing interests, it is in a position to deal with each of them upon a business-like basis, free from the jealousies and suspicions which exist be tween competitors. It is often able to secure financial support which the individual competitors could not obtain. It secures also the advantages of combina tion without the necessity of direct dealing between competing interests.
Altho examples are not lacking of holding com panies or of combinations which have been formed by the mutual agreement of competitors, such promotions are distinctly rare. It is an established principle in the promotion of consolidations that the various units must be dealt with individually. In the smaller in dustrial combinations, it is customary, in the initial negotiation, that the individual companies should not be permitted to know the basis upon which their competitors are entering. The promoters must be financially strong, in this case, as some of the more powerful companies may demand cash, while the weaker ones are willing to accept securities from the new combination in exchange for their property. The dealings of the promoters, of course, are with the con trolling stockholders of the competing companies. As a rule, the minority stockholders will follow the lead of those who control, knowing full well that the holding company can obtain control without their shares.
6. Procedure in forming holding companies.— There are two general methods of promoting consoli dations : (a) A bargain is driven with the stockholders of each company separately, by which the controlling interests are purchased with cash, bonds or stock of the new company, upon an agreed basis.