(b) Limited powers. Corporations possess only the powers granted to them by law, while individuals and partnerships possess all except those prohibited by law.
(c) Unusual expenses, such as charter fees, vari ous special forms of taxes upon domestic and foreign corporations, taxation of corporate stocks and bonds, etc. The partnership and trusteeship escape some of these forms of taxation.
(d) Government regulation. The Federal and state governments closely regulate the activities of corporations, and require frequent reports of their condition and business. This regulation is best typi fled by the control of the Interstate Commerce Com mission over railroads, and of the Federal Trade Commission over industrial companies.
14. Is there a substitute for the increasing taxation and regulation of corporations by the Federal and state governments, imposing in some instances burdens that are almost prohibitive, have stimulated renewed interest in an old and recognized form, the business trust, under which certain parties, known as trustees, are vested with the legal title and management of property for the benefit of others, described by the law as beneficiaries or ces tuis que trustent. Certain flexibility of interest is obtained by issuing negotiable certificates of bene ficial interest, divided into equal units, somewhat sim ilar in effect to certificates of capital stock. These certificates refer to the trust agreement under which the trustees are acting and set out the principal rights of holders and the extent of their interest in the enter prise.
This form of association has reached its greatest development in Massachusetts, and is variously des ignated as the Massachusetts Trust, Expressed Trust, Business Trust, etc. Its weakness lies in the fact that certificate holders cannot control the trustees to the extent that stockholders control their directors. The trustees, once elected, are not agents of the certifi cate holders, but act independently as legal owners of the property. The courts recognize the business trust as an attempt to dodge the liabilities of the corporate form, and whenever the trust agreement subjects the trustee to any considerable control by beneficiaries, the courts are likely to construe it as a partnership agree ment, with the certificate holders as partners and the so called "trustees" as their agents. These decisions have tended to limit the use of the trust as an instru ment of business and make it doubtful whether the business trust will ever supersede the corporation on any large scale. Of course, it lies within the power of the state to declare such business trusts illegal, or to subj ect them to the same taxation and control as cor porations. It would be very difficult, however, to prohibit or restrict them by law without hampering the use of the trust form for other necessary and de sirable purposes.
15. Corporate combinations.—One company may control the stock of another, and if both are engaged in the same or allied lines of business, the latter is termed a subsidiary company. If the subsidiary com pany grew naturally out of the extension of the busi ness the original corporation is called a parent com pany. A company which is formed for the purpose of acquiring and holding the stocks of other companies, for reasons other than pure investment, is known as a holding company. An operating company is one which itself engages in production or distribution. Many corporations are both operating and holding companies.
The principal forms of corporate combination may be summarized as follows: (a) The holding company.
(b) The voting trust. This is a device to concen trate diverse interests in the same corporation, or to harmonize the management of several corporations, by placing a controlling interest in the capital stock in the hands of trustees, who thus acquire voting con trol and eliminate competition under a continuous and uniform policy of management.
(c) The leasing by one corporation of the proper ties or assets of other companies. This concentrates the management largely into the hands of the lessee company.
( d) The information of selling companies, which, by controlling the market and apportioning the busi ness, are able to prevent competition and dictate the policies of the various producing companies con cerned.
(e) The formation of trade associations, which, thru gentleman's agreement, regulate trade practices, prices, etc. Legally speaking these are not combina tions, as they exist, ostensibly, only for the purpose of advancing the industry thru the exchange of infor mation. As a matter of fact, by gentleman's agree ment or tacit understanding, trade competition is often closely or nearly eliminated by these voluntary associations.
In addition to the above forms, in which corpora tions may combine without losing their corporate iden tity, there may be mentioned the following methods of combination in which the corporate identity is lost: (a) Physical Merger, in which one company pur chases the assets of other companies, which then wind up their affairs or lie dormant.
(b) Dissolution of competing companies and the placing of their assets in the hands of trustees, whose certificates of beneficial interest are issued to former security holders in exchange for their stocks and bonds.
It should be noted, however, that a corporation cannot become a partner in any enterprise, as that would partly subject its assets to the control of other partners outside the company, who have not been elected by stockholders. This would be a departure from the principle of agency, under which the direc tors, and directors only, manage the corporate prop erty and affairs in the interests of stockholders.