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Voting Trusts and Antitrust: Rethinking the Role of Shareholder Litigation in Public Regulation, from the 1880s to the 1930s

Published online by Cambridge University Press:  22 September 2021

Naomi R. Lamoreaux  and
Laura Phillips Sawyer
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Abstract

Scholars have long recognized that the states’ authority to charter corporations bolstered their antitrust powers in ways that were not available to the federal government. Our paper contributes to this literature by focusing attention on the relevance for competition policy of lawsuits brought by minority shareholders against their own companies, especially lawsuits challenging voting trusts. Historically judges had been reluctant to intervene in corporations’ internal affairs and had been wary of the potential for opportunism in shareholders’ derivative suits. By the end of the nineteenth century, however, they had begun to revise their views and see shareholders as useful allies in the struggle against monopoly. Although the balance between judges’ suspicion of and support for shareholders’ activism shifted back and forth over time, in the end the lawsuits provoked state legislatures to strengthen antitrust policy by making devices like voting trusts unsuitable for purposes of economic concentration.

Type
Original Article
Information
Law and History Review , Volume 39 , Issue 3 , August 2021 , pp. 569 - 600
Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press on behalf of the American Society for Legal History

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Footnotes

The authors thank Edward Balleisen, Rudi Batzell, Christopher Bruner, Brian Cheffins, Sally Clarke, Eric Hilt, Louis Galambos, Joanna Grisinger, David Lamoreaux, Jonathan Levy, Gregory Mark, Ajay Mehrotra, William Novak, J.J. Prescott, Gautham Rao, Veronica Santarosa, Logan E. Sawyer, Elizabeth Tandy Shermer, Shaoul Sussman, Jesse Tarbert, and five anonymous referees for their helpful comments. The authors state that they have also benefited greatly from the questions and suggestions that they received during presentations at the 2018 annual meeting of the Business History Conference, the Harvard Business School conference on “New Perspectives on U.S. Regulatory History,” the Newberry Library “History of Capitalism” seminar, the University of Georgia School of Law, and the Law and Economics Workshop at the University of Michigan Law School, and they give special thanks to Stephen Lamoreaux for producing the figure.

References

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10. People v. North River Sugar Refining Co., 121 N.Y. 582 (1890), at 626.

11. Charles W. McCurdy, “The Knight Sugar Decision of 1895 and the Modernization of American Corporation Law, 1869–1903,” Business History Review 53 (1979): 304–42; Naomi R. Lamoreaux, The Great Merger Movement in American Business, 1895–1904 (New York: Cambridge University Press, 1985), ch. 6; Melvin I. Urofsky, “Proposed Federal Incorporation in the Progressive Era,” American Journal of Legal History 26 (1982): 160–83; Arthur M. Johnson, “Antitrust Policy in Transition, 1908: Ideal and Reality,” Mississippi Valley Historical Review 48 (1961): 415–34; Martin J. Sklar, The Corporate Reconstruction of American Capitalism, 1890–1916: The Market, the Law, and Politics (New York: Cambridge University Press, 1988), 228–85; and Daniel A. Crane, “The Dissociation of Incorporation and Regulation in the Progressive Era and the New Deal,” in Corporations and American Democracy, ed. Naomi R. Lamoreaux and William J. Novak (Cambridge, MA: Harvard University Press, 2017), 109–38.

12. US Commissioner of Corporations, “Report,” House Doc 165, 58th Cong. 3d Sess. (Washington, DC: Government Printing Office 1904), 40; Lamoreaux, Great Merger Movement, ch. 6; Herbert Hovenkamp, Enterprise and American Law, 1836–1937 (Cambridge, MA: Harvard University Press, 1991), esp. ch. 20; Herbert Hovenkamp, “State Antitrust in the Federal Scheme,” Indiana Law Journal 58 (1983): 375–432; William G. Roy, Socializing Capital: The Rise of the Large Industrial Corporation in America (Princeton: Princeton University Press, 1997).

13. May, “Antitrust Practice and Procedure”; and Lamoreaux, “Antimonopoly and State Regulation of Corporations.”

14. Bruce Bringhurst, Antitrust and the Oil Monopoly: The Standard Oil Cases, 1890–1911 (Westport, CT: Greenwood Press, 1979), 14.

15. Nolette, “Litigating the Public Interest,” 395.

16. Wayne D. Collins, “Trusts and the Origins of Antitrust Legislation,” Fordham Law Review 81 (2013): 2279–348, at 2327–28.

17. For general overviews, see J. J. Speight and Nathan B. Williams, Laws on Trusts and Monopolies: Domestic and Foreign, with Authorities, revised ed. (Washington, DC: Government Printing Office, 1914); and Marketing Laws Survey, State Antitrust Laws (Washington, DC: Government Printing Office, 1940).

18. Joseph A. Pratt, “The Petroleum Industry in Transition: Antitrust and the Decline of Monopoly Control in Oil,” Journal of Economic History 40 (1980): 815–37; Joseph A. Pratt and Mark E. Steiner, “‘An Intent to Terrify’: State Antitrust in the Formative Years of the Modern Oil Industry,” Washburn Law Journal 29 (1990): 270–89; Jonathan W. Singer, Broken Trusts: The Texas Attorney General versus the Oil Industry, 1889–1909 (College Station: Texas A&M University Press, 2002); and William R. Childs, The Texas Railroad Commission: Understanding Regulation in America to the Mid-Twentieth Century (College Station: Texas A&M University Press, 2005).

19. Steven L. Piott, The Anti-Monopoly Persuasion: Popular Resistance to the Rise of Big Business in the Midwest (Westport, CT: Greenwood Press, 1985).

20. Nolette, “Litigating the Public Interest,” 392–93.

21. Ruth H. Bloch and Naomi R. Lamoreaux, “Corporations and the Fourteenth Amendment,” in Corporations and American Democracy, 286–325, at 296–97.

22. Illinois General Assembly, “An Act concerning corporations,” in force July 1, 1872, §1–2. Unless otherwise noted, all citations to state laws are from the Session Laws collected by Heinonline, https://www.heinonline.org/HOL/Index?index=sslusstate&collection=ssl.

23. Illinois Attorney General, Biennial Report (Springfield, IL: H. W. Rokker, 1890), 34–41. Pennsylvania similarly obtained assistance from an association of independent oil producers in bringing its suit against Standard Oil. See Chester M. Destler, Roger Sherman and the Independent Oil Men (Ithaca, NY: Cornell University Press, 1967), 83–193.

24. People v. Chicago Gas Trust, 130 Ill. 268 (1889), at 298.

25. These increases can be tracked in the regular reports filed by state attorneys general, most of which are available on hathitrust.org.

26. Kansas Attorney General, Twelfth Biennial Report (Topeka: W. Y. Morgan, 1900), 13–14.

27. Oklahoma, 1907 Constitution, Art. 2, Sec. 28, and Art. 9, Sec. 15–25. For similar provisions, see New Mexico, 1911 Constitution, Art. 11; and Arizona, 1912 Constitution, Art. 14, Sec. 8 and 17, and Art. 15. For the text of these constitutions, see the NBER/Maryland State Constitutions Project, http://www.stateconstitutions.umd.edu/index.aspx.

28. Singer, Broken Trusts, 219–220, 293 n25.

29. “Legislation: A Collection and Survey of State Anti-Trust Laws,” Columbia Law Review 32 (1932): 347–66, at 361–62; Davies, Trust Laws and Unfair Competition, 211–16.

30. J. B., “Distinguishing between Direct and Derivative Shareholder Suits,” University of Pennsylvania Law Review 110 (1962): 1147–57.

31. The most common method was to mandate cumulative voting, whereby shareholders received as many votes as there were directors being elected and had the option of spreading them over an equal number of candidates, voting them all for one candidate, or anything in between. By 1900, seventeen states had such rules. Charles M. Williams, Cumulative Voting for Directors (Boston: Graduate School of Business Administration, Harvard University, 1951), 20.

32. New Jersey General Assembly, “An Act relating to the consolidation of corporations …,” approved April 17, 1888; Massachusetts General Court, “An Act relative to business corporations,” approved June 17, 1903, §40; Illinois General Assembly, “An Act in relation to corporations for pecuniary profit,” approved June 28, 1919, §67; and California General Assembly, “An Act substituting for the existing title one of part four of division first of the Civil Code …,” approved June 12, 1931, §361. See also William J. Carney, “Fundamental Corporate Changes, Minority Shareholders, and Business Purposes,” American Bar Foundation Research Journal 1980 (1980): 69–132.

33. Hodges v. New England Screw Co., 1 R.I. 312 (1850) and 3 R.I. 9 (1853); Brewer v. Boston Theatre, 104 Mass. 378 (1870); Wardell v. Railroad Company, 103 U.S. 651 (1880); Hawes v. Oakland, 104 U.S. 450 (1881); Dunphy v. Traveller Newspaper Assoc., 146 Mass. 495 (1888); Leslie v. Lorillard, 110 N.Y. 519 (1888); Edison v. Edison United Phonograph Co., 52 N.J. Eq. 620 (1894); and Burden v. Burden, 159 N.Y. 287 (1899).

34. See State v. American Cotton Oil Trust, as reported in Railway and Corporate Law Journal 1 (1887): 509–13.

35. Trisconi v. Winship, 43 La. Ann. 45 (1891), at 47–48.

36. Trisconi v. Winship, 49–50. For other cases with similar outcomes, see Ellerman v. Chicago Junction Railways, 49 N.J. Eq. 217 (1891); and Rafferty v. Buffalo City Gas Co., 56 N.Y.S. 288 (1899).

37. State v. Nebraska Distilling Co., 29 Neb. 700 (1890), at 719.

38. Coquard v. National Linseed Oil Co., 171 Ill. 480 (1898), at 484.

39. “Illinois Corporations in Court,” Paint, Oil and Drug Review 21 (1896): 11–12. See also People v. National Linseed Oil Co., as reported in Illinois Attorney General, Biennial Report (Springfield, IL: Phillips Bros., 1897), 182–94.

40. Harding v. American Glucose Co., 182 Ill. 551 (1899).

41. “Obituary: Benjamin Drake Magruder,” Chicago Legal News 42 (1910): 297.

42. Harding v. American Glucose Co., 601, 632.

43. Harding v. American Glucose Co., 631. The citation was to William W. Cook, A Treatise on the Law of Corporations Having a Capital Stock, 4th ed. (Chicago: Callaghan, 1898), Vol. 2, §669–70.

44. Dunbar v. American Telephone and Telegraph Co., 22, 25–26. The judge cited the Chicago Gas Trust and American Glucose cases, as well as the United States Supreme Court's decision in Northern Securities Co. v. United States, 193 U.S. 197 (1904). For another similarly decided case, see Bigelow v. Calumet & Hecla Mining Co., 155 F. 869 (1907).

45. Sprague v. Universal Voting Machine Co., 134 Ill. App. 379 (1907), at 380, 385.

46. New York Legislature, “An Act in relation to stock corporations …” approved June 7, 1890, §7.

47. Davies, Trust Laws and Unfair Competition, 199–202.

48. F. A. Updyke, “New Jersey Corporation Laws,” American Political Science Review 7 (1913): 650–52; Seager and Gulick, Trust and Corporation Problems, 361–65.

49. Coffee, Entrepreneurial Litigation, 34–36; J. A. Livingston, The American Stockholder (Philadelphia: Lippincott, 1958), 49–55; “Old Sue-&-Settle Man,” Time, November 21, 1932, 39; and “Extortionate Corporate Litigation: The Strike Suit,” Columbia Law Review 34 (1934): 1308–21, at 1308, n1. A search through LexisNexis for 1889 to 1927, shows that Venner brought suit as a stockholder against US Steel, American Telephone & Telegraph, Amalgamated Copper, Bethlehem Steel, and American Hide & Leather, to name a few, as well as against numerous railroads.

50. Continental Securities v. Interborough Rapid Transit Co., 207 F. 467 (1913), at 472. The decision was affirmed by the Second Circuit Court of Appeals in 221 F. 44 (1915).

51. Continental Securities Company v. Interborough Rapid Transit Co., 165 F. 945 (1908). The judge cited a similar ruling in Burrows v. Interborough Metropolitan Co., 156 F. 389 (1907).

52. For background on the case, see Simeon E. Baldwin, “Voting-Trusts,” Yale Law Journal 1 (1891): 1–15, at 6–10. See also “Railroads: The C., H. and D.-Erie Contract,” Cincinnati Enquirer, April 24, 1885, 5; “In the Railroad World: Taking Mr. Jewett's Side,” New York Times, May 19, 1885, 5; and “The Railroads: Progress in the C., H. and D. Case,” Cincinnati Enquirer, June 9, 1886, 6.

53. Griffith v. Jewett, 9 Ohio Dec. Reprint 627 (1886).

54. “Simeon Eben Baldwin,” Museum of Connecticut History, https://museumofcthistory.org/2015/08/simeon-eben-baldwin/ (August 18, 2021). The case was reported in the Weekly Law Bulletin 15 (June 21, 1886), 419–23. It was also cited approvingly by a federal circuit court judge, who allowed a shareholder to revoke a power of attorney granting Drexel, Morgan & Co. the authority to sell his stock and vote it in the interim. Woodruff v. Dubuque & S.C.R Co., 30 F. 91 (1887).

55. Shepaug Voting Trust Cases, 60 Conn. 553 (1890), at 579–81.

56. Baldwin, “Voting-Trusts,” 14.

57. White v. Thomas Inflatable Tire Co., 52 N.J. Eq. 178 (1893).

58. Cone v. Russell & Mason, 48 N.J. Eq. 208 (1891). The case involved the use of a voting trust to entrench a particular stockholder in a managerial position.

59. Harvey v. Linville Improvement Co., 118 N.C. 693 (1896); Kreissl v. Distilling Co. of America, 61 N.J. Eq. 5 (1900); Warren v. Pim, 66 N.J. Eq. 353 (1904); Morel v. Hoge, 130 Ga. 625 (1908); Sheppard v. Rockingham Power Co., 150 N.C. 776 (1909); Bridgers v. First National Bank, 152 N.C. 293 (1910); and Luthy v. Ream, 270 Ill. 170 (1915). In another case, State v. O. & M.R.R. Co., 3 Ohio Cir. Dec. 518 (1892), the court upheld a voting trust but noted that it would have been invalid if irrevocable. See also Marion Smith, “Limitations on the Validity of Voting Trusts,” Columbia Law Review 22 (1922): 627–37.

60. Mobile & Ohio Railroad v. Nicholas, 98 Ala. 92 (1893); Smith v. San Francisco & North Pacific Railway Co., 115 Cal. 584 (1897); Brightman v. Bates, 175 Mass. 105 (1900).

61. Chapman v. Bates, 61 N.J. Eq. 658 (1900); Boyer v. Nesbitt, 227 Pa. 398 (1910); Bowditch v. Jackson Co., 76 N.H. 351 (1912); Carnegie Trust Co. v. Security Life Insurance Co . of America, 111 Va. 1 (1910); Thompson-Starrett Co. v. Ellis Granite Co., 86 Vt. 282 (1912); and Winsor v. Commonwealth Coal Co., 63 Wash. 62 (1911).

62. Carnegie Trust Co. v. Security Life Insurance Co., 20.

63. Carnegie Trust Co. v. Security Life Insurance Co., 23.

64. See US House of Representatives, “Report of the Committee Appointed … to Investigate the Concentration of Control of Money and Credit,” Report 1593, 62nd Cong., 3d Sess. (Washington, DC: Government Printing Office, 1913).

65. See Vincent P. Carosso, “The Wall Street Money Trust from Pujo through Medina,” Business History Review 47 (1973): 421–37; J. Bradford De Long, “Did J. P. Morgan's Men Add Value? An Economist's Perspective on Finance Capitalism,” in Inside the Business Enterprise: Historical Perspectives on the Use of Information, ed. Peter Temin (Chicago: University of Chicago Press, 1991): 205–36; and Mary A. O'Sullivan, Dividends of Development: Securities Markets in the History of U.S. Capitalism, 1866–1922 (Oxford: Oxford University Press, 2016), ch. 7.

66. Louis D. Brandeis, Other People's Money and How the Bankers Use It (New York: Fredrick A. Stokes, 1914).

67. Vincent P. Carosso, The Morgans: Private International Bankers, 1854–1913 (Cambridge, MA: Harvard University Press, 1987), 260–62. Morgan was not the first to use voting trusts for the purpose of reorganizing a railroad. See Harry A. Cushing, Voting Trusts: A Chapter in Modern Corporate History (New York: Macmillan, 1927), 4–10.

68. US House of Representatives, “Report of the Committee,” 57–91.

69. US House of Representatives, “Report of the Committee,” 133–35.

70. US House of Representatives, “Report of the Committee,” 40–41.

71. “No Market on ‘Change for ‘Stubborn’ Southern Stockholders: Morgan Shows his Hand: Opponents of Voting Trust Are Punished: Litigation May Follow,” Louisville, Kentucky Courier-Journal (Nov. 12, 1902), 8.

72. US House of Representatives, “Report of the Committee,” 41. See also Samuel Untemyer, “A Legislative Program to Restore Business Freedom and Confidence,” Address to the Illinois Manufacturers’ Association (January 5, 1914).

73. Venner v. Chicago City Railway Co., 258 Ill. 523 (1913).

74. Luthy v. Ream (1915).

75. Venner v. Chicago City Railway Co. (1913), 538. To the press, Venner also charged that the purpose of the merger was to deflect the CCRC's earnings to shore up the “tottering properties of the other companies,” but he seems not to have made this case to the court, perhaps because there was as yet no track record for him to cite. After Venner lost his suit, however, a group of discontented minority shareholders waged a proxy fight for control of the railroad and made essentially the same complaint. See “Opposes Chicago Merger,” New York Times, January 23, 1910, 5; and “Protest Against Car Merger Plan,” Chicago Daily Tribune, October 11, 1913, 9.

76. Faulds v. Yates, 57 Ill. 416 (1870).

77. Venner v. Chicago City Railway Co. (1913), 540.

78. Ibid.

79. Venner v. Chicago City Railway Co., 236 Ill. 349 (1908).

80. Venner v. Chicago City Railway Co. (1913), 550.

81. Luthy v. Ream, 190 Ill. App. 315 (1914).

82. Luthy v. Ream (1915), 178.

83. Luthy v. Ream (1915), 180. He was quoting here approvingly from Charles Fisk Beach, Commentaries on the Law of Private Corporations … (Chicago: T. H. Flood, 1891), Vol. 1, §306.

84. Luthy v. Ream (1915), 177.

85. Ibid.

86. Luthy v. Ream (1915), 181; and Venner v. Chicago City Railway Co. (1913), 541.

87. Luthy v. Ream (1915), 182.

88. I. Maurice Wormser, “The Legality of Corporate Voting Trusts and Pooling Agreements,” Columbia Law Review 18 (1918): 123–36, at 127, 132. See also Vincent Dougherty and John J. Berry Jr., “The Voting Trust—Its Present Status,” Georgetown Law Journal 28 (1940): 1121–28, at 1122. Cushing, however, downplayed the effect of the Pujo investigation in Voting Trusts, 26–30.

89. Smith, “Limitations on the Validity of Voting Trusts,” 630.

90. “Corporate Voting Trusts—Validity—Banks,” St. John's Law Review 1 (1926): 65–71; “Corporations—Validity of Voting Trusts,” Southern California Law Review 1 (1928): 479–83; Robert W. Miller, “Voting Trusts,” Indiana Law Journal 4 (1929): 600–606; and Cushing, Voting Trusts, ch. 3.

91. New York Legislature, “An Act to amend … the general corporation law,” approved April 16, 1901. New York later extended the term of a voting trust to 10 years in “An Act to amend the stock corporation law, generally,” approved May 24, 1923.

92. The case was Smith v. San Francisco & North Pacific Railway Co., the decision cited by Dunn in Venner v. Chicago City Railway Co. (1913). See California Legislature, “An act … regulating the giving and use of proxies to vote corporate stock,” approved February 27, 1905. For a case invalidating a voting trust on the basis of this act, see Simpson v. Nielson, 77 Cal. App. 297 (1926).

93. Wormser, “Legality of Corporate Voting Trusts,” 125; Dougherty and Berry, “Voting Trust,” 1124; and American Bar Foundation, Model Business Corporation Act Annotated (St. Paul: West Publishing Co., 1960), §32, 559–61. California, in a major reversal, allowed irrevocable voting trusts with a duration of 21 years. California Legislature, “An act … relating to corporations,” approved June 12, 1931.

94. “New Products Co. Lists Its Stock,” New York Times, August 28, 1924, 25.

95. “Fox Boards Adopt New Financing Plan,” New York Times, February 19, 1930, 22.

96. “New Plan to Save New York Title Co.,” New York Times, December 3, 1937, 35.

97. Derivative actions soared during the 1930s, as revelations of bad business behavior in the run-up to the crash made judges more sympathetic to shareholders’ challenges. Coffee, Entrepreneurial Litigation, 36–40.

98. Perry v. Missouri-Kansas Pipe Line Co., 22 Del. Ch. 33 (1937).

99. Belle Isle Corp. v. Corcoran, 29 Del. Ch. 554 (1946).

100. Kittinger v. Churchill Evangelistic Assn., 151 Misc. 350 (N.Y. 1934).

101. “End of Banks’ Rule in Industry Hinted,” New York Times, March 25, 1937, 37.

102. Berle, Adolph A. and Means, Gardiner C., The Modern Corporation and Private Property (New York: Harcourt, Brace & World, 1932), 73Google Scholar, 83.

103. See Temporary National Economic Committee, Hearings (Washington, DC: Government Printing Office, 1940), Part 22, 11,403–25, 11,519; and Part 24, 12,553, 12,860–65.

104. US House of Representatives, “Report of the Committee,” 142.

105. Simon, Miguel Cantillo, “The Rise and Fall of Bank Control in the United States: 1890–1939,” American Economic Review 88 (1998): 1077–93Google Scholar; and Frydman, Carola and Hilt, Eric, “Investment Banks as Corporate Monitors in the Early Twentieth Century United States,” American Economic Review 107 (2017): 1938–70CrossRefGoogle Scholar.

106. Clayton Act, section 7 (15 U.S.C. § 18).

107. For an example, see Moody & Waters Co. v. Case-Moody Pie Corp., 354 Ill. 82 (1933), at 96–97.