This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
Another form of combination that has proven unsuccessful in this country - though it has worked to some extent abroad - is the "pool" or selling agency, which is an agreement to restrict production and sales, and which frequently accomplishes this purpose by having all the sales of the competing companies handled by one selling organization. This arrangement was found to be illegal in this country and was given up more than a generation ago.
Its successor was the "trust," using that word in its legal, not its popular, sense. Under the "trust" form of combination, controlling shares in competing corporations were turned over to a group of trustees who issued in exchange their trustees' certificates. The trustees were able in this way to direct all the corporations and to restrain their competition with each other. In the late 8o's this arrangement also was found to be illegal and consequently the trusts were dissolved.
Shortly afterward began the use of the "holding" company to accomplish this same purpose. One corporation was formed which purchased the controlling shares of competing corporations and was thus able to direct them in the same way that the trusts had previously done. After many years of agitation and litigation, this method also has in recent years been found to be illegal. Some of the large holding companies have been dissolved by order of the courts and others have voluntarily relinquished their holdings of stocks of competing companies.
Out of the discussion and the various legal measures that have been taken, there has arisen a popular feeling that all holding companies are questionable, and it has even been seriously proposed that a corporation should be forbidden to hold stock in any other corporation. Yet, as a matter of fact, no real legal objection to a holding company itself has ever been raised. The only question has been whether the holding-company has been used for purpose of restraining trade and competition, and it is that use which is forbidden. For any purpose that is not illegal, a holding company may be used as effectively and with as little legal objection as ever.