Formed for the especial purpose of holding or owning the shares of another company or other companies; an arrangement whereby financial combinations may indirectly control operating companies through ownership of their capital stocks. A good example is that of the old Amalgamated Copper Co., which was a " finance company,' so-called, controlling the stocks of certain operating copper companies.
This is generally done to circumvent the law, and thus bring about indirectly the virtual consolidation of two or more companies, when to do so directly would be illegal; or where it may be impossible to bring about an actual consolidation by the acquisition of all the outstanding stock.2 The "sub-companies" 3 - as the several corporations thus brought together are termed - maintain their individual existence as before, but the officials managing the same are appointed by the "holding company." This latter is incorporated under the laws of some such State as New Jersey, Maine, or West Virginia, which has enacted laws to attract such corporations. The Northern Securities Corporation, brought into existence under the laws of the first named State, is one of the most colossal examples of the kind yet attempted. In this case it was desired to consolidate certain railways; the laws of some of the States, crossed by the roads, prohibited the consolidation of parallel or competing lines. It was held that these were such, and, therefore, to get around this, another corporation was formed in New Jersey and its shares issued in exchange for the shares of the railways in question. However, this has been held to be illegal by the Supreme Court of the United States, and the stocks so taken in exchange were ordered distributed among whom the Court, in its decision, conceived to be the proper owners. (See foot-note to " Merger.")
1 Act 265, P. A. 1905.
2 The " holding company " might succeed in acquiring the total capitalization of another corporation, dissolve it, and take actual possession of the property represented. It is possible also for a " holding company " to acquire possession of an unincorporated business, but it is almost entirely for the acquisition of stocks of other companies that a " holding company is created.
3 Subsidiary companies.
Always beware of the financial statement of a holding company but insist on receiving a consolidated statement showing the condition of all the companies combined.
A "holding company" may or may not result in good. In general, the principle is wrong if on a large scale, as it naturally results in stock watering, and concentrates control. It brings about unhealthful stock gambling and stifles competition. Efforts have been made in at least one State Legislature to limit to a comparatively small sum the amount of the capital stock of one company which may be held by another, thus preventing the obtaining of control in this way.