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Senator NEWLANDS. No. The State corporation, although not limited at all by the State laws regarding the size of its capital would be compelled, in order to engage in interstate commerce, to accommodate itself in its articles of incorporation to the national charter or license.

Mr. KRAUTHOFF. In respect of its State business?

Senator NEWLANDS. In respect of its capitalization.

Mr. KRAUTHOFF. I mean the capitalization in respect of the State business.

Senator NEWLANDS. That is, the general capitalization.

Mr. KRAUTHOFF. Including its right to do a State business?
Senator NEWLANDS. Yes; which covers everything.

Mr. KRAUTHOFF. I do not think Congress can accomplish that result.

Senator NEWLANDS. Well, then, we will assume that the State, under those conditions where the national law put that limitation upon capital, should disregard it and have the right to do so so far as State commerce is concerned, but it would not have the right to do so so far as interstate commerce is concerned, would it?

Mr. KRAUTHOFF. Except that it would have to have practically two kinds of capitalization.

Senator NEWLANDS. And therefore, necessarily, the State corporation, when created, would accommodate itself to the law which imposed the greater restriction, would it not?

Mr. KRAUTHOFF. I think you would probably find, in practical experience, that the State corporation having a large capitalization would cause a Federal corporation to be formed with a small capitalization, all of which the State corporation would hold as a part of its assets.

Senator NEWLANDS. Would it not find that so very difficult and burdensome that it would prefer to adapt itself to a reasonable statute limiting capitalization-a national statute-would not that result?

Mr. KRAUTHOFF. It is very hard to say. The general question of how a corporation can meet conflicting statutory requirements is one which I have had to pass upon many times, because I have represented interests that wanted to do business in nearly every State in the Union.

For instance, Missouri, until recently, had a law that no corporation could be incorporated in or admitted into that State to do a mercantile or other private business which had a capital exceeding $10,000,000. Colorado had a law until recently that no corporation should be admitted into that State-and Michigan had a law of the same character-without paying a tax equal to 1 per cent upon its entire capitalization.

Louisiana had a law at one time that no foreign corporation could be admitted into that State to do business unless it paid an annual franchise tax of 2 per cent upon its gross sales throughout the United States.

Senator NEWLANDS. Were those restrictions tested in the courts? Mr. KRAUTHOFF. The Louisiana restriction was not and probably was valid. The others were undoubtedly so. The Colorado statute has, I believe, been amended because, naturally enough, large foreign

corporations proceed to organize local corporations with a small capital.

Senator NEWLANDS. Then, in those cases the States were successful in imposing restrictions upon the capital with which corporations engaging in interstate commerce and organized under other States were compelled to comply?

Mr. KRAUTHOFF. No; they were not. The Pullman Co., for instance, organized a hundred thousand dollar corporation under the laws of Colorado, upon which it paid the fees that were charged in respect of a local corporation, and the larger company held the stock of it.

Senator NEWLANDS. Suppose a national incorporation law, in addition to prescribing the rule regarding capitalization, should also prescribe a rule that no corporation should engage in interstate commerce that held the stock of other companies. Would not that have a tendency to check the present system of holding companies?

Mr. KRAUTHOFF. Naturally it would, if the provisions were valid. A holding company as such is not always resorted to from choice. That is to say, as a rule nothing can be accomplished through the instrumentality of a holding company which could not be reached as well by an ownership company. I am not speaking now of the point that by a holding company control is acquired by small amounts of stock. I am speaking now of the mere organization of a holding company other than for the perpetuation of an arrangement previously existing under some previous instrument, perhaps in the nature of a trust, which of itself has been declared illegal.

For instance, if a large manufacturing concern had a number of stores or branch houses or salesrooms in every State of the Union, if it itself had a very large capital, it would be very unwise and expensive for that company, with its large capital, to undertake to qualify in every State, although it may have only one or two branch houses there. It would be very unbusinesslike for that company not to form a local selling agency.

Senator NEWLANDS. But suppose the national charter or license should prevent that company, or any other company engaged in interstate commerce, from holding the stock of any other company. Then it would mean that this great department-store company would find it impossible to organize a store in any other State through the agency of a holding company; and would not that be beneficial?

Mr. KRAUTHOFF. It might not.

Senator NEWLANDS. Why not? Is there any advantage in having one great holding company, one great corporation-I am speaking of the public-any advantage in having one great corporation, organized under the laws of New York, for instance, to engage in the dry goods business, and permitting that company to hold the stock of 46 different companies, each one of them located in a different State and having a big department store in that State?

Mr. KRAUTHOFF. Assuming that the local law prohibited the large company from coming in and a valid Federal incorporation law provided that it could not hold stock in any other corporation, the effect would necessarily be that that company could not do business in that State. How that could be of any conceivable benefit to the

people of that State I do not know. They would be deprived of competition in business.

Senator NEWLANDS. It could do business in that State; but it would do it, of course, subject to the laws of that State.

Mr. KRAUTHOFF. In the way of a local company, do you mean? Senator NEWLANDS. No; not in the way of a local company. It would forbid every company. That would be the misfortune of that State, and it is probable, if it were prejudicial to the public interests, that the law would be changed.

Mr. KRAUTHOFF. How would your problem be simplified if, instead of the company you assume having gone into Missouri by means of a local company having a hundred thousand dollars or ten thousand dollars of capital, it had been compelled to go there in its large capacity? The holding of the stock of the local company, except the directors' qualifying shares, is a substantial ownership of its property. It is not, of course, a question of the legal title to the property.

Senator NEWLANDS. And there is nothing in my contention if you regard a holding company as a thing which is required by the public interests?

Mr. KRAUTHOFF. No; I think not.

Senator NEWLANDS. If the holding companies are to be condemned-I was inquiring whether we could not practically prevent the organization of these holding companies by declaring that no corporation engaged in interstate commerce could hold the stock of other companies. Would not that have the effect of preventing companies organizing under State laws which prevented holding companies from organizing as such?

Mr. KRAUTHOFF. I do not believe that holding companies ought to be indiscriminately condemned. I can give you some illustrations, if you wish.

Senator NEWLANDS. I do not want to enter into that discussion as to whether it is desirable that we should have holding companies or not. I am simply speaking now of the power of the United States, through a charter or license, to prevent admitted evils, and it seems to be the general consensus of opinion that holding companies are prejudicial to the public interest. That is what the Attorney General says and what a great many others have said who have appeared before us. Of course, I understand there can be a difference of opinion regarding it. But I am talking now about correcting well-known evils in an organization of State corporations by the persuasive power of a Federal statute which prevents these State corporations from engaging in interstate commerce unless they comply with certain restrictions imposed by the national law.

Mr. KRAUTHOFF. It may be so. I do not want to be misunderstood. I do not imagine that the Attorney General would say that holding companies were an evil without qualification.

Senator NEWLANDS. I think he does say that. I think he takes that position.

Mr. KRAUTHOFF. Not unless he uses the phrase "holding company as describing some specific kind of a corporation, for there are many corporations that are very beneficial, although they may hold stock of other corporations.

Senator NEWLANDS. My recollection is that he states particularly that one of the greatest evils of corporate organization is the power of one corporation to hold the stock of another corporation. He puts it as broadly as that. I may be mistaken about that, however.

Mr. KRAUTHOFF. I might not differ with him, if I knew the particular nature of the corporation he had in mind; but I do not think that a holding company is necessarily an evil.

Senator NEWLANDS. I think you will find that he made that statement as broadly as I gave it, in his Duluth speech, and possibly in one of his reports.

Mr. KRAUTHOFF. I may be speaking of holding companies of a different nature.

Senator NEWLANDS. As I understand it, he condemns the practice of permitting one corporation to hold any stock in another corpora

tion.

Mr. KRAUTHOFF. That is an advanced theory to which I have not progressed.

Senator NEWLANDS. If, however, the general contention should be, not in favor of the absolute prohibition of the holding of stock in other companies, but a prohibition against holding the control, we could easily legislate against that. Now, the question in my mind is, and that is the question I put to you, whether we could not, by the persuasive power of a national statute of that kind, practically correct the admitted evils that exist now in the organization of State corporations through the varying State laws, which, as you know, vie with each other, not in imposing proper restrictions, but in giving the freest indulgence to corporations.

Mr. KRAUTHOFF. If I understand your question, it involves the persuasive force of an enactment. The practical difficulty about a permissive or persuasive enactment is that the very people which you may want to reach would refuse to be persuaded.

Senator NEWLANDS. They could, of course, escape, but they would suffer the consequences, which would be an inability to enter into interstate commerce. I assume that no corporation of any consequence would be willing to voluntarily submit itself to that privation, and that the privilege of entering intersate commerce is so valuable a one that no corporation of large operations could afford to be without it, and that consequently it would necessarily adapt its organization to the requirements of a national statute.

Mr. KRAUTHOFF. I have often thought that if the corporations which are engaged in large business transactions could have, with the consent of the States-and I doubt very much its effectiveness without such consent-one law which they would comply with, and which would be a universal protection to them everywhere, it would be a distinct advantage to them. If, however, they were granted a Federal charter, which gave them power to violate the laws of Texas, for instance, you would at once precipitate a serious situation.

Senator NEWLANDS. It would not be violative of the law of Texas. Mr. KRAUTHOFF. Well, you would have to overcome the restrictions imposed by the laws of that State.

Senator NEWLANDS. No; it would not be in contradiction of that at all. It would simply say to a corporation organized under the laws of Texas: "It is true that your law permits you to overca pitalize; it is true that your law permits you to hold the stock of another

corporation. You are at liberty to comply with that law provided you engage only in State commerce. But if you desire to engage in interstate commerce, then we propose that in your articles of incorporation you shall declare that you will not hold the stock of other companies, and that your capitalization shall only represent the cash or a fair valuation of your property." How does that annul the constitution of Texas? It leaves it still operative within its proper jurisdiction and domain in the matter of purely State com

merce.

Mr. KRAUTHOFF. I have not the statutes of Texas before me. But as I recall it, roughly speaking, the law of Texas prohibits any corporation, domestic or foreign, from owning more than one plant engaged in producing the same products. You can not safely assume offhand that the Supreme Court will say that it is constitutional for Congress to pass a law which says to the State of Texas: "Notwithstanding your statute, this Federal corporation is authorized to do a local business in your State under the terms of the Federal statute, with power to have as many plants as it pleases." Senator NEWLANDS. I am speaking thus far now simply of the restrictions. You are speaking of the power.

Mr. KRAUTHOFF. I take it that they go together. Senator NEWLANDS. But assuming that case. Assume the case where the national statute permits a corporation engaged in interstate commerce to own more than one plant; to own, we will say, a plant in every State; and the law of Texas forbids a corporation doing business in that State and engaging in State commerce to own more than one plant anywhere. I imagine in that case that the corporation claiming the benefit of the Federal license or charter and organized with more than one plant would not be permitted to engage in State commerce in the State of Texas.

Mr. KRAUTHOFF. Yes, sir.

Senator NEWLANDS. What harm is there in that?

Mr. KRAUTHOFF. But supposing it wants to so engage?

Senator NEWLANDS. Supposing it wants to. That is no answer. The answer is that the State of Texas is a sovereignty within its proper jurisdiction-as great a sovereignty as the United States. It has as great sovereign powers within its jurisdiction, and within its jurisdiction, namely, purely State commerce, it declares that no corporation shall engage in State commerce that owns more than one plant. Why should not that law be obeyed just as the national law should also be obeyed?

Mr. KRAUTHOFF. Suppose it should be that it wanted to qualify in Texas, because a part of its raw material was obtained there, or because it was a particularly valuable place for the output of its product. It would, therefore, be constrained to form a Texas corporation.

Senator NEWLANDS. If it did that it would be violating the Federal statute, which prohibits corporations doing interstate business from holding the stock of other corporations.

Mr. KRAUTHOFF. Would you believe it wise, in that particular case, to deny the right of the Federal corporation to own the instrumentality

Senator NEWLANDS. I am not speaking of the Federal corporation. I am speaking of a corporation organized and acting under a Federal license or charter.

29657-VOL 2-12-3

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