TRUSTS CAN LAST FOREVER
By Melvin J. Howard
The fascination I have with Trusts goes back to over 20 years ago.
When my lawyer, business confidant and friend taught me the many uses of Trusts
and it’s intricacies. But I dug further I wanted to know the history where did
the idea of trusts come from etc. I discovered it arose almost accidentally
from the procedural intricacies of English law, where a dual system of justice
had arisen as early as the fourteenth century. The system provided two judicial
structures based on fundamentally different jurisprudences of the rule of law
and the rule of equity. The common-law courts administered law and the Chancery
courts provided equitable relief when the application of strict law in the common-law
courts either gave no remedy or gave an unjust one. The Chancery courts were
often faced with petitions relating to “uses”. A “use” arose where a person
(the “feoffor”) conveyed property of any sort to another (the “feofee”) upon
the understanding that the other was to hold the property on behalf
of the feoffor or on behalf of a third party (cestui que use). Clearly the
feofee, bound in honour but beyond the law, was in a position of confidence
which he might abuse. Consequently, the rights of the cestui que use required
protection. The common-law courts failed to recognize uses and so it was upon
repeated petition to the court of “conscience” that relief was awarded by the
Chancellor who forced the feofee to administer the property for the benefit of
the cestui que use, according to the terms of the grant.
Throughout the centuries, the trust has proved a remarkably resilient and flexible concept. Its uses have reflected the needs of the times. In Medieval times, it was used as a means of avoiding forfeiture, while in the Victorian period it was often used as a means of controlling one’s family, even after one’s own death. Today, as well as retaining its old uses, the trust has been put to many new ones. The modern role of the trust lies significantly in pension funds, charities and various endowments.
A function of the trust concept, which has been common for many centuries, is its utilization for charitable purposes or for the public good. “Charitable” in English law has a technical and somewhat artificial meaning, which derives from the meaning contained in the Statute of Charitable Uses (the Statute of Elizabeth). To date, no comprehensive definition of a legal “charity” has been provided either by statute or by the courts. However, there is an accepted if not wholly adequate test. A claim to charitable status is determined by considering whether the purpose in question comes within Lord MacNaghten’s classification, first stated in 1891:
Charity in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community’. The achievement of charitable purposes through the use of a trust is often easier and cheaper than the use of a charitable corporation, or for the purposes to be administered by a local authority. For these reasons, many established charities today are in fact trusts. One pertinent way in which such trusts are utilized is in the creation of disaster funds which accepts funds from members of the public (the trusters or settlors) for equitable distribution amongst the victims, survivors and dependents of victims, of the disaster.
A debtor’s property is in principle available for the satisfaction of his creditors and ,if he becomes bankrupt, it will pass to his trustee in bankruptcy; but it is possible, by making use of a protective trust, to obtain a measure of protection against such a calamity. The very notion of protective trusts, which effectively empowers a settler to defeat his creditors by putting his property beyond their grasp, would no doubt have Henry VIII turning in his grave. However, there is much to be said for allowing some means of protecting a person’s dependents from the adversities caused by his own lack of financial prudence and from this perspective it is pleasing to note that a settler cannot create a trust which will protect him against himself own bankruptcy. In Re Boroughs-Fowler , a settler attempted to protect his property by creating an ante-nuptial settlement that provided that the income from the trust should be paid to him and in event of his bankruptcy, paid to his wife. This was not allowed by the court and it was held that the property vested in the bankruptcy trustee, who could validly dispose of it. This rule is now enshrined in the Trustees Act 2000, formerly the Trustees Act 1925 of the UK.
A trust may be created in order to avoid any single person acquiring a controlling share of a company. If for some commercial or other reason the original owner does not want another person or body to acquire a controlling shareholding in a company, a sufficient number of shares could be taken out of circulation and put in trust. This method may be used in order to protect a company from a hostile takeover. It should be recognized however that this procedure might well have the effect of limiting the company’s freedom of manoeuvre, as the trust holding would be subject both to trust considerations and to commercial ones, and company decisions would be tightly bound into the welfare of the trust.
With the increasing incidence of divorce in modern society it is foreseeable that a marriage will not last a lifetime. One way of avoiding the financial arguments that invariably embitter the parties to a divorce would be to make provision for the holding of property in trust, with the aim of dividing it out equitably on the break-up of the marriage. However, there may be a problem in relation to such a provision’s validity. In Re Johnston’s Will Trusts a trust was set up which made provision by a father whereby his daughter was to receive certain sums in the event of her divorcing her husband. Clearly, the father’s intention was to provide for his daughter only if her husband stopped supporting her; but the court held that the provision was void as being contrary to public policy in that it amounted to an encouragement to the daughter to divorce her husband. In spite of such precedents, it is submitted that such a provision may be a sensible way to deal with an event that is undesirable but foreseeable, so long as it does not encourage the onset of the undesirable event itself.
COMING TO AMERICA
The Business Trust made its debut in Massachusetts in 1827. As a result, a U.S. Business Trust today is often called a "Massachusetts Trust" in legal circles. The U.S. Supreme Court defined the Massachusetts Trust as a form of business organization, common in Massachusetts consisting essentially of an arrangement whereby property is conveyed to trustees: in accordance with terms of the Trust. The business is to be held and managed for the benefit of persons who hold transferable certificates issued by the trustees showing the shares into which the beneficial interest in the property is divided. [Hecht v. Malley, 265 U.S. 144 (1924)] [446 U.S. 458, 469].
Neither the railroads, nor industry or banking were invented in the period between 1865 and 1914, generally accepted as the time limits of what was called the Gilded Age. The new element which drove the concentration of wealth was consolidation in search of economies of scale and the strive for monopoly ( “ Trusts “).
When the great C. Vanderbilt acquired both the New York
& Harlem and the Hudson River railroads, he achieved a monopoly on
railroad transportation between New York City and Albany. This he later
parlayed into a controlling interest of the New York Central Railroad, which he
promptly merged with his Hudson River railroad, thereby establishing a through
line between New York and the Great Lakes. His interest in the Erie Railroad,
which ran a parallel line along the Southern border of New York state, was
entirely motivated by the intention to extend his monopoly. What Vanderbilt did
or sought to do in New York, the Pennsylvania Railroad did in Pennsylvania and
other railroads did elsewhere. Mergers created larger and more efficient
systems and a reduction of competition, which in turn promised higher profits.
Thus, when the new generation of industrialists started to expand their scope
of activity from local factory owners to national operators, they merely
followed the railroads in their economic logics.
The concepts of pooling and artificial price fixing, were not invented during the Gilded Age, but the period was characterized by the typical short economic cycles, the boom and bust cycles, which favored their application. In times of rapid growth, high profits tended to attract an excess of investors and overcapacities were rapidly built up. When the excessive offer hit the markets, prices had to sink and spelled doom over the concerned industries. Leading firms then often tried to maintain high prices by pooling and collectively reducing production. Such pools (or cartels) were more or less loose and the looser they were, the less they were effective. Only in a few cases did these cartels succeed to control prices effectively for a prolonged period. One such example is the Gunpowder Trade Association, which was organized by the leading gunpowder manufacturers, including E.I. Du Pont de Nemours, after the end of Civil War threatened the industry, which then naturally suffered from overcapacity.
The concept of "trusts" was invented during the Gilded Age, as a response to the specific legal situation, which forbid corporations from owning other companies or assets in other states. It notably appeared as the legal form, the Standard Oil alliance took in 1882, to unite its shareholders as it could not merge its constituent companies. The introduction of the holding company in New Jersey during the 1890's allowed what was formerly impossible and thereby accelerated the trust movement in corporate America during this period. Under public pressure, the US Congress reluctantly introduced anti-trust laws to rein in the growing concentration of wealth and power in the hands of a few individuals and fight the large corporations in their efforts to restrain competition. These efforts proved rather futile, as witnessed by the creation in 1890 of the American Tobacco trust, the same year in which the Sherman Act passed. The American Sugar Refining Company joined in January 1891 and the nine year old Standard Oil trust made no efforts to adjust, despite the fact that it was the target of the Sherman anti-trust legislation. It would take twenty years until these three major trust would be dissolved by order of the Supreme Court of the United States.
In time most American industries fell prey to the consolidation or trust movement, many of them during the 1890's. However, some sectors were more suited to be "organized" than others. Such was the case of the nascent (rock) oil or petroleum industry, which came under the influence of the secretive John D. Rockerfella and his partners. Drawing his strength in his deep faith, John D. Rockefeller relentlessly brought his Standard Oil Company forward, until it owned 90% of the nation's oil refining capacity and controlled all essential oil transportation infrastructures, with its pipeline network, tank car fleet and secret railroad rebates. The four major railroads serving the Western Pennsylvania Oil Regions then were the New York Central - Lake Shore, the Erie - Atlantic & Great Western, the Pennsylvania and the Baltimore & Ohio. To achieve his goal of monopolizing the oil industry, John D. Rockefeller allied himself with his strongest competitors : refiners. He also enrolled the most fervent of his opponents in the Oil Regions, such as John Dustin Archbold and lawyer Samuel C.T. Dodd.
Standard Oil became so fabulously profitable, that it was soon
known as the "Mother of Trusts", standing behind the consolidation of
many other industries. By then, John D. Rockefeller inherited the mantle of
evil the brand-mark of the villain, who tried to monopolize just every sector
he could get hold on and thereby required his tribute from the innocent consumer
and producer. This impression was actually wrong, as these enterprises sprang
from the initiatives of the oil trust's individual shareholders and were not
orchestrated by a common entity. Although John D. Rockefeller had some
ambitions to consolidate the steel industry, (which he failed to do), most of
the trusts financed by Standard Oil money were organized by other partners. The
most active were Oliver Hazard Payne (American Tobacco), Henry Huddleston
Rogers (the smelters trust) and Rockefeller's brother William, who promoted the
great Amalgamated Copper scheme in 1899, with the support of James Stillman and
the National City Bank. There were lesser trusts with Standard Oil influence,
such as the National Lead Company and the American Linseed Company.
What Rockefeller did in oil, James Buchanan did in
tobacco products and the Havemeyers in sugar refining. Founded in 1890, the
American Tobacco Company grew mainly by acquisitions until it controlled most
of the smoking tobacco industry in the USA. Its sister, the Continental Tobacco
Company, was organized (in 1898) to control the plug tobacco sector as where
the American Snuff and American Cigar companies to control their respective
segments of the tobacco trade. These companies were merged into the Consolidated
Tobacco Company of New Jersey in 1901. To expand into foreign markets, the
British American Tobacco Company was formed and the Havana Tobacco Company, to
control the cigar supplies from that Caribbean island. Duke, a self-made-man
like Rockefeller, was supported by a powerful group of Northern financiers, who
had built the street railway systems in New York, Philadelphia and other
cities. This group essentially consisted in William Collins Whitney, Thomas
Fortune Ryan, Peter A. B. Widener and Anthony N. Brady. Oliver Hazard Payne,
the long-time treasurer of Standard Oil and estranged brother-in-law of William
C. Whitney, was also a large shareholder.
Unlike the Rockefellers and the Dukes, the Havemeyers who reorganized the sugar industry in the 1890's, were already wealthy and well established in the sugar refining business. The first pair of Havemeyer brothers, William and Frederick Christian, immigrated from Schaumburg-Lippe (Germany) in 1802 and established their first sugar refinery on Vandam Street in New York three years later. Their family prospered in New York and made the city to the premier sugar refining center in America. A scion of this family, Henry Osborne Havemeyer, who was linked by marriage to the Elder family, whose fortune was also made in sugar refining, consolidated the industry under his American Sugar Refining Company in 1891. By 1907, the Sugar Trust controlled 98% of US sugar production. Thereafter it came under litigation with the US government and was forced to relinquish control of its member firms, thereby effectively loosing its dominant position. When a settlement was reached in 1922, the market share of American Sugar Refining had sunk to 32%. In modern times, sugar refining ceased to be the profitable business it used to and the industry, once New York's most important, declined.
During the 1890's and into the first decade of the Twentieth Century, trusts were organized in every major American industry. Some were loose agreements between major firms, such as the infamous "Meat Trust", which pooled the large Chicago and St. Louis packers (Armour, Cudahy, Morris, Swift and Wilson) in one strong combination, using essentially the same methods as Standard Oil, notably in relation with the railroads, to fix prices and drive competitors out of business. Others took the form of holding corporations, usually chartered in New Jersey or Delaware and frequently organized with speculative rather than economic motives. To these, we may count a number of the companies, which were set up by a former shipping merchant, turned investment banker, whose involvement in industrial consolidation earned him the nickname "father of trusts" : Charles Ranlett Flint. Although generally weak at their beginnings, some of the Flint trusts later became successful corporations, like American Woolen (later Textron) or the Computing-Tabulating-Recording Company (now IBM). The Moore brothers of Chicago were also prominent trust organizers of the rather speculative nature. They created the National Biscuit Company (Nabisco), the Diamond Match Company and four companies, which were absorbed by the United States Steel Corporation in 1901. The Moores stood also behind one of the last great railroad empires to be organized in the USA.
The steel merger, which created the largest company of the world,
was the apotheosis of the trust movement and a monument to America's greatest
financier of the Gilded Age : John Pierpont Morgan. The banker and railroad
pacificator had already a name in industrial consolidation, having merged the
Edison manufacturing units with Thomson & Houston to form General
Electric in 1892. Morgan's credit in organizing the US Steel Corporation was
essentially related to the mobilization of the huge financial means it took to
float securities with a par value of $ 1'370'000'000 without breaking the market. Morgan, who stood
behind the Federal Steel Company and the National Tube Company, also managed to
unite all major players in his steel trust, these being the Carnegie Company,
the Moore Group, Gates' American Steel & Wire Company as well as
Rockefeller's iron ore properties in the Mesabi range. Elbert Henry Gary from
Morgan's Federal Steel became chairman of the board, Charles Michael Schwab of
Carnegie Steel became president and the directors included J.P. Morgan, John D.
Rockefeller and J.D. Rockefeller jr , Henry H. Rogers, Marshall
Field, Nathaniel Thayer jr, William H. Moore, Peter A.B. Widener and Henry
C. Frick. Unlike Standard Oil or Consolidated Tobacco, the United States Steel company,
despite its huge capitalization, was nowhere near achieving a monopoly
position, as several major competitors (including Lackawanna Steel, Jones &
New combinations soon appeared and threatened the steel trust in its very
existence. After clashing numerous times with the conservative Gary over
corporate policies, Schwab left US Steel after a three year tenure, took over
Bethlehem Steel and built it into a major competitor. His successor William E.
Corey also left after a few years to take over a competing concern. John Warne
"Bet-A-Million" Gates was involved in the creation of Republic Iron
& Steel after he had unloaded his wire trust to United States Steel.
And Henry Clay Frick, while still a director, teamed with the Mellons of
Pittsburgh to create the Union-Sharon Steel company, which they also unloaded
on the steel trust.
Under the presidency of Theodore Roosevelt, who succeeded the elected William McKinley after his assassination in 1901, the US government started to take a stronger stand against the trusts. As a consequence of these actions, the following major trusts were ordered to dissolve: Northern Securities (Western railroads) in 1904, Standard Oil and American Tobacco in 1911. The split-up parts continued to prosper and in many cases became greater than their parents had ever been. But with the gradual retirement and dilution of the founding interests, the resulting oligopoly of strong companies characterized a new and more competitive environment, which eventually benefited both, the general economy and the stronger of the competing firms. Industries, where competition gave way to regulation, like the railroads, generally declined, although this decline may be essentially due to more general macro-economic changes. The trusts were the predecessors of our modern corporations and they played a role in the economic growth of the United States. The multi-million dollar fortunes they made to their organizers and promoters were part of the Gilded Age. But it is no different today when billion dollar fortunes are derived from successful companies in the field of high tech.
The above are a few of the uses to which the trust can be put. The examples chosen show that the nature of a trust can be protective, of person or property; it can achieve desirable aims, either of a private or charitable variety; or it can be distributive, in the sense of transferring wealth in a tax advantageous manner. From a strategic point of view, it is submitted that Maitland’s claim that the trust is “the greatest …achievement performed by Englishmen in the field of jurisprudence” holds sufficient weight. From a moral stand point, it is simply stated that Henry VIII’s misgivings of the Medieval system would still hold a degree of justice when applied to the modern trust. However, what is important to note is that the trust can clearly not be dismissed as having outlived its usefulness and today forms a distinctive part of English law which at the very least says a great deal about the ingenuity of some highly skilled lawyers of which I have known a few.
