CHAPTER II

LEGISLATION

A. CLAYTON ACT

1. POLITICAL BACKGROUND

Criticism of interlocking managements as a device for corporate concentration at the turn of the century was not founded solely on information developed in the Pujo, Stanley, and Brandeis investigations. Additional evidence of the types of abuses that result from managements' inside dealing had been collected in 1887 by the Pattison Commission in its investigation of the Pacific railroads. Four directors of the Central Pacific Railroad Co., the Pattison Commission found, had procured contracts for construction, leases, repairs, and other services with companies they controlled, and as a result had improperly profited, in an amount that exceeded $142 million, at the expense of the Central Pacific, its stockholders, and creditors.1

Senator Robert La Follette, in a speech to the Senate on March 17, 1908, had asserted that a series of corporate interlocks set in motion in 1898, had progressed to the point where a "mere handful of men," which he estimated did not exceed 100, had acquired the ability to control the industrial production of the United States. He also reported that the Wall Street Journal, as early as 1903, editorially, was disturbed at the "evolution of a strong financial oligarchy." 2"

Both major political parties became committed to revisions of the antitrust laws that would strengthen the prohibitions against common corporate managements. In 1908, the platform of the Democratic Party stated:

We therefore favor the vigorous enforcement of the criminal law against guilty trust magnates and officials and demand the enactment of such additional legislation as may be necessary to make it impossible for a private monopoly to exist in the United States. Among the additional remedies we specify three: First, a law preventing a duplication of directors among competing corporations; * *

In 1912, the Republican Party called for supplementary legislation that would authorize an administrative commission to define specifically outlawed practices. The party's platform stated:

The Republican Party favors the enactment of legislation supplementary to the existing Antitrust Act which will define as criminal offenses those specific acts that uniformly mark attempts to restrain and to monopolize trade, to the end that those who honestly intend to obey the law may have a guide for their action, and that those who aim to violate the law may the more surely be punished.*

1 The Pacific Railway Commission report and testimony, S. Ex. Doc. 51, 50th Cong., 1st sess. (1887), vol. 2, p. 143; vol. 6, p. 4522 ff.

242 Congressional Record 3435, Mar. 17, 1908. * 51 Congressional Record 14213, Aug. 25, 1914. • Ibid.

The Democratic Party platform in 1912 said:

We favor the declaration by law of the conditions upon which corporations shall be permitted to engage in interstate trade, including among others the prevention of holding companies, of interlocking directors, of stock watering, or discrimination in price, and the control by any one corporation of so large a proportion of any industry as to make it a menace to competitive conditions *

2. LEGISLATIVE HISTORY OF SECTIONS 8 AND 10

Beginning with the 56th Congress in 1899, bills had been introduced to enact legislation that would supplement the Sherman Act. None of these bills, however, received enough support to advance through Congress.

On January 20, 1914, on the subject of trusts and monopolies, President Wilson requested Congress to enact legislation that would prohibit and prevent the interlocking of corporations by means of the personnel that made up their officers and directors. His message, in part, stated:

We are all agreed that "private monopoly is indefensible and intolerable," and our program is founded upon that conviction. It will be a comprehensive but not a radical or unacceptable program, and these are its items, the changes which opinion deliberately sanctions and for which business waits:

It waits with acquiescence, in the first place, for laws which will effectually prohibit and prevent such interlockings of the personnel of the directorates of great corporations-banks and railroads, industrial, commercial, and public-service bodies-as in effect result in making those who borrow and those who lend practically one and the same, those who sell and those who buy but the same persons trading with one another under different names and in different combinations, and those who affect to compete in fact partners and masters of some whole field of business. Sufficient time should be allowed, of course, in which to effect these changes of organization without inconvenience or confusion." a. The House Bill

H.R. 15657, the bill that was destined to become the Clayton Act, was introduced by Mr. Clayton on April 14, 1914. Its provisions on interlocking corporate managements were contained in section 8 and, 2 years after approval, would have prohibited the following:

5 Id.

(1) Vertical interlocks between interstate common carriers and their suppliers and securities underwriters;

(2) Horizontal interlocks between banks, banking associations, or trust companies, either of which has deposits, capital, surplus, and undivided profits aggregating more than $2,500,000;

(3) Horizontal interlocks between any bank, banking association or trust company, organized under Federal law, in any city or town of over 100,000 population and any other bank, banking association or trust company located in the same place;

(4) Horizontal interlocks between two or more corporations other than common carriers engaged in whole or in part in interstate commerce if such corporations are or have been competitors

6 See App. A for a list of antitrust bills that preceded the Clayton Act.

7 House of Representatives Committee on the Judiciary, Antitrust Legislation, H. Rept. 627, 63d Cong., 2d sess., May 16, 1914, pp. 17-18.

8

so that elimination of competition by agreement would constitute a violation of any of the provisions of the antitrust laws. H.R. 15657 was reported to the House by the Committee on the Judiciary on May 6, 1914. In its report, the committee amended the bill as introduced by deletion of all after the enacting clause and the substitution of new language. The prohibitions against interlocking directorates were contained in section 9 as follows:

(1) No change was made with respect to interlocks affecting common carriers;

(2) With respect to banks, banking associations, and trust companies, the size standard (deposits, capital, surplus, and undivided profits aggregating more than $2,500,000) was to be determined from official statements for the fiscal year next preceding the date set for the annual election of officers. In addition, three exceptions were included:

(a) Mutual savings banks not having capital stock represented by shares;

(b) Director, officer, and employee interlocks were permitted between parents and wholly owned subsidiraies; and (c) A Class A director of a Federal Reserve bank was permitted to be an officer or director, or both, in one other member bank.

(3) With respect to corporations other than common carriers, a size test also was added and the interlock prohibitions were

Sec. 8 of H.R. 15657 as introduced is as follows:

"SEC. 8. That from and after two years from the date of the approval of this Act, no person who is engaged as an individual, or who is a member of a partnership, or is a director or other officer of a corporation that is engaged in the business, in whole or in part, of producing or selling equipment, materials, or supplies to, or in the construction or maintenance of, railroads, or other common carriers engaged in commerce, shall act as a director or other officer or employee of any common carrier engaged in commerce, to which he, or such partnership or corporation, sells or leases, directly or indirectly, equipment, materials, or supplies, or for which he, or such partnership or corporation, directly or indirectly, engages in the work of construction or maintenance; and, after the expiration of said period, no person who is engaged as an individual, or who is a member of a partnership, or is a director or other officer of a corporation which is engaged in the conduct of a bank or trust company, shall act as a director, or other officer or employee, of any such common carrier, for which he, or such partnership, or bank, or trust company, acts, either separately or in connection with others, as agent in the disposal of, or is interested in the underwriting of, or from which he or such partnership, or bank, or trust company, purchases, either separately, or in connection with others, issues or parts of issues of securities of such common carrier.

"That from and after two years from the date of the approval of this Act no person shall at the same time be a director or other officer or employee of more than one bank, banking association, or trust company organized and operating under the laws of the United States, either of which has deposits, capital, surplus, and undivided profits aggregating more than $2,500,000; and no private banker, or person who is a director in any bank or trust company, organized and operating under the laws of a State, having deposits, capital, surplus, and undivided profits aggregating more than $2,500,000, shall be eligible to be a director in any bank or banking association organized and operating under the laws of the United States.

"No bank, banking association, or trust company organized and doing business under the laws of the United States in any city or town or more than one hundred thousand inhabitants shall have as a director or other officer or employee any private banker or any director or other officer or employee of any other bank, banking association, or trust company located in the same place.

"That from and after two years from the date of the approval of this Act no person at the same time shall be a director in any two or more corporations engaged in whole or in part in commerce, other than common carriers, subject to the Act to regulate commerce, approved February fourth, eighteen hundred and eighty-seven, if such corporations are, or shall have been theretofore, by virtue of their business and location of operation, competitors, so that an elimination of competition by agreement between them would constitute a violation of any of the provisions of any of the antitrust laws.

"That any person who shall violate any of the provisions of this section shall be guilty of a misdemeanor, and shall be punished by a fine of $100 a day for each day of the continuance of such violation, or by imprisonment for such period as the court may designate, not exceeding one year, or by both, in the discretion of the court.

H. Rept. 627, 63d Cong., 2d sess.

limited to corporations either of which had capital, surplus, and undivided profits in excess of $1 million.10

H.R. 15657 passed the House on June 5, 1914. Prior to adoption, the House amended section 9 to provide that no change in the affairs of a corporation, for any cause, would impair the eligibility of a director, officer, or employee, to continue to act in such capacity, or to be amenable to the interlock prohibitions, until the expiration of 1 year from his election or employment.

b. H.R. 15657 in the Senate

In the Senate, the Committee on the Judiciary's report, issued July 22, 1914, differed substantially from the House on the way two of the three classes of interlocking directorates should be treated. Only the House provisions relative to interlocking directorates in industrial cor

10 Sec. 9 of H.R. 15657, as reported to the House, is as follows:

"SEC. 9. That from and after two years from the date of the approval of this act no person who is engaged as an individual, or who is a member of a partnership, or is a director or other officer of a corporation that is engaged in the business, in whole or in part, of producing or selling equipment, materials, or supplies to, or in the construction or maintenance of, railroads or other common carriers engaged in commerce, shall act as a director or other officer or employee of any other corporation or common carrier engaged in commerce to which he, or such partnership or corporation, sells or leases, directly or indirectly, equipment, materials, or supplies, or for which he or such partnership or corporation, directly or indirectly, engages in the work of construction or maintenance; and after the expiration of said period no person who is engaged as an individual or who is a member of a partnership or is a director or other officer of a corporation which is engaged in the conduct of a bank or trust company shall act as a director or other officer or employee of any such common carrier for which he or such partnership or bank or trust company acts, either separately or in connection with others, as agent for or underwriter of the sale or disposal by such common carrier of issues or parts of issues of its securities, or from which he or such partnerhip or bank or trust company purchases, either separately or in connection with others, issues or parts of issues of securities of such common carrier. "That from and after two years from the date of the approval of this act no person shall at the same time be a director or other officer or employee of more than one bank, banking association, or trust company organized or operating under the laws of the United States either of which has deposits, capital, surplus, and undivided profits aggregating more than $2,500,000; and no private banker or person who is a director in any bank or trust company, organized and operating under the laws of a State, having deposits, capital, surplus, and undivided profits aggregating more than $2,500,000, shall be eligible to be a director in any bank or banking association organized or operating under the laws of the United States. The eligibility of a director under the foregoing provisions shall be determined by the average amount of deposits, capital, surplus, and undivided profits as shown in the official statements of such bank, banking association, or trust company filed as provided by law during the fiscal year next preceding the date set for the annual election of directors, and when a director has been elected in accordance with the provisions of this act it shall be lawful for him to continue as such for one year thereafter under said election. No bank, banking association, or trust company organized or operating under the laws of the United States in any city or incorporated town or village of more than one hundred thousand inhabitants, as shown by the last preceding decennial census of the United States, shall have as a director or other officer or employee any private banker or any director or other officer or employee of any other bank, banking association, or trust company located in the same place: Provided, That nothing in this section shall apply to mutual savings banks not having a capital stock represented by shares: Provided further, That a director or other officer or employee of such bank, banking association, or trust company may be a director or other officer or employee of not more than one other bank or trust company organized under the laws of the United States or any State where the entire capital stock of one is owned by stockholders in the other: And provided further, That nothing contained in this section shall forbid a director of class A of a Federal reserve bank, as defined in the Federal Reserve Act, from being an officer or director or both an officer and director in one member bank.

"That from and after two years from the date of the approval of this act no person at the same time shall be a director in any two or more corporations, either of which has capital, surplus. and undivided profits aggregating more than $1,000,000, engaged in whole or in part in commerce, other than common carriers subject to the act to regulate commerce, approved February fourth, eighteen hundred and eighty-seven, if such corporations are or shall have been theretofore, by virtue of their business and location of operation, competitors, so that an elimination of competition by agreement between them would constitute a violation of any of the provisions of any of the antitrust laws. The eligibility of a director under the foregoing provision shall be determined by the aggregate amount of the capital, surplus, and undivided profits, exclusive of dividends declared but not paid to stockholders, at the end of the fiscal year of said corporation next preceding the election of directors, and when a director has been elected in accordance with the provisions of this act it shall be lawful for him to continue as such for one year thereafter.

"That any person who shall violate any of the provisions of this section shall be guilty of a misdemeanor and shall be punished by a fine of $100 a day for each day of the continuance of such violation, or by imprisonment for such period as the court may designate, not exceeding one year, or by both, in the discretion of the court."

porations remained unchanged. The Senate Judiciary Committee's amendment to section 9 substituted entirely new matter in reference to interlocks relative to common carriers.

In lieu of the absolute prohibitions against interlocks between common carriers and their suppliers of equipment, materials, supplies, construction or maintenance services, or security underwriting services, the Senate Judiciary Committee substituted a size test that limited the prohibitions to contracts that amounted to more than $50,000 in any 1 year, and added provisions that would permit such interlocks provided there was compliance with specified standards for publicity and competitive bidding under the supervision of the Interstate Commerce Commission. The Senate Judiciary Committee believed that absolute prohibitions, in the event of emergencies, could be injurious to the public. In this regard, the committee's report stated:

* The prime object of this provision is to prevent common or interlocking directors in corporations which occupy the relations to each other which are thus described; and is mainly intended to arrest the practice of the same persons occupying conflicting and incompatible relations in the corporate dealings of common carriers, often being practically both seller and purchaser, lessor and lessee and trustee and beneficiary of the trust. While this evil is fully appreciated, the committee nevertheless recognize that, especially in the case of railroads, emergencies may arise when absolutely prohibitory law against such dealings would be most injurious to the public. In the case of railroads calamities of fire and flood might make it necessary in the shortest possible time and to a certain extent regardless of lesser consequences to replace engines, cars and bridges ***.11

The Senate Judiciary Committee's amendment also struck out the entire provision relative to interlocking directorates that involved banks and trust companies. The committee thought such prohibitions were more appropriately made by amendment to the banking laws

and not the commerce acts.

Finally, the Senate Judiciary Committee deleted the penalties of a fine of $100 per day, or imprisonment up to 1 year, that had been in the House version. Civil enforcement actions by the ICC and FTC were substituted. Interlocking directorates that involved common carriers, however, continued subject to a penalty provision which was increased to a $25,000 fine and up to 2 years imprisonment."

11 S. Rept. 698, 63d Cong., 2d sess., July 22, 1914, p. 47.

12 Sec. 9 of H.R. 15657 as reported by the Senate committee is as follows: "SEC. 9. [That from and after two years from the date of the approval of this Act no person who is engaged as an individual, or who is a member of a partnership, or is a director or other officer of a corporation that is engaged in the business, in whole or in part, of producing or selling equipment, materials, or supplies to, or in the construction or maintenance of, railroads or other common carriers engaged in commerce, shall act as a director or other officer or employee of any other corporation or common carrier engaged in commerce to which he, or such partnership or corporation, sells or leases, directly or indirectly, equipment, materials, or supplies, or for which he or such partnership or corporation, directly or indirectly, engages in the work of construction or maintenance; and after the expiration of said period no person who is engaged as an individual or who is a member of a partnership or is a director or other officer of a corporation which is engaged in the conduct of a bank or trust company shall act as a director or other officer or employee of any such common carrier for which he or such partnership or bank or trust company acts, either separately or in connection with others, as agent for or underwriter of the sale or disposal by such common carrier of issues or parts of issues of its securities, or from which he or such partnership or bank or trust company purchases, either separately or in connection with others, issues or parts of issues of securities of such common carriers.] After two years from the approval of this Act no common carrier engaged in commerce having upon its board of directors or as its president, manager, or purchasing officer or agent any person who is at the same time an officer, director, manager, or general agent of, or who has any direct or indirect interest in, another corporation, firm, partnership or association, with which latter corporation, firm, partnership or association or with such person such common carrier shall make purchases of supplies or articles of commerce or have any dealings in securities, railroad supplies or other articles of commerce or contracts for construction or maintenance of any kind with any such corporation, firm,