Thereupon ensued the "raid" of the Union Pacific or Harriman interests on the Northern Pacific shares, culminating in the memorable panic of May 9, 1901. They succeeded in acquiring a majority of the total capital stock of the Northern Pacific Company, but fortunately for the Hill-Morgan interests nearly one-half of this stock belonged to the preferred class and was subject to retirement at any moment before January 1, 1917. It was the mistake of the Union Pacific interests in buying preferred instead of common stock that saved the Hill-Morgan interests from losing control of the Northern Pacific. The retirement of the preferred stock and the purchase of additional shares of common by Messrs. Hill and Morgan still left them in possession of a small majority of the shares. But there was always the danger that this majority might be converted into a minority at any moment by changes of ownership resulting from the death or weakening of the allegiance of friendly shareholders. The effect of the acquisition of a majority of the shares of the Northern Pacific by the Union Pacific interests, Mr. Hill asserted, would be to put its control practically in the hands of those who were hostile to its growth and development and destroy its value. The interests of the Great Northern shareholders, he asserted, would be similarly affected." To prevent the possibility of such a contingency in the future and to protect the Northern Pacific Company from the recurrence of future "raids," it was determined by Mr. Hill, Mr. Morgan and their associates to form a holding corporation to which should be transferred in full ownership the shares of the Northern Pacific Company held by Mr. Morgan and his associates as well as those held by Mr. Hill and his friends in the Great Northern. This would give the proposed company a majority of the Northern Pacific shares, but less than one-third of those of the Great Northern. 12 To use Mr. Morgan's language: "What I wanted to accomplish was to put that stock where it would be protected." It was first proposed to organize the holding company as a Minnesota corpora tion provided a territorial charter could be found which was beyond the power of legislative amendment, but a diligent search failed to find such an one. 13 Organization under the general laws of 11 Mr. Hill's testimony, p. 694. 12 Mr. Morgan's testimony Record, p. 344. the State of Minnesota was not favored because of the double liability imposed on shareholders and the general unfriendliness of the State towards corporations. After an examination of the laws of West Virginia, New York, and New Jersey, the latter State was selected "principally because its incorporation laws were of earlier date and had been more thoroughly construed than those of other States." 9914 On November 13, 1901, the projected company was incorporated under the name of the Northern Securities Company. It was agreed that its shares should be given in exchange for Northern Pacific shares on the basis of $115 per share and for Great Northern stock on the basis of $180 per share, the price in both cases being somewhat less than the market value, a fact which is not without significance. The original plan was to capitalize the concern at an amount only sufficient to acquire a majority of the Northern Pacific stock and the holdings of Mr. Hill and his friends in the Great Northern which amounted to less than one-third of the total. Subsequently the scheme was enlarged so as to give all the shareholders an opportunity to sell their stock to the new company, not for the purpose, it was asserted, of acquiring a majority of the Great Northern stock, but to give all the shareholders the same opportunities that were given to Mr. Hill's friends. The capital stock of the Northern Securities Company was, therefore, fixed at $400,000,000, the estimated amount necessary to take over at the exchange valuation agreed upon the entire capital stock of the Great Northern and Northern Pacific companies. Shortly after the organization of the company a considerable number of the "outside" holders of Great Northern stock upon the advice of Mr. Hill that they could do so with profit and advantage to themselves, accepted the offer of the Northern Securities Com pany and sold their holdings on the basis mentioned above.15 The result was that within a month after the organization of the Northern Securities Company it had acquired about 76 per cent. of the entire capital stock of the Great Northern Railroad. A few weeks later the Union Pacific holders of Northern Pacific stock seeing that they were outdone sold their stock to Mr. Morgan, receiving pay partly in cash and partly in Northern Securities stock, as a result 14 Mr. Young's brief, p. 69; Mr. Grover s brief, p. 46. 15 Brief for the United States, p. 46; also Mr. Hill's letter: Record, p. 703. of which the Northern Securities Company came into possession of about 96 per cent. of all the shares of the Northern Pacific. The effect was to place the control of the two roads in the hands of a single corporation, the Northern Securities Company, and to substitute in the place of two distinct sets of stockholders with rival and competing interests, one set of stockholders with common interests, or, to use the language of the Court, "the stockholders of the two competing companies disappeared, as such, for the moment, but immediately reappeared as stockholders of the holding company which was hereafter to guard the interests of both sets of stockholders as a unit." II. THE SECURITIES COMPANY IN COURT. Soon after the full import of the organization became known a conference of Governors and Attorneys-General representing the States directly affected was held, upon the suggestion of the Governor of Minnesota, at Helena (December 30) and it was decided that the State of Minnesota should bring suit under the Sherman Act against the Securities Company in the United States Supreme Court. Permission, however, to file a bill for this purpose was denied. The State of Minnesota then instituted proceedings in its own courts; the case was transferred to the United States Circuit Court and eventually carried to the Supreme Court, when a decision was rendered April 11, 1904, against the State on a ground of jurisdiction. But the suit that was destined to result in the undoing of the Securities Company was that instituted on March 10, 1902, on behalf of the United States, in the Federal Circuit Court for the District of Minnesota. The case was heard before the four judges of the Eighth Circuit in accordance with the Act of February 11, 1903, for expediting the hearing of anti-trust cases, which provides that such cases shall be heard before not less than three Circuit Judges of the Circuit in which the suit is brought and that appeals from them shall lie directly to the Supreme Court. On April 9, 1903, a unanimous decision was rendered holding that the acquisition by the Northern Securities Company of a majority of the Stock of the Northern Pacific and Great Northern roads was a combination or conspiracy in restraint of trade among the States, and a decrce was issued prohibiting the company from acquiring further stock of the two roads, from voting stock already acquired, from receiving dividends thereon, and from exercising any control over either road. The defendant railroads were enjoined from permitting their stock to be voted to the Northern Securities Company or paying dividends to the Northern Securities Company. Subsequently one of the judges suspended that part of the decree which forbade the payment of dividends, pending an appeal to the Supreme Court, to which the case was now carried. The several lines of argument upon which the defendants relied may be roughly grouped as follows: First, the acquisition by the Northern Securities Company of a majority of the shares of the two defendant railroad companies was not a "contract, combination or conspiracy" in restraint of trade or commerce among the States nor a "monopoly" of such trade but simply a contract of purchase and sale in no way connected with interstate trade or commerce. An agreement among competing lines to fix rates as in the Trans-Missouri case, or an agreement among manufacturing concerns not to compete among themselves for the sale of their products, as in the Addyston Pipe case, were true contracts in restraint of trade, but only by the wildest stretch of the imagination, they contended, could an agreement to acquire property be placed in the same category. Nor could it be said that there was any monopoly even though it were granted that the purpose of the "merger" was to suppress competition, since monopoly involves the idea of the exciusion of other supply. There could be no monopoly unless all the existing roads were acquired by the Securities Company and the building of others was forbidden. Second, there was no evidence of intention upon the part of the defendants to restrain or monopolize trade among the States as charged by the Government. The underlying motive, they asserted, was not to suppress competition, but to protect from the hostility of an enemy an arrangement designed to create and extend commerce both among the States and with foreign countries. In support of this proposition it was shown that the lumber business had been enormously developed, that a large trade in cotton and steel products with the Orient had been created and that transportation rates had been considerably reduced-so much so that a loss of $1,000,000 in net earnings had resulted. It was, for example, shown that flour was being transported from points in the Mississippi Valley to China, a distance of nearly 8,000 miles, at the rate of 80 cents per barrel, while the rate to New York from the same points, distances less than 1,500 miles, was fifty-five cents per barrel.16 The problem of return freights had been solved and a large coal traffic between Illinois. and the States traversed by the Great Northern and Northern Pacific lines had been developed, the result of which was to relieve the inhabitants of this region of dependence upon the distant mines of Pennsylvania. In short, from whatever point of view it was considered only results of the highest benefit to the public at large had followed the "merger" and although this did not prove the absence of criminal intent, it constituted a very strong presumption against such intent. The defendants insisted that if the mere act of acquiring the stock of the two roads itself constituted restraint the presence or absence of evil intent was immaterial, but if it did not and this seemed self-evident, and if such acquisition had not resulted in restraint and the contrary was conclusively proven by the defendants and was not denied by the government, then the existence of criminal intent was necessary to constitute an offense. The government took the position that both questions were immaterial and the Court sustained the contention. To the allegation of the government that the Securities Company had been able to acquire a majority of the shares of the Great Northern (Mr. Hill and his friends owned but twenty-seven per cent. of the total) only by the "advice, procurement and persuasion" of Mr. Hill, the defendants replied in effect that the Company never contemplated taking over any of the Great Northern stock except that owned by Mr. Hill and his friends, and in fact would have preferred not to admit "outsiders," but not wishing to expose themselves to criticism it was decided to allow them to exchange their shares for Northern Securities stock if they wished. Being applied to for advice Mr. Hill prepared a circular to be sent only to those inaking inquiries, stating that in his opinion the Northern Securities offer could be accepted with profit and advantage. 17 Further than this there was no "advice, procurement or persuasion.” Third, the Northern Securities Company did not possess the 16 Mr. Johnson's brief, pp. 13-16; see also Mr. Grover's brief, pp. 105-109; Mr. Hill's. testimony: Record, pp. 677-737; Mr. Young's brief, pp. 29-41. |