Holding Company

views updated Jun 11 2018


HOLDING COMPANY. A holding company is characterized by its ownership of securities (generally common stock) of other companies for the purpose of influencing the management of those subsidiary companies, rather than for investment or other purposes.

Some holding companies, often called "pure" holding companies, confine their operations to owning and managing other firms, whereas other holding companies are themselves operating companies. This distinction was formerly of greater significance than it is now, because—until the passage of the first limiting legislation in the 1930s—pure holding companies that controlled operating companies in several regulated industries, including banking and public utilities, were free of state and federal regulations imposed on operating companies. Through acquisition of separate firms, holding companies could enter activities and geographical areas barred to regulated operating companies. Many loopholes in regulations governing these industries were closed by the Public Utility Holding Company Act of 1935 and the Bank Holding Company Act of 1956.

The holding company emerged as a common form of business organization around 1900, some decades after its first use in railroads (1853) and communications (1832). The earliest holding companies had charters granted by special acts of state legislature that explicitly permitted them to control stock of other corporations; the courts in most states usually ruled that this power had to be granted by explicit legislative enactment. However, a few early general incorporation acts did provide for charters granting such powers. Nevertheless, the widespread use of holding companies followed, especially upon liberalization of general incorporation acts by New Jersey and several other states starting in 1889. This development suggests that the wide use of charters in New Jersey and, later, in Delaware stemmed from other factors, including favorable tax treatment and the financial, technological, and marketing demands and opportunities of large-scale business.

The holding company, depending upon circumstances, offers financial, administrative, and legal advantages over other forms of business organization. It usually has better access to securities markets than do the member operating companies individually, making it easier to secure the capital necessary to conduct large-scale operations. It permits a combination of firms with control of a smaller portion of voting stock than is necessary for a merger of those firms. (One objection to the holding company, however, is the sometimes meager protection it provides to the rights of minority stockholders.) It affords a convenient method of centralizing control of the policies of different businesses while leaving control of their operations decentralized. Pyramiding—the use of a number of holding companies placed on top of each other—especially when combined with a heavy reliance on borrowed funds at each level, permits business organizers to acquire control of a large volume of assets with relatively little investment. Separate incorporation of properties located in different states or engaged in different activities often simplifies the holding company's accounting, taxation, and legal problems and may free the holding company of legal restrictions to which it might otherwise be subject.

As business organizers moved to exploit these advantages toward the turn of the twentieth century, the holding company device became the dominant form of large-scale business organization. Long used in the railroad industry, it was extended there, notably with formation of the Northern Securities Company in 1901. The formation, also in 1901, of United States Steel—then called the "world's greatest corporation"—signaled the adoption of holding company organizations in mining and manufacturing. Somewhat later, extensive holding-company systems were formed in banking and finance and in public utilities. Many of the latter were noted for their extensive pyramiding and their combination of diverse, widely scattered holdings.

Under attack from the beginning, holding companies have remained controversial and the subject of continuing demands for public control. Those formed around the turn of the twentieth century were enveloped from birth in the antitrust agitation of the period. The public utility holding companies of the 1920s were likewise attacked as monopolistic. The attack on them, which gained intensity and focus with the failure of a number of the systems in the early 1930s, led to the passage in 1935 of the Public Utility Holding Company Act. Corporations controlling two or more banks were brought under federal control in 1956. Attention in the 1960s and early 1970s shifted to the conglomerate (the highly diversified holding company), and to the financial congeneric (the bank-centered one-bank holding company, which limited its operations to banking and other closely related financial services). Both were subjected to a measure of federal control in the early 1970s: the Justice Department initiated a number of antitrust suits to block some acquisitions of the former, and Congress, in 1970, amended the Bank Holding Company Act of 1956 to circumscribe activities of the latter.

In the late twentieth century, federal regulators continued to scrutinize anticompetitive or monopolistic acquisitions, especially in the media and telecommunications industry. In the year 2000 alone, the government blocked a potential merger between American Telephone and Telegraph (AT&T) and the media giant Time Warner, and another proposed merger between long-distance telephone providers WorldCom and Sprint.


Berle, Adolf A., Jr., and Gardiner C. Means. Modern Corporation and Private Property. New Brunswick, N.J.: Transaction Publishers, 1991.

Chandler, Alfred D., Jr. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass.: Harvard University Press, 1977.

Means, Gardiner C. The Corporate Revolution in America: Economic Reality versus Economic Theory. New York: Crowell-Collier Press, 1962.

Wm. PaulSmith/t. g.

See alsoAntitrust Laws ; AT&T Divestiture ; Conglomerates ; Corporations ; Leveraged Buyouts ; Mergers and Acquisitions ; Monopoly ; Restraint of Trade ; Trusts .

Holding Company

views updated Jun 27 2018


A corporation that limits its business to the ownership of stock in and the supervision of management of other corporations.

A holding company is organized specifically to hold the stock of other companies and ordinarily owns such a dominant interest in the other company or companies that it can dictate policy. Holding companies must comply with the federal antitrust laws that proscribe the secret and total acquisition of the stock of one corporation by another, since this would lessen competition and create a monopoly.

holding company

views updated May 18 2018

hold·ing com·pa·ny • n. a company created to buy and possess the shares of other companies, which it then controls.