Guy A. (Guy Atwood) Thompson.

Business trusts as substitutes for business corporations : a paper read before the Kansas City Bar association, April 10, 1920 online

. (page 1 of 7)
Online LibraryGuy A. (Guy Atwood) ThompsonBusiness trusts as substitutes for business corporations : a paper read before the Kansas City Bar association, April 10, 1920 → online text (page 1 of 7)
Font size
QR-code for this ebook

Business Trusts

^^m as Substitutes for

Business Corporations








Business Trusts

as Substitutes for

Business Corporations

A paper read before the Kansas
City Bar Association, April 10, 1920













Coyyrigrht, 1920
All rights reserved


Something more than a year ago it became necessary for me,
in the discharge of my professional duties, to consider the
proposed employment of the express trust as a vehicle of trade.
Interest thus aroused has since led me to read as widely on the
subject as opportunity permitted. I learned that the atten-
tion of lawyers generally was being directed to this subject.
Accordingly when, recently, I accepted an invitation to ad-
dress the Bar Association of Kansas City, no subject seemed
to be more opportune for discussion certainly none, appro-
priate for such an occasion, in which I personally felt a keener
interest. The subjoined production was the result. There was
no thought of publication in its preparation, but merely,
within the necessarily restricted limits of such a paper, to se-
lect for discussion those phases of the subject which seemed
both interesting and fundamental. Since its delivery, mem-
bers of the Bar, whose judgment I value, have advised that it
be published, and so numerous are the requests received for
copies that I have consented to its publication. I have done
this with some hesitation, for it is not, and in the nature of
things could not have been, a comprehensive treatise. On the
contrary, many of the important aspects of the subject were
of necessity eliminated from consideration. Such, for exam-
ple, as the duties of the trustees, their right of indemnity,
their liability to the cestuis, action by and against the trus-
tees, theory and extent of creditors' rights against the trus-
tees and against the trust estate, inviolability of the trust
fund, seeking direction of the Chancellor, etc. With this
foreword of explanation I submit the pages that follow in the
hope that they may be of interest and possibly of service to
my brethren of the Bar.

St. Louis, Mo., May 1, 1920.




1. Its Rapid Growth.

2. Reasons for Delay in Development

3. Its Accomplishments.

4. Reasons Therefor.

5. Growing Dissatisfaction With the Corporation as Business


6. Its Disadvantages.

7. Is There a Satisfactory Substitute.


8. Origin and Development of the Express Trust.

9. The Proposed Business Trust.

10. Its Legality.

11. May the State Forbid It.

12. Will Quo Warranto Lie Against It?

a. For Usurping the Privileges of a Corporation.

b. For Usurping the Franchise of a Corporation.

c. For Violating Constitution.

13. Does It Afford Limited Liability.

a. As to the Cestuis Que Trust, or Shareholders.

b. As to the Trustees.

14. Advantages Over the Corporation.

a. Prejudice.

b. Migratory Rights.

c. Inquisitorial Legislation.

d. Taxation.

15. Its Disadvantages Considered.

a. Its Novelty and Consequent Uncertainty of Its Status.

b. Possible Legislation.

c. Nature of Cestuis' Interest and Extent of Rights They May


d. Perpetuities.

16. Conclusions.


Forms for Trust Declarations.
Forms for Trust Certificates.


1. Its Rapid Growth: The most remarkable
fact of all commercial history is the business corpora-
tion. Remarkable not only because of the economic
and social part it has played, but remarkable also be-
cause of the rapidity and magnitude of its growth.
With approximate accuracy it may be said that the
business corporation is the product of the past seventy

As late as 1775, so eminent an authority as Adam
Smith wrote: "The only trades which it seems pos-
sible for a joint stock company to carry on success-
fully without an exclusive privilege are those of which
all the operations are capable of being reduced to what
is called a routine, or to such a uniformity of method
as admits of little or no variation. Of this kind is,
first, the banking trade; secondly, the trade of insur-
ance from fire, and from sea risk and capture in time
of war; thirdly, the trade of making and maintaining
a navigable cut or canal; and, fourthly, the similar
trade of bringing water for the supply of a great
city." 1

There is authoritative warrant for the statement
that up to the year 1800 there were not to exceed one
hundred private corporations in the entire United
States, that one-half of these were in Massachusetts

i Wealth of Nations, Vol. 2, Book 5, Part 2, p. 242.


and that the enterprises carried on by them were
banking, turnpike roads, toll bridges, canals, and, to a
very limited extent, manufacturing. 2

Giving attention to our own State of Missouri, it
may be noted that during our territorial days but two
private corporations were created and both of those
were banks, namely: The Bank of St. Louis in 1813
and the Bank of Missouri in 1817. From Missouri's
admission to the sisterhood of States in 1821, to the
year 1850, while a number of academies, colleges and
seminaries, turnpike road, insurance and railroad
companies, and a few bridge and bank companies were
incorporated, yet it is unlikely that more than fifty
companies were granted charters which now would
incorporate under the manufacturing and business

The first English text upon corporations, Kyd, was
published in 1793 and dealt exclusively with municipal
corporations. The first American text, that of Angel
and Ames, appeared in 1831, and gave scant treatment
to business corporations. Indeed, it may be said that
corporate literature and the business corporation as
it exists today virtually begin with the year 1850.

And yet in 1918 there were in the United States at
least 350,000 business corporations with gross incomes
of $79,500,000,000, net incomes of $10,730,000,000, pay-
ing to the Federal Government alone in income taxes
for the year 1917, $2,142,000,000. 3

2. Reasons for Delay in Development: Without
doubt their growth was retarded until this late date
first because of the difficulty and expense attendant

2 Williston, Law of Business Corporations, 2 H. L. R. 105, 149.
s Statistics of Income, Treas. Dept. 1919.


upon the securing of corporate charters and, second-
ly, because the necessities of commerce were served
with measurable adequacy by the ordinary partner-
ship, and quasi-partnership, the joint stock company.

In England only the Crown and the Parliament
could grant corporate charters and not until 1862 was
the English Company's act adopted, 4 called by Sir
Francis Palmer, the "Magna Charter of Co-operative
Enterprises." In our country it was necessary to ob-
tain corporate charters by special acts of the legisla-
tures. Excepting perhaps a half dozen states, we find
no general incorporation acts till toward the middle of
the last century. 5 In Missouri the first general cor-
poration act for business companies was enacted in
1849, 6 and not until 1865 was the creation of corpora-
tions by special acts of the legislatures prohibited by
constitutional provision. 7

During the early part of the last century the field of
commercial enterprise was held by the ordinary part-
nership practically alone. But, the increase in popula-
tion, the constantly growing settlements by the pio-
neers of new territory, the discovery of vast natural re-
sources, the multiplication and complexity of human
needs and wants, the progress of inventions and par-
ticularly the advent of steam, proved that the partner-
ship was an agency utterly inadequate to commercial
necessities. It was inadequate chiefly because of the
unlimited liability of its members, for this made it im-

* 25 and 26 Viet. C. 89.

5 First general incorporation acts for manufacturing companies
were N. Y. 1811, Mass. 1836, Mich, and Conn. 1837, and Ind. 1838.

6 Laws 1849, page 18; Laws 1864, page 20; R. S. 1865, Chapter 39,

i Art. VIII, Sec. 4.


possible to mobilize necessary capital. The result was
that corporations began to increase ; and when the re-
straint that was imposed upon their formation was re-
moved by the enactment of general corporation acts
under which they might be readily organized at little
expense, they quickly crowded the partnership from
the field and started upon that career which is the out-
standing feature of commercial history.

3. Accomplishments: Neither has the rapidity
of their growth exceeded the importance of their ac-
complishments, for, without forgetting, or in any de-
gree minimizing or palliating, the gross frauds, the
heavy oppressions, and the black iniquities that have
been, and are today being, perpetrated under the cor-
porate cloak, it must be conceded by all that the busi-
ness corporation has been also of immeasurable bene-
fit to mankind. It has played an important, if not an
indispensable, part in the development and progress
of our country and the world. It has afforded the
means for experiments essential to the development
of our arts and sciences. It has fostered our indus-
tries, cultivated our deserts, brought from their hid-
ing places the stored-up treasures of nature, harnessed
the very elements to the service of mankind, bridged
our rivers, tunneled our mountains, constructed our
railroads and, while linking our states in closer unity,
has brought the nations of the earth together.

4. Reasons : Without doubt this monopolization
by the corporation of the field of commercial endeavor,
has been due to the limited liability of the investor or
stockholder, for it was this assurance that made it pos-
sible to mobilize capital in projected business enter-


prises. In this connection it is interesting to recall
that we have come far away from the original concep-
tion of the chief value of the corporation. Since the
municipal, the ecclesiastical, the educational and the
charitable corporation preceded the regulated com-
pany and the joint-stock company, its immortality was
emphasized as the chief and most valuable attribute of
corporate existence. Indeed, as late as 1819, it would
seem to be this characteristic that was chiefly empha-
sized by our great Chief Justice in his famous defini-
tion in the Dartmouth College case. 8 With the advent
of private corporations, it was the right of associa-
tion, governmental powers and trading privileges that
were chiefly desired and that were granted. Though
early decided that the stockholder was not personally
liable for the debts of the corporation, yet the corpora-
tion, through leviations, could compel him to pay the
sums assessed. Later this power was avoided by con-
tract between the stockholder and the company; but
until and unless it was so avoided, the creditor might
enforce it in chancery through a kind of subrogation. 9
The artificial personality gradually came to be empha-
sized, and from that fiction was developed what proved
to be the attribute of chief value, namely: the limited
liability of the stockholder ; for, the theory is that since
the corporation is an artificial person entirely distinct
from those who have formed it, its debts and obliga-
tions are those of this artificial person and not of its

5. Growing Dissatisfaction: And yet, though
its growth has been marvelous and its accomplish-

4 1 Wheat. 518.

Salmon v. The Hamborough Co. (1671), 1 Ch. Cas. 204.


ments great, is there not now perceptible an increas-
ing dissatisfaction with the corporation as a business
agency! Can it be that the very fiction, viz.: imper-
sonal, artificial entity distinct from the persons com-
posing it, which has given such value to the corporate
form, is now being laid hold of to cripple its useful-
ness? Why are business men, in increasing numbers,
asking for another device, some other vehicle or
agency of trade, that will serve the needs of commerce
and be free from oppressive exactions?

6. Disadvantages: That there are corporate
disadvantages must be conceded. Prejudice is one of
them. It is reflected daily in our courts, in the ver-
dicts of juries, while our legislatures too frequently
respond to it.

Again, the corporation being an artificial person,
existing only in contemplation of law and by force of
law, can have no legal existence beyond the boundaries
of the sovereignty which created it. "It must dwell
in the place of its creation and can not migrate to an-
other sovereignty." 10 It is not a citizen within the
meaning of Article 4, Section 2 of the Constitution of
the United States, providing that * * the citizens of each
state shall be entitled to all privileges and immunities
of citizens in the several states." 11 It follows that it
may do business in another state only by comity, and
that the other state may prescribe such conditions as
it will (not discriminatory) upon the right of the for-
eign corporation to transact business within its bor-
ders. The consequent cost and inconvenience are

10 Bank of Augusta v. Earl, 38 U. S. (13 Peters) 519.

11 Paul v. Virginia, 8 Wall. 178.


harassing and burdensome to the corporation that
transacts business in several states.

Constantly changing legislation and the necessarily
attendant uncertainty are additional impediments, for
there is no assurance whatever that the law of today
with respect to corporate rights will remain as the law
of tomorrow.

Inquisatorial legislation and the state's visitorial
powers, finding expression in the necessity of making
multitudinous reports, and of submitting to examina-
tions by state authorities, are also disagreeable fea-
tures of corporate existence.

Above all, perhaps, taxation presents the most for-
midable objection to corporate life, for it seems that
we have entered upon a new economic era, in which
revenue in large part is to be collected from the public
indirectly through corporate levies.

7. Is There a Substitute: Is there any arrange-
ment men may make, any form of agreement they may
enter into under which they may serve the require-
ments of commerce and trade as satisfactorily as does
the corporation? The ordinary partnership will not
answer. Its necessarily limited resources and the un-
limited liability of its members have already proven
this. The limited partnership is no more satisfactory
since it is rendered impracticable by statutory require-
ments. Neither will we find our answer in the quasi-
partnership, the joint-stock company, for, while it af-
fords advantages not found in the ordinary partner-
ship, still it contains the very element of the ordinary
partnership that causes its rejection, namely: the un-
limited liability of its stockholders.


The vehicle for which we seek, therefore, must, as its
essential characteristic, afford limited liability to the
investor; for, unless it is possible for men to con-
tribute to a business enterprise without thereby endan-
gering their entire private fortunes, it will be futile
to attempt the mobilization of capital in amounts suffi-
cient to transact any considerable part of the busi-
ness of the country.



8. Origin and Development: Whether derived
from the Roman fidei-commissa, 12 or, as Mr. Justice
Holmes concludes, from the Grennan law, 14 all
students of the law will agree with Professor
Maitland that "Of all the exploits of equity
the largest and most important is the invention
and development of the Trust It is an institute of
great elasticity and generality; as elastic, as general
as contract." 15 A remarkable tribute this to an insti-
tution the parents of which were Fraud and Fear,
and whose nurse was a Court of Conscience; 16 for it
should be remembered that in its youthful days the
trust or use, if not devised, was still employed by the
debtor to avoid his creditor, by the freeholder to be
relieved from the feudal burdens he owed his lord, and
by the ecclessiastic to avoid the mortmain statutes. 17
It was also laid hold of during the wars of York and
Lancaster to prevent forfeitures of estates for trea-
son. 18 Later, with the increase in property, the multi-
plication of investments and the increasing complexity
in financial affairs, it reached its maturity and was
used in the making of marriage and family settlements
and settlements upon charities. It is of the express

12 Spence Equitable Juris, Vol. 1, p. 435.
i* Early English Equity, 1 L. Quarterly Rev. 162.
is Lectures on Equity, p. 23.

le Sir Robert Atkyns in argument, Attorney General v. Sands,
Hard. 491.

"Lewin, Trusts (12th Ed.) 1.
is perry, Trusts (6th Ed.), Sec. 3.


trust so employed we are accustomed to think, and
with which we are the most familiar.

9. The Proposed Business Trust: Now it is
urged by members of our profession who, to a serious
consideration of the subject, have brought wide re-
search and a wealth of learning, that this 'institute of
great elasticity and generality, as elastic, as general
as contract,' may be utilized in the field of commerce
and trade as an effective substitute for the ordinary
private business corporation. 19 Its use, as they sug-
gest, closely resembles in form the incorporated com-
pany. It is created by the execution of a declaration
of trust, usually by three or more trustees, to whom
there has been, or will presently be, transferred or
paid the property or money to constitute the corpus
of the trust. It recites: (1) the property to constitute
the corpus of the trust and that the corpus shall be by
the trustees managed and disposed of for the benefit
of the holders from time to time of the transferable
certificates of shares, or beneficial interest, issued and
to be issued by the trustee thereunder; (2) if desired,
the number of shares or of beneficial interests that
may be issued; their character, whether common or
preferred, or both (for both may be issued) ; and
the nominal or par value if they are to have an
expressed par value; (3) the business to be conducted
by the trustees and an elaborate recitation of the pow-

18 S. R. Wrightington, of the Boston Bar, see his "Unincorporated
Associations;" John H. Sears, formerly of the St. Louis and now of
the New York Bar, see his "Trust Estates As Business Companies;"
Alfred D. Chandler, of the Boston Bar, see his "Express Trusts Under
the Common Law;" and Prof. H. L. Wilgus, see his "Corporations
and Express Trusts as Business Organizations," 13 Mich. L. Rev. 70,


ers they may exercise in its prosecution and in the man-
agement of the corpus; (4) usually a clause providing
that creditors shall look only to the funds and prop-
erty of the trust for payment, and requiring the trus-
tees to incorporate in their contracts a provision to
this effect; (5) that the shareholders shall have no
title to the trust property but only the right at the
termination of the trust to share pro rata in the pro-
ceeds of the sale of the property thereof, and mean-
while to income, which shall be distributed when and
as provided therein; and that the death of a share-
holder shall not operate to terminate the trust or en-
title his legal representative to an accounting; (6) gen-
erally a name and provision for the adoption of a
seal; (7) the trustees' compensation and the manner
and time of choosing trustees and filling vacancies;
(8) the extreme limit of time during which the trust
may continue, usually not more than twenty-one years
after the death of the last surviving original trustee.
Such other provisions as appear appropriate and de-
sirable may, of course, be added. Thus the corpus of
the trust corresponds to the capital of the incorporated
company, the trustees to the Board of Directors, the
beneficiaries or cestuis que trust to the stockholders,
and the beneficial interests or shares to the corpora-
tion's shares of stock.

10. Its Legality Considered: We purpose to
consider this proposal solely from the standpoint of
the investor.

The comparative novelty of this employment of the
express trust, at once excites inquiry as to its legality.
Equity has long since established the principle that all
persons sui juris have the same power to create trusts


that they have to make a disposition of their property ;
* ' that every one competent to enter into a contract, or
to make a will, or to deal with the legal title to prop-
erty, may make such disposition of it as he pleases;
and he may annex such conditions and limitations to
the enjoyment of it as he sees fit; and he may vest it
in trustees for the purpose of carrying out his inten-
tion." 20 Or, as said by Lewin: 21 "It may be laid
down as a general rule that whoever is competent to
deal with the legal estate may, if he so disposes, vest
it in a trustee for the purpose of executing the settlor's
intentions." While not customary, it has not been un-
usual for a testator in his will to designate that a
trustee therein appointed shall, for a limited time,
carry on the business of a partnership of which testa-
tor was a member, and it must be conceded that no
legal objection has been found to this use of the trust. 22
Again, since a settlor may convey property to a trus-
tee in trust for himself and others 23 there would seem
to be no legal objection to the business trust upon the
ground that the beneficiaries thereof are themselves
the settlors. It has been judicially determined by two
notable decisions, one in England and one in North
Dakota, that a business trust created by a debtor with
himself and his creditors as cestms que trust is a valid
arrangement which equity will recognize and enforce. 2 *

20 Perry, Trusts, 6th Ed., Sec. 13.

21 Trusts, 12th Ed., Chap. 3, Sec. 1.

22Burwell v. Mandeville's Executor, 43 U. S. (2 How.) 506; Smith
v. Ayer, 101 U. S. 320; Ex parte Richardson, 3 Maddocks, Ch. 79.

23 in re Est. of foulard, 141 Mo. 642 ; Mcllvaine v. Smith, 42 Mo.
45; Lampert v. Haydel, 96 Mo. 439.

24 Cox v. Hickman, 9 C. B. (N. C.) 47; Wells-Stone Mercantile
Co. v. Grover, 7 N. Dak. 460.


As long ago as 1880, in Smith v. Anderson, 25 which is
without doubt the leading English case upon this sub-
ject, the court of Chancery gave judicial recognition
and approval to a trust of the character we are now dis-
cussing. For at least the past thirty-five years, in the
State of Massachusetts, the business trust has been a
recognized institution of great utility. 26 In at least
three decisions by the Supreme Court of the United
States, presently to be noticed, it has received judicial
recognition. Likewise in other cases here and there
(only a few it is true) the courts have approved

Therefore, it may be fairly concluded that weapons
of attack have not as yet been used to destroy the
legality of the business trust. However, every inno-
vation to serve commercial needs has met with opposi-
tion. Indeed, this was true of the corporation, and it
is reasonable to assume that the express trust as an
agency of trade, if it shall be increasingly used, will
be subjected to the closest legal scrutiny and that ob-
jections to it not yet considered will be found.

Recently the Attorney General of the State of Ohio,

25 15 Ch. D. 247 ; see also Crowther v. Thorley, 50 L. T. 43 ; In re
Siddall, 54 L. J. Ch. 682; In re Thomas, 54 L. J. Q. B. 336; In re
Faure Electric Ace. Co., 40 Ch. Div. 141, 151, 152.

26Hoadley v. County Comrs., 105 Mass. 519; Whitman v. Porter,
107 Mass. 522; Shoe & Leather Co. v. Dix, 123 Mass. 148; Gleason v.
McKay, 134 Mass. 419; Phillips v. Blatchord, 137 Mass. 519; Ricker
v. American Loan and Trust Company, 140 Mass. 346; Mayo v.
Moritz, 151 Mass. 481; Hussey v. Arnold, 185 Mass. 202; Wil-
liams v. Boston, 208 Mass. 497; Williams v. Johnson, 208 Mass. 544;
Williams v. Milton, 215 Mass. 1; Frost v. Thompson, 219 Mass. 361;
Rand v. Farquhar, 226 Mass. 91; Dana v. Treas. and Recr. Genl., 227
Mass. 562; Cunningham v. Bright, 228 Mass. 385; Priestley v. Treas.

1 3 4 5 6 7

Online LibraryGuy A. (Guy Atwood) ThompsonBusiness trusts as substitutes for business corporations : a paper read before the Kansas City Bar association, April 10, 1920 → online text (page 1 of 7)