oU'. *5u /^QG) 
 
 3ui"ep.u of i\{;.-- .^.-. v,iral i^: -S 
 
 Division of Cocporatlvd Markotins. 
 
 US DEPOSiTORV 
 
 SUBSILLARY CORPOIUTICNS AND CCOPiiUSIVE ASCOCI.-T 
 
 aO^aO 
 
 A ?reliniiiisr;y Heport 
 
 ^ashis^oci, I). ^. 
 ScptcDbcr, 1926 
 
r 
 
 This report prcFontc 
 Bonxs of the ros'XLte of research condiicted by 
 Tha Division of Cooporativo Wai'keojng 
 in tho or^anizr'.tion lud operation of 
 cocperr.ti''o r.ssociiAtions. 
 
 1 
 
S'JBSIDI^Y CORPORj\TIONS ;dTD COOPEII.MPIVE /iSSOCIAIIOKJ 
 
 By L. S. Hulbert, Senior torketing EconoLiist, 
 3uxeau of J^rioulturol ^onumicc 
 
 A subsidiary corporation is one c^vncd and controlled, eithor 
 diroctly or tiirough trurtoes, by another corporation, CoainorciJ!.l corpora- 
 tions for manj' years nave forniod and omployod subsidiviry corporations, and 
 recently c*- operative ascociations have organised subcidiary corporationc 
 to or*ablo tnoc to conduct their <a,ctivitius to bettor advanta/;o or to moot 
 specific cit\2ation8. 
 
 probably the cMef reason for tho creatioii of subsidii^ry corpora- 
 tions has been to avoid the payment of tanos impo°od by Strtos upon foreign 
 corporations. Ail, or practically all, of the States impose a spoci:il ta:: 
 upon foreign corporations nhich do an intrastate u^tninoss rithin their 
 borders, and corporations operating in core than one State in miiiierous in- 
 staxxes have forjied subsidiary corporations under tho lavrs of such Gtatoc 
 through vrl^ch they hr.\'^ conducted t}itoir b^oi-inesi: in such Sta«es, thus 
 avoiding the payment of State tar.es upon forsign corporations. 
 
 Cf coiirse, if a corporation is engaged in interstate coinmorce, uo 
 State in which it is so engaged has the right to ta;: the privilege of en- 
 ga^ins la such coiEcurce. Attention is called to the fcllovrin^ quotation 
 froD the opinion of the Supreme Court of the United States in the case of 
 Bahnice-Maljcer Co, v. Bondurant, 2t>7 U, S. 28.3, 291: 
 
 "A corporation of one State ir\ay go into another -.vith- 
 ouz obtaining tlio leave or licence cf the latter, for all 
 the lo^tisate purposes of such interstate coDrr.ercu; and 
 any statute of the latter State v.hieh obstructs or lays a 
 burden on tlie exercise of this privilege is voia 'ojtidor the 
 cozncrce clause." 
 
 .'ianj*^ cooperative associations are now doing an intrastato biosineoo 
 in various States and so the saiae reason that has prompted the for.^.tiJi! 
 of nany subsidiary corporations by cOinrseroial corporations - tho avoidance 
 of State ta^es on forei,f;n ccrporation - would unaoubtecily, in some instances, 
 bring about the fcrnatioi: of loc^ cubcidiar^r' corporations by such coopera- 
 tive associations. 
 
 In ^;cncral, one of th3 nain reasons for tho fornation of a corporation 
 of any character, nairely, lixited liability on t"i»e part of thosw rvho are mcui- 
 t re or etockjicluers, exists as a reason for tho formation ol subsidiary cor- 
 •^-"^ ons, A cooperative association, for instancj, „'i^ht be •.rillir.e; to 
 
 - a certain portion of its asr.utc in a given activity ont ^oc\d not care 
 to rieic ail of its assets witn respect to such activity. Under sixh circiiir.- 
 ct:.jiccc it ciay bo d-siratle to fora a subsidiary corporation for the j/irpobo 
 cf conducting that activity. 
 
- 2 - 
 
 A subsidii..^ corporatior. affords a : . .. of "departirwntaiizirg" a 
 bxisiaeas co th:\t thoru i» a ooparation in i 3 mil aa frou a practical 
 standpoint of Uxo divicions of tho bixsinoce. 
 
 The Uichican State r'arm Buraau at ona titoc onga^d in a nusiber of 
 8 activities. Now, all of these activities cjro handled by four 
 :•■ -•—.-•---. ""l of f: - -"'ck of vhich is owned by the K'ich- 
 
 .jh co:-_ .oTit iacludi:^ tho parent orp^niz:^- 
 
 tion, i^aB tr*o same Doard of directors and ofiicors, Ono of tlio subsidiary 
 — -- *•' - ' r.dlus sujpliec, aiiOtiicr soeds, another nool and the- foxirth 
 
 .V c .ofcrj.tivo ::.w-soci;.tion coiiia oo -ca 77itr! ciutiioro-^y to 
 
 handle over/ i^'po of agricult',iral prod'jxt . ud in a 2i-^'-n region. 
 
 contract covering all of such products could be entered into with each 
 BJeTiior aii^ theu for tho pui-pose of effoctirg a Boparation of the v 
 activities involved in ths handling of the diff rent products, £uc. . y 
 corporations could bo fonued for tho pxispose of Landling ejid nHi'keting 
 cuch of the products. 
 
 Difficulties with respect to income taxoa may arise in the case of 
 cooperative apsociations, prinarily organized to Tcarket specific farm pro- 
 ducts, out of a quectioa :-s to the proper scopj of their ^erporatc po.veis 
 and activitieii. The activities causing; these difficulties, it is believed, 
 i uccs eould be so^Trecated through subsidiary corporations no 
 
 *--- --.Id net affect, from a a income tcx rt- .d^cint, th^ .v.ioril :jc~ 
 
 tivitios of the association. 
 
 In fact, if a cooperative association in any caco four^d that the con- 
 duct of a particulai' activity coropiicatcd its income tax probleni, it ni^t 
 1 ' ' '-L* corsidoi'ation to the foriLation of a subsidiary c • - 
 
 t_ — particular activity. Of course, if the sub&idiar^ . 
 
 profits, it T-ould bo liable for taxes en such profits, and anj' dividends 
 v.aich a c. -ive association ndgl-it receive in any year from its subsidiar;' 
 
 in proper _ — rould also Ov, tuei-le. 
 
 The foi-mitio:» of f. S" .ry corporation mry rfford .^ of borrow- 
 
 i -!'• '^^.noy which co'old not ot — . -e be as aafiiiy or advauta^t ^ obtained, 
 
 . tlae placin,: ol assets vrj th & subsidiary corporation thiLt no\ild not be 
 to t-. p of cho ^orenc co~poratlon. The C ivc '»r -ue 
 
 I. ,,ion T^^ - of Ithaca, IIcw Yorh, hac eniplojod e_.:,_*ar7 cc: :_.:.& 
 
 in its oporatione. For ii^stiUice, it er^ani-od the New York Vi^^'^tural Credit 
 
 tion. In"-., viith offices et It^rca, Wc-.' Yori^, for tne e cf in- 
 
 c- • ••• dlt facilities. TMs corporation ondorLos tl;o nj-._- -: farnioi^ ?n 
 
 leci*. - tiveo who are pp.trona of the Jran-sc League tederatiou. Following 
 endorsutcent , ' r, if accc • - , io passov. on to tho Ir. iate Credit 
 
 Bank, TtiO prv^w^-v.— -^rived fre v.».5 thus haadlod are i-etur ,c the cor- 
 poration wiiich roraits thjta to tl*e per&ou to rhoa credit is extended, less 
 interest. 
 
- 3 - 
 
 No attempt is here mad© to enumoratci all of tho roaconn that may 
 cjist for tho fcnaaticn of subsidiary corporatious, Thu laws of a 
 particular St£.to aay virtually conpcl the forpi^tion of a subRidiary 
 corporation. The Suii-iiai .'. P.aisia Growers of California, for inetanco, 
 at tho tirco of its reorganization a for years ario raa dcsirour. of obtain- 
 ing u^ore capital than it believed possible to secure from jts prodacor- 
 nemberG, Consideration was then given to the soiling of non-voting pre- 
 ferred stock to "outsiders," that is, to any person v;ho alight care to 
 purchase such stocic. It ras fouad, however, ti^at unuor tho laws of Cali- 
 fornia it 'as not possible to isav.a stock tiiat did not carry the i*ignt to 
 vote. In addition, it ras thought tl^t tiio icsu;jace of proforred votintj 
 stock in the Sun-ltdd Raisin Grovrerc of California to lion-producorc '.vonld 
 operate to prevent the aaeociation from successfully snov/ing ttiat it was 
 operating under the Capper -Vol stead Act, 
 
 In view of tb^se circuiastances a subsidiary corj^oration 'ondor tho 
 laws of Delaware was organized with comcon and preferrod ctock. /J.1 of 
 the cocEjon stock is ov:ued by the Son-ifcu .1 Eaibin Growers of Celiforria, 
 wLilo the preferred stock, phich is non- oting, has been solu to non- 
 producers as well as producerc, Inasnroch as the conmon ctock is the only 
 stock -hich carries the ri^ht to voLe, the Sur^-iJaid Kaisir. Grov srtJ of 
 C^Jtifornia controls the subsidi?.ry corporation to which it trans fcrr.'d 
 certain processing" plants and facilities, vrhich process the raisins re- 
 ceived by Ihe S\in->iaid F.aieia Growers of C.alifornia from its iroUibc;xS. 
 
 A cooperative association must be authorized to acouire the stock 
 of other corporatio^nc , or, at least, of a corporrtion of the kind it 
 desires to form, if it is to form a 8\ibsidiai-y corporation. It will bo 
 recen-bered that at conrx>n larr a corporation, generally sp-^akin^, was not 
 authorized to acqxiire the stock of otlicr corporations. (First National 
 Bank of Ottasra v. Converse, 200 U. S. 425; Contra! Life Sccaritiec Co. 
 V, Si^th, 235 ?. 170.) 
 
 In vieT7 of this corE-on law rulo, a CJoperative associaticn before 
 atterrpting trx forar.ti^n of a s'ibsidiary corporation s'nculd ascertain if 
 it is authorized to own the stock of a corporation engaged or to engage 
 in the business in question. The charter Ox the cooperative, the consti- 
 tution of the S*&tc, its statutes pertaining to corporations, and the 
 dccisicns of tho courts of the State regarding those matters, should be 
 exaain-d. If a cooperative is author: zed tc engaged in an activity it 
 may bo that it will be found easier to form a subsidiary for conducting 
 the activity than if Ew:h TJcre not the case. Under those circi:mata.xe8 
 the subsidiary might bo- looked upon as simply a moans to an end. 
 
 It will be remembered tl-at restrlctlona with respect to the persons 
 eligible to own stock or havf meraoorship in a cooperative have no direct 
 application in detensining if a cooperative may bo a meiaber of or hold 
 stock in another corporation. In some instances it mey be; deymad advis .\.>x.. 
 or found leg-^lly necessary to raice the funas to bo injeutad J a a eubsidiary 
 through deductions specifically authorized for tlie purpose by a pi'ovielon In 
 the contract. It -sill b-- borne iu mind that only those ded\iCtions wl^ijh aro 
 -utiiorized can be made by an aocociation, Silveira v. ^sociated Llilk Pro- 
 ducers, (Calif.) 219 P. 461. 
 
^ a mlo. It IB .ca tro-rc will bo loss difficulty in find- 
 ing authority fc- the ^\- jd of a -.ubsidlary by e cooperctive if the 
 Buboldiary is . ^^je in aa acti'/lty closely rclateu to the b'^iLoce 
 in 7.-iiich th .ivo i , or ii. - noction th — - 
 nith, If 1:. . "ith : :^ the . _ i is to t 
 place. 
 
 Again, if tho proposed subsidiary is to er-sage in an activity 
 which would be wholly propor for the cooperative association to on^a^ 
 in V.ich for any reason it ie deoioed advisable; to have porfomiud by 
 a - ,- .- ,ic coi-poration there chov.ld be little difficulty in finding 
 authority for tho formation of such subsidialy by it. For instance, 
 aomu vcs Imvo formed vjaiehousu corporations prijiarily to con- 
 duct •• ..^ - in Phich to otoro tho proaucts they v.ero eni?.:^ed in 
 
 inaricetinG. Thoy apparently had only aoroal difficulty in dcin^ so. 
 
 with respect to subeidiary warehouse corporations, care should 
 bo exercised to'oalce certain that thoy at all times have "an open, 
 oxcluBivo and unequivocal possesbiou" of tho product ctored. il!ha 
 Security TTarehousinc Co. v. Hand, et -^J.., 1-13 ?. 32, 2C6 U. S. 415.) 
 In other words, c^jre slxuld be exercised not only to hold out to tho 
 world th/.t the EubBidi:.ry coi-poraticn is the "jarehoar-oiiTai." and not 
 tho ccio:jer5.tivu association, buc axro that the rarehoxise corporation 
 receives and delivers products ar.d exercises co!2plete control over them 
 while in storago, j\ist the saiLo as if the products rere stored ^^ith a 
 strictly co!iEacroiai v/arexiouseuan. Iho books ana records of the yrare- 
 house corporation should bo ceparate and distinct from those of the 
 cooperative acsociatioii, tJid in all respects the /rarehouse corporation 
 shoiad function as an indopoudout entity. .These matters arc highly in- 
 portant if the Taroho-occ resei^jts are to bo ':£oC for collateral purposes. 
 Liany bankers will not loan on the recoipts as collateral if the ware- 
 houue cor^or^.tion does not in all respects ^unction as an incependcnt 
 entity ana exercise an aoroiute, e;:clusive and iinaqvii vocal control over 
 the products stored. 
 
 Sorwtimes sabsiliary corporations have been or^nized, the stock 
 of vrhich T7a8 held 'oy oertoin persons as trusteos for th-. - c^rpor- 
 
 *v r. Tor instrnce, in the care of *-he Interstete Tel-,,. Co. v. 
 
 T.-)rc & Ohio 7olephouc Cc, 51 F. '*9, 5-: F. 50, it appeared that the 
 iialiiaoro & Cido Railroad Co., owned through t-:-\isiees a*l of tho stock 
 of the Baltinoro & Ohio Telephone Co. 
 
 It is eubmiwtou tU't in soue Inotancfis in ^hich it ini- 
 
 j^ys^iolc. •' -- "•- "u Btendpoirt, for a cooperative to or^_.-^^ a sub- 
 sidiary -.took thcrocf, it would be possible, if deemed ad- 
 visabla. for taa cooperative to orji,ani2Q e thro : 
 
 tc. -' rsona c ^ -»:d by it, to whom tho .-..-.. Id be — 
 
 cc . osooc - . could then, ualoso prohibited from doiacg to, 
 
 loaJa fflooey to tho tubaidiary o^.d, ao Poourity tiujrofor, co^vld liold the 
 etock of *;. -- '-loiory. Propjrly dravrn contrccte covering the relation 
 . . i to tho outJidiary chould bo entered into. 
 
Thw statutes of aoXi;/ Sto.tos providing, for the incorporation of 
 corporatiooc sti'.te thr.t thoy may bo fonaod "for any liinful purpoae." 
 Ttds phrase in the case of Dittnan v. Dictilling Co. of America, 64 N. J. 
 Bq. 537, 54 Atl, 470, Kas hula to autboi-lso the formation of a corpora- 
 tion to hold stock of other corporatione. TTeirnt wac j^ivo:i to tl-io fact 
 that corpors.tions of i<0T7 Jorscy .Then forrccd rroro i^uthorized uudor itc l3'.7e 
 to hold stock of otlior ccporations. 
 
 It is obvious that the fundamental principle upon vvhich subsidiary 
 corporations arc recognized as sepai-ato and distinct from tho parent cor- 
 por.-:tion arises froD the fact that each corporation is a Roparatc and 
 distinct entity, a logal az'tificial person, and oust bo dealt with 
 accordir^ly. 
 
 The case of the United States v, Ajoorican Pell Tolophono Coj^jany, 
 2S ?. 17, decided in 188G, is one of the first cases iuvolr'ine; eubsidiary 
 corporations, Tae Aikerican .►^^ll 'lelephono Coinpany received from ^U-cx'-nder 
 Gr?±uin Boll certain telephone patents and thereafter proceedfjd to ostaj- 
 lish telephone li-.cilitius in various pans of the coi^try. Tt did this in 
 general through local subsidiary corporations Trl-ich it o'.Tned either vrholly 
 or in a sufi'icient degree to er^blo it to control them. ?he AF":rican Bell 
 relephone 3ompar.y, as a role at least, furnished the capital needed by tne 
 local rubsidiary corporatioLis for tho purpose of enabling them to estab- 
 lish telephone facilities, riie United Stat^.s in the case under discussion 
 bro\;^ht suit against the .Vierican Bell Telephone Conpi-xry, and claiiied tnat 
 process had been served upon the ^\3kiricF.n Bell Tolephcne Compani'' by reason 
 of thi; fact that process v:as surved en an officer of a subsidiary corpora- 
 tion of tne .foerican Bell Telephone Contpa-ij- . The court h«ld that whe 
 iu»rican Boll Telephone Corpany liad not beun served rith process in the 
 oviit .mu. her.co 7.-^s not a party tlxreto. In answer to the ai'i^unent thiat 
 the American Bell Telephone CompcUiy was ene-a^ed in business in tlxe juris- 
 diction because it ov.noa tlie subsidiary corporation and nad furnished it 
 rith tae means for enablirig it to io business, the court said: "For one 
 person to supply tho moans to aaotaer to do business with or on is not 
 the doing of that business by thr lormc-r." In oth::r rords , the court l;eld 
 ^hat thu .American Bell Texepncnt- Gor..xjar.y vas not en£:a.:;ea in business in tne 
 Federal district in q-aestion and hence could noi; be s-aed therein. 
 
 In the cace of the Peopl:; v, ;jnerican Bell Telephone Co., 117 ll, Y, 
 241, the saoie ger^ral eituationj the status of a subsidiary corporation 
 of the Axericc-n Bell Tole^houe Jcnprny, -.vos cgain involved. The following 
 quotation is ta^n from the opinion of the court in this c-r^e: 
 
 "It is ^tr.ifcst that so r/aoh of the argument oi ir.e 
 coxirt below r.s :s bacod upo.' the fact that the jai'.rican 
 Bell Telephone Gomt.any la a stocklioluer in the local co?'5)anies 
 derives no supr^ort from that circximstejaco. In no le.'al sense 
 can the business of a corporation be said to be that of its 
 individUcJ. stockholdors. It is true that t>jey have an interest 
 in the bosiaeso carried on and an influ»nce in con' '' Its 
 
 cojaduct; but tney have created a legal entity to ; 
 such business, malce its contracts end be reeporcible for its 
 
- 6 - 
 
 oblif.atiomi, and that entity io alona responsible for its 
 
 •ions, emd that entity is alone reepor^ible to persons 
 
 <i J with it for the conduct of such wOCincEs. The taxation 
 
 of a foreign or domestic stockliolder in a doiriystic corporation 
 ■^ the buainesr of such corporation upon the theory tloat it 
 - his buyinese vrould bo an u^rea3on£.ble exorcise of tho 
 powere of taxation ar^ such a tax upon the theory thr.t a 
 licoiisor or lessor retaining title in hinaelf to a patented 
 article, borrowed or leased of him by some person or corpora- 
 tion for tho purpose of carrying on a trade or business, v.as 
 Mccelf carrying on such business, cin not be supported by 
 • r.y >norn principle of lav?." 
 
 Tho case of Conley v. Mathiesoa Alkali Worics . 190 U. S. 406, 
 arose in tne State of New York. The trial court referred the case to 
 a matter and the conclioding part of his report read =s follows: 
 
 II n?T 
 
 'Upon the facts thus outlined, it d.oez not ar^pear 
 that tlie deienosnt corporation was, at the tia» of the service 
 of tho s-oiraons hsrein, viz., .April 18, 1901, doing business 
 within this State. 
 
 "»Thc fact that it held the entire capital stock of the 
 Saotner Electrolytic Alkali Coinpany and that the operations 
 of that co!npanj' wers carried on uiider ti.e same manae'ecient as 
 before Decoabar 51, ISOO, is not luaterial. The new corporation 
 was a separate lecal entity, and whatever cey have been the 
 motives leadir^ to its creation it com. only je r^.araod as cuch 
 for the purposes of le§al proceedingf. 
 
 "'It was that corporation alone which transacted any 
 business in this State, notwithstanding i. miy have been for 
 all practical purposes merely tne instrumont of the defendant 
 corporation. People v. ^. Bell Telep.ione Co., 117 i;.Y. 241; 
 United States v. The Sai^, 29 Fed. nep. 17."' 
 
 The plaintiff excepted to the report of the master and the case eventually 
 T-ont to the Supreme Couj-t ol the United States, wiiich court approvingly 
 qxioted tl*e language Trom tne master's report given above. 
 
 In the caae of Peterson v. Chic^o, Rock Island &. Pacific Railway, 
 205 U, 3, 364, the court said: 
 
 ■The new corporation was a separate legal entity, 
 aad,whatevor may have bee. .ves leading to its 
 
 creation, it can only be : is such for the purpore 
 
 of ler^l proceodingp. It was the corporation alone which 
 
 treAsactod any business in this State', notTithrtanding it 
 
 nay have been for all practical purposes Tjerely the iustruroent 
 
 of the defendant corporation. People ^'. .toerican Bell 
 
 'V o Co., 117 N. Y. 241; Uiiited States v. .Vreri can Bell 
 
 ..c Co., 29 Fed. Rep. 17." 
 
la ^Qo case of Pnilaat'lpnia & Keadinf; njuiwoy Company v. 
 JicKibbi:., C43 r. S. r^n-x, t;.. ro.irt s Id: 
 
 "I'Jor would the fact, xi estabiifcf.ou by '■ -nt 
 
 evidence tiiat subsidiary cotnpanies did buaineb .in 
 
 the State, warrant a finding tluit the defend.«nt did 
 
 business there*", v 
 I 
 
 In the cr.se of Trimble v. Railroad, 199 Mo. 44, 97 S. V. 16-i. 
 •-it*- successfully brought suit afltainst a corporation f * 
 
 "€- . Jf fees for services which they claimed they riai y ^-<i 
 
 fox it. All of its stock and bonds were owned by anotlier rnilroad co/r 
 pany. The following is taken from the opinion in the case; 
 
 "The stocl^holders of a corporation direct its business 
 :.r -^- t linj: is beet Tor their ovm interest, ind if it 
 ^'^ • ..i th£..t the persons v/ho ovm the atpck in one 
 
 rorporation are also the owners of the stoclc in another 
 -v 2nd conceive it to "be to their interest to malx 
 -■po ration eubcervient to the ether, t\\ey have a 
 :tt to do ao, beer use they are deaJ-inr; v.ith their ovm. 
 '- i: here said ic of course sub.icct to this qualifica- 
 *- ■: , *:;..t is, tliat the conduct of the stocldiolder s 
 •'- one corporation subservient to another is valid 
 
 . it is not in viol-ttion of any lav7 forbilclinf- it; 
 is no such question here, v/e are nov/ dealing v/ith 
 cot in r/hich an ovmer of two properties sees fit to 
 
 "3 the advancenent of the other or both to a mtual 
 — nt. In such c^se, neither corporr.tion 1.^:^^.. itc 
 so:porate entity." 
 
 It is interesting to note that in this case it is int: r.' .tCwi that 
 only Qooxistic corporations in the State of Louisiana inay cxe:\:xSo the 
 power of endaent domain. 
 
 A recent case with respect to subsidiary corporations decided by 
 :r.e Suprerae Court of the United States is that of the Cannon J/janufactur- 
 i" ■ '""rpany v, Cudahy Company, 267 U, S. 333. It appeared tiiat the de- 
 : y a I^ine corporation engaged in the packing busine&s, markclod 
 
 its products in Korth Carolina through a subsidiary corporation which it 
 — : -jinder the laws of .U.abama. It ov-ned all of the stock o'" ib- 
 
 corporation. The plaintiff brSugnt suit against the y: . 
 ■ for a breach of contract to purchase cotton sheeting for use in 
 " ' . The question for decision was nhethor tiiC " v/as 
 
 - - s in the State of llorth Carolina in such a l. . to 
 
 sxicn an extent as to warrant the inference that it was present there. 
 ~ the p-urpoce of s^iovring that this v.as the case, the planti ff 
 : to establish oi.e identity betv.een the defendant and Ire ;J. 
 crporatioc. The court said: 
 
 *The Alabana corporation, which has an office in Ilorth 
 Carolina, is the iostrunentality «)mployed to i&irket Cudahy 
 
- 8 - 
 
 product Tritbia tlie Gtato; but it does not do tto as defendant's 
 a^nt. it buys from the defendcjit c^id sells to dcalcra. In ful- 
 flllaont of cuch conti'actB to 'jcll, t^oods paclied by the defend- 
 aat in Iowa are shipped direct to dealers; and from them the 
 Alabana c .tioa collecto the purchase price, Throuch owner- 
 
 ship of t,. ..ire Capital stock, and othorrise, tiie defendant 
 
 docdnateo the ^ibama corporac5oa, inmediately and conipletely; 
 arid exerts its control botn coianorcic.liy ana fincjicially in 
 substantially ti"^ same way, and Ei£.inly throui^h tlie sano individ- 
 uals, as it does over those selling Lirauches or departicents of 
 its bvisinesp not separately incorporatea "/hich are estatliehed 
 to siari:ct tho Cudahy products in other States. The existence of 
 the ;Llabainp couipany as a distinct corporate entity is, Iriorever, 
 in all respects observod. Its bocka are icept separate, All 
 tratiiGactiono betr-een tlie two ccrporatioii': are reprciiented by 
 a^ipropriate entries in their "espec^ive books in the sarre way 
 ::.s if tne fro vrere wholly independent corporations. Tins cor- 
 porate separation from the ^eueral Oodahy businoss w£.3 doubtless 
 adopted solely to secure to the aeferdar.t soi:)e adva'ta^e 'uider 
 the IoccJl laws. 
 
 The defendant wanted to have business traixsactions irith 
 persons re^idert in Torth Carolina, lut for regs^rs satisfactory 
 to itcelf , did not choose to enter the State iL- its corpor3.te 
 capacity. It ndght l^vv. conducted sucli busiueso tlirouf,h an 
 independent a^^ency -vithout suojectiu^: itself to the .jurisdic- 
 tion. (Banic of Jjnerica v, TThitnay Central Natioiiai Bank. 261 
 U, S. 171.) It preferred to eciploy a subniiiary coiporation. 
 Congress hcis not pro'-i-dod that a corporation of one State shall be 
 :utenable to suit in the federal court :or anothsr State in Thich 
 tho plaintiff resides, v.he.'.ever it uTploya a subsidiary corpora- 
 tion aa t.xo instrujoentaiity for uoing ousinesL' tiiereia. 
 
 The corporate separation, though perliaps cercly formal, was 
 real. It '..as not pure fiction, Thore is here no atteu^t to 
 hold the dof eudaut xiau2c for an act or onisr.ion o:*" its sub- 
 sidiary or to eril'crce az against the latter a liability of the 
 def verdant . 
 
 Put whata'^er adj^ht be other iejal ccasequences of the con- 
 centration, we cannot say that for purposes of .jurisdiction, 
 the buPinobs of the ;^1. jorporation in North Caiolina became 
 
 the ba'^ir'^'t.o cf vho C' nc." 
 
 In tie caoo 01 r^iiirxj'b rui xe G-r ^o;.-r;\.iy v, .,a:i^oui'i P '"' ^' 
 ?jiilway Coqpaa;', 316 b. S. 58'^, the Supre-::vj Cour*. held that c^e ^nt 
 
 of the Hoilray Coupauy to haul cars ovor all rc^us which it c<-:.croi?..cd or 
 "may control "h; 'ip» leaso or other r." did i.ot oblif- it to haul 
 
 care over a c«. . . xine of anotiier c. _ . , "all or nearly ell its 
 
 stoolc* which it owned. In this case the court osphasiied th^ fact that 
 the coryorutions were in fact separately oper:.ted. 
 
- - 
 
 In the case of In Ro '..aterto.Tn ?a>ei' Co., 169 F. 25C, tho court 
 
 said: 
 
 "The fact wfu; t~e .;tOv;:Tl:o].'.er:', oi tv.o y 
 charterad corpcratiour are identical, that on- lea 
 ia aacther, and thi-t they have niutui:^ dealings, "^il-- not, 
 as a faneral. rale, . .a into cno co^'^oration, or pra-» 
 
 vent the onforcecen: _ - tho insolvent ool?te of the 
 
 one of a-^ other.Tloe valid claim of the other." 
 
 In Lan^a v. Purlre, 69 Ark. P5, 61 S. VV. 155, a crti,e in wliich the 
 tv.o corporations involved Tvere practically controlled o;- the sa-re atock- 
 holdera and had had intiraate biu^incss relatione, incl^Jidin^ the oxployicnt 
 of the SciEe ^oolzkeeper, the com't held that the clp.i.n of one corporc-.ti on 
 vould ^e enforced :^ainjt tl:ie insolvant estate of the other. 
 
 It is texieved that the cni:' irstvacos in '"hich tho entity of a 
 subsidiary corporation Trill Ic diGre<-r.rded are inutancea analogOMs to 
 those in which the sep-rato idoutity of any other corporation wald be 
 disrct^ardea. To prevent fraud or injustice, tae cou^'ts will disre^u.rd 
 the separate identity of a corporation and rill lock tehind tn. forui 
 to the substance, Soiae of Ire cases in vrrdch the sorarate identity cf 
 a corporation has oeen disregarded TiuII now be air.casued. 
 
 In t*-se caje of tiie First i;iauio*isl Ba^Jc v. r. 3, Trebei.^, 59 C^io St. 
 316, 52 II. S. c3-*, a debtor in iailin^ circurstances ferried a ccrnorfcion 
 consisting, of hiocjlf an.' ccmbers of Ms family and conveyed all his 
 property to the corporation in ezohance for btoc^ isr,-..£d to him, ^.•hich 
 Steele he irraediateiy placed rith nis cre'^itors as collateral sec^u-it^, 
 «hilo .>e retained control of tne property and laana^d it as preoident of 
 the Conpanj. The conveyance '>7as held fravduieut, end, tmone; other things , 
 the Court said: "The transaction caniot be likened to a conveyance to a 
 third person for a valuable consideration — considered in the li^ht of 
 the facts, it Tas no .^re tl'^n e. conveyance fron* hiir-self to hiciself . 
 The corporation ras in substance arother Y, C. Trobein." 
 
 In idnifie v. Rowley, 137 C&J.. -iSl, 202 P. 673, it appeared z.. t 
 Hovrley individually oorro'sred $10,0oC, giving his personal notes cherc— • . 
 Subceq-uently a corpori.ticn owned "jy hie: renewed the loan by ^vint-: its 
 note for that aii:0"<ant. The holder of the note, after its .Tiaturity, su^d 
 the corporation and I-lorlcy or the deot , ?nd ihn Court held tl:at Rowley 
 was personally liable. 3cs also J. J. McCaskill Co. v. U. S., 216 U, S. 
 504, 54 L. 3d-. 590; State Trust and Saving Bank v. Iler-oca Land 2Jad 
 ^^ttle Co., (X.::. ) 240 p. -iSS. In this 'joruiC-cticn, the foxlo^'ine Ot^otc'- 
 cion froE the opinion of the S-ipronie Co-art of :.;aryland in the ca^e of 
 Carozza v. federal Finance i Credit Co., 131 A. 232 is of inteiest; 
 
 "The equitable rule that the fora of a corporate 
 entit;' may be disregaaded. where the ownersliip of all of 
 it-' corporate ctock is tn one person is rot of gerer^l 
 application, but ia coLraonly licdted tc those instances in 
 
- 10 - 
 
 which It becooee neccescjry to aioresard a formel corporate 
 exietcnco to prevent fraud or inrposition or to enforce a 
 paramount ojoA uuperlor equity." 
 
 The Supreoe Court in the case of the Hart Stcol Co. v. The 
 B&ilroad Supply Co., 2-;-i U. S. £94, applied the fundameutal rule of law 
 that a Judgment of a court of coiEpetent jurisdiction is tindine upon 
 tha parties to the cace in wiiich rendered and their privies in a situa- 
 tion iuvol\'ing a piixeut corporation and its subsidiary by holdir*^ that 
 a Judgmeat rendered againct a patent owner in a euit broiight by hiia for 
 infringesoent against the parent corporation could be pleaded as a bar 
 to a suit brou^t by him against its subsidiary. 
 
 it^ain, in the case of the Chicago, M. & St. ?. Ry. v. Minn. 
 Civic «38ociatiou, 247 U. S. 'iSO, the court held that the tvro railroad 
 companies involved could not, through the medivm of a short terminal 
 railroad which they owned jointly, discriminate afoainct shippers whose 
 cars were handled by it by requiring such sMppers to pco'^ special 
 handling charges on account of the fact, while shippers receiving sub- 
 stantially the same service, but '.vhoce cars did not pacs over the terjdnal 
 line, v;ere not required to pay euch charges. 
 
 Tlie courts by reason of a statute may have to disregard conyletely 
 or to a degree the entity of a corporation. 
 
 The case of the U. S. v. D., L. «S: V7. R. R. , 238 U. S. 515, 
 which arose under the coiomodity clause of the E^pburn i^ct illustrates 
 t'.i'j situation. Tliis act '•.'as intended to prevent railrosidc from occupy- 
 . :. J the dual azid inconsistent positiano of public carrier and private 
 shipper, and in order to separate the business of transportation frosi 
 the business of soiling, the statute made it unl:;T?ful for railroads to 
 transport in interstate cooL^rce an^* coal in which the Company liad 
 "any interest, direct or indirect." It appeared that the railroad coii- 
 pany, prior to the passage of the Hepb'irn xiCt, had engaged in the Duci- 
 ness of mining, buying, transporting smd selling coal. Follorring the 
 passage of the Act, ihe railroed couipaay "decided to adopt a plan by 
 which to divest itself of title after it xiad teen mined out before trsuis- 
 portation began," It thereupon caused a coal coiapany to je incorporated 
 having stockholders and officers in comtion with the railroad company. 
 The two corporations, nriving a conxion r:. nt, then saae a contract 
 
 prepared by the railroad company under • . . :he railroad companj' did 
 not F.o out of the mining and selling business but when the coal 7.as 
 
 t to tho surface the railroad company- lost title by a sale to t he 
 
 ^, .jupaay f, o, b, ainea and instantly re<5aincd possession as carrier. 
 
 It retained tnat position until delivery to the coal company w'nich sub- 
 seqxientiy paid tncrefor at the contract price. The relation between the 
 railroad coc^pany and the coal coi:5)any Tas covered by a comprehensive con- 
 tract cont€Lining provisions restricting and limiting the nethodr. that 
 mi,2:ht b il by the coal c • and the porers wliich it night e;:er- 
 
 cise, ...^ ._^..cmo Court decide- — case against the railroad company' 
 and hfild tnat it should be enjoined from transporting coal under the con- 
 tract in question. The basis for the opinion was the character of the 
 
- il - 
 
 contract arid tho identity of :■ ^nt between the railroad corDpt.ay and 
 
 the coal congjaijy. The court l., . .* ..tly recognized the right of the 
 stockiicldorj of tho railroad ccznpauy'to cwn ctcck In tho coal coojpary. 
 
 There arc cases in which a parent corpcr_wi<.ij .las 'oeon held 
 liable on account of acts or dama^oe for -#hisb it ciaiiced its ouboidiary 
 alone was rccrorcible. It is believed that all cf th^oe cacea will be 
 found to involve situations in which the parent corporaticn lian failed 
 to treat and deal wit,h the subsidiary in all respects no fxd indepondant 
 distinct e. tity, or because the contract involved nao rith the parent 
 corporaticii. 
 
 In tho case of Joseph 2. 7oard Co, v. SJtate of Maryland. 219 ?. 
 627, the parent corporation was held liable x'pr the daiL':.g€S caioced 
 throvsgn the explosion cf dyraaate on a ship thao vvaB Vein^^ unloaded by a 
 subsidiary corporation, which it claiiacd v.ua an indepondw-nt contractor. 
 In tiiis connection, the Circait Coui-t of il^^pocilQ fo*' the Tou-vth Circviit 
 said: 
 
 "The Disti'ict Cuurt ras clearly right in holding 
 untenable the position taken by ths Fcrrd Cor^oTiy tliat 
 the loading rras dona by tne General Stevedoring Conpany 
 as inceper.der.t contrac*;or and that it aJ oue' was respcasible 
 for any ne^^ligence in handling tho dynamte, VTiia.tovor 'ray 
 have been the original design v;hen the Foard Coicpany caused 
 to be orga:iized the Geusriil J3tevedoriivf Corjo^ny. the evidence • 
 leaves no aoubt that the stevedoring, rhether done under ore 
 or the other corporate naross, was i;i reality but a df^particeiit 
 of tho busjrepf. of the loard Cor'Tjany as ship-bro]rero and 
 agents. Che two conpar.ies had tne Scjue officers; the Steve - 
 dorii^ Cotrpany handled no funds, except through the Foard 
 Cocpr-ny; its losses were pfid V tne Foard CoDpc>ny and dealt 
 with as if they were tnat Ccopany's own lo&ses. All of the 
 profits of the Stevedoring Co/Lpany rrere kept by the Foard 
 Cojppp.ny as a c^^rc,<i for j?i?a£;ing the business. There are 
 ether lik:; ci rears tanccs , hut these are 3uf:icicnt to show 
 that the Stevedoring Compc^uy was organized and controlled and 
 Its affairs so cond rteij as to uiake it a mere insiruir.entality 
 of the Foara Corjpany. This being so, the two corporations 
 uaist be regarded, as to the outside public, ido:;tical.'»°'">«" 
 
 It is subcdtted that the foregoing lan^-iiiage of tho Coiirt is 
 caterially explained, aid luodified, by the following quotation from the 
 opinion: 
 
 •'Bat, even if the usual current of busmecs of tho tv/o 
 corporations h<id been separate, jn this iii'jtanca t:. * 
 
 to load tne vessel ras with the ioard Coapony, and -. - . nee 
 
 tends to sMw that it ciade no separate contract with tho SC^ve- 
 doring Company, but co-operated rith ard coiapletely controlled it." 
 
- 12 - 
 
 In Ihc caae jx\ct referred to, l^u ccatract to load the vessel laao 
 made with the p,:iTont corpoialion. If the coutrax:t had beon made with the 
 subsidiary corporation, it is subicitted that an efi'i-irely different question 
 wo'Jdd h.Hve beon presented. Attention io called to tho f:iCt that cne who 
 contracts rrith a corporation is generally thereafter, with respect thereto, 
 eetopped from denying the corporate existence of the corporation. 
 
 In the case of Lehcanv. Warner, 61 Ala., 455, the Court said: 
 
 "It is tou ^ell cctiiea nos to cio contrcver-.u zr^t 
 a party who contracts with a corporation, v:hether it be by 
 subscription to its stock, or by promisf-opy.^oVp.bond, 
 •0, or other fore, of contract, is estopped from 
 • the corporate existence of the corporation." 
 
 i:. tr.e case of Close v. Gloudwood Ceioetry, 107 U. S. 460, tne 
 Supreoe Court said: 
 
 "One who deals with a corporation as existin.s in fact 
 is estopped to deu^" as against the corporatioa ti-at it has 
 been legally organized." 
 
 In other words, the cases just cited and others of similar import 
 hold that one who has contracted v;ith an orgSLnization llo though it were 5. 
 C' . tion is estopped to show tliat the organization is not a corporation. 
 £j - — (Si i^ would seem to follow that one who h^s dealt with a subsidiary 
 corporation as principal would be estopped from claining ttiat the parent 
 corporation was liable. 
 
 On March 10, 1926, the Suorerae Court of the United States decided 
 t^ of Edwards v. Cliile Copper Co., 46 Sup. Ct. 345. The following 
 
 r-. . .z are ta^n from the opinion in the case: 
 
 "The Cliile ."iw-ploraLion Coirpar.y, a Hew Jersey corporation, 
 owned mines in Cliile and neeaed to borrow large sii:^ of nioney in 
 order to develop them. 3y the laws of Chile it coxJ.d not njortgage 
 its mines effectively pnd therefore could not give sccm*ity direct- 
 ly for bonds. 2o meet tne difficvCty th« Ciiilo Copper Gomparjy was 
 organized in roi£.ware for tho purpose of holding tho capital atock 
 of the CMle Exploring Company, issuing bonds secured by a pledge 
 of the stock - — - ■^ximishing the proceeds froji time to time to tho 
 Exploration : ., to enable the latter to go on with its work. 
 The purpose was caiTiod out." 
 
 "••♦•♦•♦There was eone suggestion that there was only one 
 ": 3 and taeruforo ought to be only one tax. But if ihe one 
 
 l.uuii..,ii3 could not be carried on v.ithout two corporations taking 
 part In it, eac^ rrjust pay, by tho plain ror''? of the Act." 
 
 Pjirti^wil.' r utt(.'i ui^a 18 callu. tj t.iu i^tvf; ^urt y: Vrje Icp^uagO 
 Jttst qiioted, in which the Court sa^-a that if the business coiild not be 
 carried on without two corporations taking part in it tliat each must pay. 
 
- 13 - 
 
 by the plr»in rords of the Act, thus rocognir:in^ the differonco in identity 
 of tl.o two corpor.itior.o. 
 
 In wi*dor that a sx.'jsj.diar:' co:*ponrtior. rsny be fully • i ar 
 
 an artificial person distinct and eoparato fron the yaro.it .. . ou, 
 
 care should bo exorcised to coe the.t it is treated and regarded aa cuoh 
 in the practical operations of the ovsinooc. 
 
 A subsidiiirj' corporation shoxild be hold out to the world for rhut 
 it is, naarly, ?. sepsj'ate corporation, a-^d reprssontatior. should not ?o 
 isade that *oald nlsload persons dealing rrith it as to its r-sd chartxtfir. 
 Parties who deal with a subsidiary corporutioc, when they know, or should 
 know, that the r-ubsidiary corporation is net the parent coi-poration, cnouli 
 be estopped from clcdming tliat cin obligation created by the subsidiary is 
 the obligation of the p?rent coixorr.tion. Generally spe5>.in(i, it is eub- 
 Eitted that there is no roore reason for al]o":'in;;]; persons aeaiing V7ith a 
 subsidiary corpcrcition to lock to the parort corporation holding itc stock 
 than there is for allor-ins parties to look to the stootrhciders of erxj 
 other corporation. 
 
 If th9 subsiai-ry corporation if d'^alt with on an ageucy "baiis \,].'jn 
 it Tould follox that the parent corporation rould be liable for its acts 
 and conduct, for it r.ill bo remeu.beicd tb*it ^ corpora"i,ioii like a natural 
 person r^ay act as the agent of a coi-porstior.. Attention is caljc-vl to the 
 foilovi-irix:,- quotation from the opinion of the ouprsie Jcurt of Alabara in 
 the recent cas3 of the Ala. Pov/er Co. •', ■iodine. :"^'' -""o. So9: 
 
 "Ths relation of inaster and scrvaiit ixiy exist 
 between covpo rations aft bet^^an ihui\'iduals. 
 
 Evidence tendine; to indicate a reserved control or 
 dir'iction of the •.Tork negatives the idea of ^n independeiit, 
 original ccntractcr, nr.ving full control ^nd rrjsponslble 
 for the coupleted work according; to contract. Whatever 
 be the relations oetween xhe Aic4.bar3a Power Comuany and 
 ririe Conscraction Co-npan^' int-'jr sees, ani Lor;ard the 
 ecroloyoes of eacn, if an elcuient of as^ency enters touching 
 ijatters aifectiii^; the ri^.ts of third perr^ons, the principal 
 oecor.ss lirtie icr r.cc? dene v.ithin the scope ot the agency 
 cr ecploynicnt . " 
 
 In th-e cafe of the Ue'7 York Tr-ist Conicany v. Carpenter, 250 J, C68, 
 the Court said: 
 
 • 
 
 "Of course, if a corporation is the agent of another, 
 owning its stock or not, as the caco aay be, through which 
 the other £^5 principal, disclosed or undisclosed, ca^Ties on 
 biisincs;:, the liabfity of the princip3l •.'•iil oc arcortained 
 tnrough prinjiplec of la;? well known and. long ettatlished." 
 
- 14 - 
 
 On March 6, 1925, the Circuit Court of i^jpoals for the Sixth 
 Circuit decided the case of Hoopor-Mankin Co. v. Matthew Addy Co., 
 4 F. (2d) 187. The following quotation from the opinion sheds light upon 
 the status of parent and subsidiary corporations under the lav:: 
 
 "Wo need refer only to the following decisions of this 
 Court: Richmond & I. Construction Co. v, Hichcond, etc., Co., 
 68 F. 105, 108; 15 C. C, A. 289. 34 L. R. A. 625; Pittsburgh & 
 Buffalo Co. V. Duncan, 232 F. 584, 587, 146 C. C. A. 542; N.Y. 
 Trust Co. V. Carpenter, 250 F. 668, 672 et seq. , 163 C. C. A. 14, 
 and cases there cited. As said in the Duncan case (page 587), 
 and quoted in the Carpenter Case (page 673): 'The mere fact that 
 the stocklioldors in two or more corporations are the same, or that 
 one corporation exorcises a control over the other through owner- 
 ship of its stock, or through identity of its stockholders, does 
 not make either the agent of the other, nor does it merge them into 
 one, BO as to make a contract of one corporation binding upon the 
 other, where each corporation is separately organized under a 
 distinct charter.' TITe reaffirm the language of this court in the 
 Carpenter Case (page 674): 'From an examination of many decisions, 
 we venture to say that no corporation acting 7ri.thin its povrers has 
 been held liable for the debts of another corporation legally 
 organized, becaxise it controlled such corporation by reason of 
 ownership of its stock, or otherwise, except by reason of con- 
 tract or on grounds of agency, or of estoppel, or because the 
 controlled corporation has been used in such a way that the 
 maintenance of its character as a separate and distinct entity 
 would work injustice.' This proposition is s-ostained by nuiierous 
 carefully considered authorities." 
 
 In general, corporations employing subsidiary corporations enter 
 into carefully drarvn contracts covering fully and explicitly tlie business 
 relations between them, and it wo-old seen advisable in all instances for 
 cooperative associatiors vsing cubsidiary corporations to adopt this 
 course. Attention is called to tac following quotation from the opinion 
 of the Supreme Court of Utah in the ci.se of Boston Acme 1/lncs Dev. Co. v. 
 Claxison, 240 p. 1-35: 
 
 "It raay be coiiceucd that suca proceedings on the part 
 of corporations aio comet iLies open to grave tj.ispicion. It 
 all depends upon thj circ'JiaBtar.ceB attendiijg the transaction. 
 In Fletcher, Cyc. Corp. p. 1357, p. 913, it is said: 
 
 • 
 
 "'If tne right tc contract, cxiots, it is ijnnaterial 
 that the same officers und st^^ctdioldera cortrcl both con- 
 tracting corporations, IF IHS^ IS iiC li/a) FAITH.'" (Italics 
 supplied. ) 
 
 Gee, also, Siait.i v. Chrse & Baker Piano I-Ifg. Co., et al. 
 (D. G.) 197 F. 466, in Thich, in the fourth -leadcote, it js said: 
 
- 15 - 
 
 "•Corporations controlled and maoaged by the samo officors 
 and stockholders can deal with each other, and coui'ts will not 
 interfuro in their internal affairs, unless the action of the 
 majority in control is dishonv-st or fraudulently opprosBivu." 
 
 In this connection see also the case of Alt. Rof. Co. v. Port Roboa 
 Pet. Corp.. 280 F. 935. 
 
 Althoxi^i it is believed that thu majority rule vrith respect to cor- 
 porations having the same officors dealing with each other is annoxinced 
 above, yet it is submitted that it would be advisable to inquire in each 
 izistance into the desirability from a practical and le^al standpoint of 
 having the officers and directors of a parent corporation and its subsi- 
 diary the same persons. In feict in a few States it appears to bo necessary 
 from a legal standpoint for the officers of the two corporations to be dif- 
 ferent. 7 R. C. L. Sec. 333. 
 
3 1262 08921 4828