VOLUME
84
HARVARD
LAW
REVIEW
MEGASUBSIDIARIES:
THE
EFFECT
OF
CORPORATE
STRUCTURE
ON
CORPORATE
CONTROL
t
Melvin
Aron
Eisenberg
*
Professor
Eisenberg
describes
the
recent
growth
of
massive
sub-
sidiary
corporations
and
the
legal
and
economic
reasons
behind
this
develonnent.
He then
points
out
the
subversion
of
shareholder
voting
rights
that
can occur
if
some
of
the
major
transactions
of
these
subsidiaries
need
be
approved
only
by
the board
of
directors
of
the
parent.
His
conclusion
is
that
the
right
to
vote
the
sub-
sidiary's
stock
in
these
transactions
either
inheres
in
the
parent
and
is
exercisable
by
the
body
of
the
parent's
shareholders
or
passes
through
the
parent
directly
to
the
parent's
shareholders.
T
has
long
been
observed
that
most
of
this
country's
business
assets
are
held
by
corporations,
so
that
ultimate
ownership
is
once
removed
from
the
assets
themselves.'
Within
the
last
few
years,
however,
the
process
has
gone
one
step
further.
Due
to
a
number
of
recent
legal
and
economic
developments,
a
significant
portion
of
the
country's
business
assets
is
now
held,
not
only
by
corporations,
but
by
massive
subsidiary
corporations
-
mega-
subsidiaries.
As
a
result,
ultimate
ownership
of
business
assets
is
often
not
only
once
but
twice
or
more
removed
from
the
assets
themselves.
The
purpose
of
this
article
is
to
explore
this
develop-
ment
and
its
implications
for
corporate
law.
I.
GROWTH
OF
THE
MEGASUBSIDIARY
PHENOMENON
A.
Wholly
Owned
Megasubsidiaries
In
terms
of
a
corporate
law
analysis,
megasubsidiaries
may
t
Copyright
1971
by
Melvin
Aron
Eisenberg.
This
is
the
third
in
a
series
of
articles
on
the
allocation
of
legal
powers
within
the
modern
corporation.
See
Eisenberg,
The
Legal
Roles
of
Shareholder
and
Management
in
Modern
Corporate
Decisionmaking,
57
CALIP.
L.
REV.
I
(1969);
Eisenberg,
Access
to
the
Corporate
Proxy
Machinery,
83
HARV.
L.
REV.
1489
(970).
*
Professor
of
Law,
University
of California,
Berkeley.
A.B.,
Columbia,
1956;
LL.B.,
Harvard,
1959.
'See,
e.g.,
A.A.
BERLE
&
G.
MEANS,
THE
MODERN
CORPORATION
AND
PRIVATE
PROPERTY
Viii-iX,
13-16
(rev.
ed.
1968).
'577
MAY
1971
NUMBER
7
HARVARD
LAW
REVIEW
be divided
into
two
classes:
those
in
which
the
parent
owns
all
or
virtually
all
of
the
stock
(hereafter
referred
to
as
wholly
owned
subsidiaries), and
those
in
which
a
significant
minority
interest
is
owned
by
persons
other
than
the
parent-in
particular,
by
members of
the public.
Characteristically,
the very largest
of
the
megasubsidiaries
fall into
the former
class.
Indeed,
many
sectors
of
economic
life
are
now
dominated
by
such
corporations.
For
ex-
ample,
the
country's
ten
largest
commercial
banking
institutions
2
-
Bank
of
America,
First
National
City,
Chase
Manhattan,
Manu-
facturers
Hanover,
Morgan
Guaranty,
Western
Bancorporation,
Chemical,
Bankers
Trust
New
York
Corporation,
Continental
Illinois,
and
First
National
Bank
of Chicago-
are
all
wholly
owned
megasubsidiaries
or
holding
companies
whose
banking
busi-
ness
is
done
through
one
or
more
such
megasubsidiaries.
3
All
told,
fourteen
of
the
fifteen
largest
commercial
banking
institu-
tions,
and
thirty-three
of
the
fifty
largest,
are
in
holding-company
form.
4
Megasubsidiaries
are
also
extremely
important
in
the
savings-bank
sector.
The
three
largest
savings-and-loan
associa-
tions
-Home
Savings,
American
Savings
&
Loan,
and
Great
Western -
are
all
wholly
owned
megasubsidiaries,
6
and
more
than
half
the
assets
of
federally
insured
investor-owned
savings-
and-loan
associations
are
under
holding-company
control.'
In
insurance
too,
the
megasubsidiary
has
become
a
major
force.'
The
six
largest
investor-owned
life
insurance
companies
9
-
Aetna Life,
Connecticut
General,
Travelers,
National
Life
&
Accident,
Occidental
of
California,
and
Continental
Assurance
-
2
Ranking
is
by
assets.
The
50
Largest
Commercial
Banks,
FORTUNE,
May
197o,
at
204.
3
See
MOODY'S
BANK
&
FINANCE
MANUAL
(1970)
under the
corporation
names
in
text.
4
See
The
5o
Largest
Commercial
Banks,
supra
note
2,
at
205-06.
2
Ranking
is
by
assets.
MOODY'S
BANK
&
FINANCE
MANUAL
a45
(970).
6
See
id.
under
corporation
names
in
text,
save
for
Home
Savings,
which
is
described
in
Hearings
on
H.R.
Z322,
H.R.
8696,
and
H.R.
X2025
Before
the
Sub-
comm.
on
Domestic
Finance
of
the
House
Comm.
on
Banking
and
Currency,
goth
Cong.,
ist
Seas.
48
(1967).
'
See
Hearings,
supra
note
6, at
48;
Brigham
&
Pettit,
Effects
of
Structure
on
Performance
in
the
Savings
and
Loan
Industry,
in
3
U.S.
FEDERAL
HOmE
LOAn
BANK
BOARD, STUDY
OF
THE
SAVINGS
AND
LOAN
INDUSTRY
971,
I102-03
(I969).
Almost
80%
of
the
assets
of
savings-and-loan
associations
are
accounted for
by
mutual
associations,
but
stock
associations,
including
holding
companies,
are
grow-
ing
faster
than
mutuals.
Id.
at
981,
1102-05,
1167.
'See
Brigham
&
Pettit,
supra
note
7,
at
112o;
Main,
Why
Nobody
Likes
the
Insurers,
FORTUNE,
Dec.
197o,
at
83,
87,
ri9;
Rose,
"The
Future
Largest
Land-
lords
in
America,"
FORTUNE,
July
197o,
at
90,
133-3.
'
Ranking
is
by
assets.
The
5o
Largest
Life-Insurance
Companies,
FORTUNE,
May
197o,
at
2o6.
[Vol.
84:1577
1578
1971]
MEGASUBSIDIARIES
1579
and
the
six
largest
investor-owned
property-liability
insurers
" -
Allstate,
Travelers,
Continental
Corporation,
Aetna
Life
&
Casu-
alty,
Hartford
Fire,
and
INA
-
are either
wholly
owned
mega-
subsidiaries
or
holding-company
complexes
doing
their
insurance
business
through
wholly
owned
megasubsidiaries.
11
In
transporta-
tion,
many
of
the
country's largest
railroads
are
owned
by
wholly
owned
megasubsidiaries,
including
the
Penn
Central;
Southern
Pacific;
Atchinson,
Topeka
&
Santa
Fe;
Union
Pacific;
and
Sea-
board
Coast
Line.
2
So
is
the
country's
largest
airline,
3
United.
4
And
the
four
largest
message-communications
companies,
com-
prising almost
the
entire
sector
"5-
AT&T,
General
Telephone,
Continental
Telephone,
and Western
Union
-
are
all
holding
companies
operating
principally
through
wholly
owned
subsid-
iaries.
6
This
dominance
of
many
business sectors
by
wholly
owned
megasubsidiaries
is
a
recent
development.1
7
All
but
a
handful
of
the sector-dominating
megasubsidiaries
were
independent
corpo-
rations
as
late
as
1955,
and many
or
most
were
independent
as
"°Ranking
is
by
property-liability
premiums.
MoonY's
BANK
&
FINANCE
MANUAL
a48
(1970).
"
See
id.
under the
corporation
names in
text,
save
for
Hartford
Fire,
which
is
described in
MOODY'S
BANK
&
FINANCE
NEW
REPORTS,
July
31,
197o,
at
1607,
col.
I.
As
in
the
case
of
savings-and-loan
associations,
many
insurance
companies
are
mutuals,
rather
than
investor
owned.
See
The
5o
Largest
Life-Insurance
Com-
panies,
supra
note
9,
at
2o6.
12
See
MOODY'S
TRANSPORTATION
MANUAL
(1970)
under
the corporation
names
in
text.
"
See
The
50
Largest
Transportation
Companies,
FORTUNE,
May
1970,
at
210.
"4
See
MooDY'S
TRANSPORTATION
MANUAL
1375
(1970).
'5
See
The
50
Largest
Utilities,
FORTUNE,
May
1970,
at
212.
"See
MOODY'S
PUBLIC
UTILITY
MANUAL
(1970) under
the corporation
names
in
text.
17
A
similar
but
more
limited
phenomenon
occurred
during
the
Twenties
and
early
Thirties
when
holding
companies
dominated
the
public
utility
sector and
were
common,
although
not
dominant,
among
the industrials.
Beginning
in
the
mid-Thirties,
however, this
pattern
was
reversed.
Public
utility
holding
companies
fell
under the
"death-sentence"
clause
of
the
Public
Utility
Holding Company
Act
of
1935,
§
zi(b),
15
U.S.C.
§
79k(b)
(1964).
See
I
L. Loss,
SECURITIES
REGULA-
TION
131-41 (2d.
ed.
i96i);
4
id.
at
2276
(Supp.
1969).
Many
of
the
industrial
companies
dropped the
holding-company
form in favor
of
a
simplified
corporate
structure.
Compare
J.
BONBRIGHT
&
G.
MEANS,
THE
HOLDING
COMPANY
76-79,
90-95
(1932),
with
2
A.
DEwING,
THE
FINANCIAL
POLICY
Or
CORPORATIONS
985-87,
999-ioo6
(sth
ed.
1953).
There
were
also
important
bank
and railroad
holding
companies
in
the
Twenties,
but
the
form
was
not
widespread
in
those
areas,
and many
such
corporations later
dropped
it
in favor
of
corporate
simplification.
See
J.
BON3RIGHT
&
G.
MEANS,
supra
at
223-24,
323-24;
2
A.
DEWING,
supra at
958-63,
986-87.
HARVARD
LAW
REVIEW
late
as
1967.
Even
more
striking
than
the
suddenness
of
this
development,
however,
is
the
way
in
which
it
has
occurred.
In
most
cases,
theretofore
independent
corporations
turned
them-
selves
into
subsidiaries
by
reversing
normal corporate
biology
and
creating
their
own
parents.
8
The
reasons
for such
a
seemingly
unusual procedure,
and
in-
deed
for
the megasubsidiary
phenomenon
as
a
whole,
are
grounded
in
part
on legal
and
economic
considerations
unique
to
each
busi-
ness
sector.
However,
some
considerations
are
common
to
vir-
tually
all
of
the
sectors
affected.
Because
the
phenomenon
is
particularly
pervasive
and
well
documented
in
commercial
bank-
ing,
an
account
of
the
way
it
developed
in
that
sector
sheds
light
on
the
phenomenon
as
a
whole.
i.
Megasubsidiaries
in
the
Regulated
Area;
The
Case
of
Commercial
Banking.
-
Commercial
banking
is
a regulated
busi-
ness.
As
one
aspect
of
this
regulation,
the
types
of
activity
in
which
a
banking
corporation
may
legally
engage
are
normally
quite
limited.
A
national
bank
may
carry
on
"the
business
of
banking,"
"'
and has
"incidental
powers
.
. .
necessary
to
carry
on
the
business
of
banking,"
20
but
is
not
empowered
to
engage
in
any
business
activity
which
is
neither
banking
nor
incidental
thereto.
Nor
can
a
national
bank,
or
a
state-bank
member
of
the
federal
reserve
system,
carry
on
a
nonbanking
business
through
a
subsidiary."'
And
the
Bank
Holding
Company
Act
of
1956
made
it
illegal
for
any
corporation
controlling
two
or
more
banks
to
engage
in
any
business
other
than
banking,
or
to
own
voting
shares
of
any
corporation
except
one
engaged
in
banking
21
or
one
"all
the
activities
of
which
are
of
a
financial,
fiduciary,
or
insurance
nature
and
which
the
[Federal
Reserve]
Board
. .
.
has
determined
to
be
so
closely
related
to
the busi-
ness
of
banking
or
of
managing
or
controlling
banks
as
to
be
a
proper
incident
thereto."
23
18
See
MooDys
MAsuArs
under
the
corporations
named
in
text
at
pp.
i578-79
supra;
pp.
i581,
1584
infra.
In
the
message-communications
sector,
however,
only
one
of
the
four
corpora-
tions named
in
the
text
-Western
Union-falls
into
the
pattern
described.
9
National
Bank
Act
of
1864,
§
5,
12
U.S.C.
§
21
(2964).
201
2
U.S.C.
§
24
(Supp.
V,
1970),
amending
National
Bank
Act
of
x864,
§
8,
ch.
io6,
§
8,
13
Stat.
ior.
21
See
id;
12
U.S.C.
§
335,
amending
Federal
Reserve
Act
of
1913,
§
9,
ch.
6,
§
9,
38
Stat.
259;
12
C.F.R.
§
7.1o(a)
(1970).
22
Bank
Holding
Company
Act
of
1956,
§
4(a),
12
U.S.C.
§
I843(a)
(1964),
as
amended,
Pub.
L.
91-607,
39
U.S.L.W.
115
(Dec.
31,
1970).
23Bank
Holding
Company
Act
of
1956,
§
4(c)(6),
12
U.S.C.
§
1843(c)(6)
(1964),
as
amended,
Pub.
L.
91-607,
39
U.S.L.W.
125
(Dec.
31,
1970).
(The
present
§
4(c)
(8),
the
amended
version of
§
4(c)
(6),
quoted
in
text,
is
set out
in
note
37
infra.)
1580
[V01.
84:1577
There
was,
however,
a
gap
in
the
statutory
restrictions
on
nonbanking
activities.
The
Bank
Holding
Company
Act
(until
amended
in
1970
24)
was
not
applicable
to
parent
corporations
holding
the
stock
of
only
one
bank
-
one-bank
holding
com-
panies.
2
'
This
gap
assumed
great
significance
in
the
mid-i96o's,
when
a
number
of
major
banks
became
eager
to
engage
in
various
new
activities
which
might
or
might
not
have
been
permissible
or
permitted
by
the
regulatory
authorities
-
electronic
data
proc-
essing,
equipment
leasing,
the
operation
of
commingled
investment
funds,
factoring,
customs
brokerage,
credit
reporting,
warehous-
ing,
selling
insurance,
and
managing
travel
agencies.
2 6
Taking
advantage
of
this
gap in the
regulatory
net,
these
banks
pro-
ceeded
to
turn
themselves
into
wholly
owned
subsidiaries
of
par-
ents
which
they
themselves
created.
Since
the
parent
did
not
itself
engage
in
banking,
it
was
not
subject
to
restrictions
ap-
plicable
to
banking
corporations;
and
since
the
parent
held
only
one
banking
subsidiary,
it
was
not
subject
to
the
restrictions
of
the
Bank
Holding
Company
Act.
The
resulting
corporate
com-
plex was
free to
go
into
any
business,
either
directly
through
the
parent,
or
indirectly
through
subsidiaries
other
than
the
bank,
and
therefore
to
deploy
its capital
in
whatever
way
seemed
most
profitable.
Several
important
collateral
advantages
also
followed
from
the
new
corporate
structure.
For
one
thing,
the
parent
could
finance
its
activities
and
those
of
its
nonbanking
subsidiaries
free
of
the
legal
restrictions
applicable
to
the
financing
of
banks."
There
were
a
number
of
other
relatively
limited
exceptions.
For
example,
the
Act
permitted
retention,
for a limited
period,
of
"shares
acquired
by
a
bank
in
satisfaction
of
a
debt
previously
contracted
in
good
faith."
Bank Holding
Company
Act
of
1956,
§
4(c)(2),
12
U.S.C.
§
1843(c)(2)
(1964).
2
4
See
pp.
1582-83
infra.
2
One
supposed
justification
for
this
exception
was
that
the
Act was
aimed
primarily
at
the
use
of
holding
companies
to
achieve
interstate
branching
or
de
facto
branching
in
states
where
branching
is
prohibited,
and
that
one-bank
holding
companies
usually
do
not
pose
these
particular
problems.
Note,
Diversification
by
National
Banks,
21
STAN.
L.
REv.
65o,
670
(1969)
;
Note,
Approaches
to Regulation
of
One-Bank
Holding
Companies,
55
VA.
L.
REV.
952,
954
(1969).
Another
was
that
most one-bank
holding
companies
in
existence
in
1956
were
relatively
small.
Rose,
The
Case
for
the
One-Bank
Holding
Company,
FORTUNE,
May
IS,
z969,
at
163;
Note,
55
VA.
L.
REv.,
supra
at
954,
985-86
n.171.
Undoubtedly
the
exception
also
reflected
practical
politics.
"
6
See
Beatty,
What
Are
the
Legal
Limits
to
the
Expansion
of
National
Bank
Services?,
86
BANKING
L.J.
3,
3-14
(1969);
Bunting,
One-Bank
Holding
Com-
panies:
A
Banker's
View,
HARV.
Bus.
REv.,
May-June
1969,
at
99,
oo-202.
"
See
Nadler,
The
One-Bank
Holding
Company,
BANKING,
December
1968,
at
34-35;
Shapiro,
The One-Bank
Holding
Company
Movement:
An
Overview,
86
BANKING
L.J.
292,
297-99
(1969);
Whitsel,
Economics
of
the
One-Bank
Holding
Company,
THE
BANKER'S
MAGAZINE,
Winter
1969,
at
28,
30-31.
Many
or most
of
the
newly
formed
one-bank
holding
companies
have
restricted
1971]
MEGASUBSIDIARIES
1581