Combination Trust | Definition | Objectives | Advantages | Disadvantages

Definition of Combination Trust

In the words of Haney, combination trusts are,

a form of business organization established through temporary consolidation in which the stock-holders of the constituent organizations under a trust agreement transfer a controlling amount of their stock to a board of trustees in exchange for trust facilities.

According to Guthman and Dougall,

Controlling stock interests in two or more corporations were turned over to a group of trustees and the stockholders received transferable trust certificates entitling them to dividends declared by the trustees out of common funds, while voting power remained with the trustees.

Combination Trusts - Definition, Objectives, Advantages, Disadvantages

Combination Trusts – Definition, Objectives, Advantages, Disadvantages

History / Objectives of Combination Trusts

Combination trusts originated in the US in 1879. The objective was to check cut-throat competition, and to ensure better enforeceability and stability when compared to pools and cartels.

Some of the initial trusts were

  • The Standard Oil Trust (1879),
  • The Cotton Seed Oil Trust (1884), and
  • The Whisky Trust (1887).

From the inception, Combination trusts were considered to be against ‘public policy’. They were declared illegal in the last century. But after a Court decision in 1935, Combination Trusts were declared to be legal if they are formed in good faith for the benefit of the company.

Businesses were entrusted to ‘trustees’. Trustees were those considered to be experts in that particular business. The objective behind this arrangement was to promote the interests of the business in a better manner. Trustees are elected and the companies transfer the stocks (shares) to the trustees.

Trustees have all powers of the shareholders. The trustees would issue trust certificates to the actual shareholders and pay dividends to them. The trustees enjoy wide powers including the power to merge companies, promote new companies, borrow loans, lend loans, pay dividends etc.

Advantages of Combination trusts

1. Combination trusts are more stable when compared to pools and cartels. Trusts are formed for a fixed period and for that period its existence is ensured, whereas pools and cartels can be broken up any time.

2. Trusts have greater control over output and marketing, and therefore are free to regulate prices

3. Since all member units are brought under a single operation, economies of scale can be enjoyed.

4. Due to the coming together of a number of business units, the capital availability is more. Therefore large scale projects which require huge capital can be undertaken.

4. Persons appointed as trustees are people with good reputation and vast experience in the business. Therefore they would be able to run the business in an efficient and profitable manner.

5. Since competing units are brought under a single entity, wasteful competition can be eliminated. The management can concentrate its entire attention on the business instead of worrying about competitor moves. It can save a substantial portion of selling costs.

Disadvantages of Combination Trusts

1. It is difficult to form when compared to pools.

2. It is quite rigid in nature and lacks flexibility.

3. The monopoly power might be used to exploit consumers by restricting output.