What is meant by Combination Trusts?
“In a combination trust, a property is handed over to a person or persons with the ‘confidence’ that they will make the most of it for common good.”
If you look into a dictionary, a synonym of the word ‘Trust’ is ‘Confidence’. It’s basically this confidence that is the basis for Combination Trusts. In a combination trust, a property is handed over to a person or persons with the ‘confidence’ that they will make the most of it for common good or for realizing the objectives and aims of the trust in question.
Here, we are going to talk about the trusts that are formed as a means of business combinations. Trust movement began in the USA as a tool to check ruthless competition and to avoid depression arising out of surplus production in industry.
Some of the big trusts formed in USA were the Standard Oil Trust, the Cotton Seed Oil Trust etc. However, after some time these trusts were stated as illegal.
They were held harmful and opposing to common law. Thus, we see that abuse of trust structure has been happening in the past and even at present such cases are not uncommon. Though the scale of such misuse is quite limited.
Nevertheless let’s proceed as regards our understanding of this term. Under the trust arrangement, the shareholders of constituent companies agree to transfer their stock to a board of trustees in exchange for a trust certificate. These trust certificates show their unbiased interests in the profits of the combination.
Trustees under the trust administer all the affairs. Shareholders of different companies transfer their stocks to the board of trustees in exchange for trust certificates. Profit is determined strictly on the basis of share of each person.
Exceptions to this rule are very rare because if profits are not proportionate to investment, the existence of a trust comes under serious threat. To avoid such a situation, the board of trustees controls each of the affairs of the unit and decides about its business strategies.
Voting power is the privilege of trustees. The trust certificates bear a right to dividend, which is declared out of the collective income after deducting trust-operating costs. Separate identity of the constituent companies is preserved. When the stipulated period of time for which a trust is defined comes to an end, the shareholders are free to take back their stock.
Author - DeeKay
Tags - Finance, Economy
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