New Jersey passed a law in 1889 that let one corporation own another.
Before 1889, American corporations were generally prohibited from owning stock in other corporations. The restriction reflected a widespread fear, dating to the colonial era, that concentrated corporate power would undermine democracy and competition.1
New Jersey changed the rules. In 1889, the state amended its general incorporation statute to permit corporations chartered there to purchase and hold the stock of other corporations. The amendment was designed to attract incorporations and the tax revenue they generated. It worked. Within a decade, New Jersey became the preferred home for America's largest business combinations.2
The holding company structure allowed a single entity to control multiple subsidiaries without merging them. Standard Oil, reorganized as a holding company in New Jersey after the Ohio courts dissolved its trust arrangement, became the model. By 1901, U.S. Steel was incorporated in New Jersey as the first billion-dollar holding company.3
The legal innovation separated ownership from operation. A holding company did not need to manufacture anything, employ anyone in production, or sell a single product. It needed only to own enough stock in other companies to control their boards.
Other states competed for incorporation fees by loosening their own statutes. Delaware eventually surpassed New Jersey as the most popular state for incorporation, a position it retains. More than sixty percent of Fortune 500 companies are incorporated in Delaware.4
The Sherman Antitrust Act of 1890, passed one year after New Jersey's holding company statute, attempted to limit the concentrations of power that the new corporate form enabled. The tension between the two legal innovations, one permitting consolidation and the other attempting to prevent monopoly, defined American corporate regulation for the next century.5