Papers Relating to the Foreign Relations of the United States, 1924, Volume II

362.115 St 21/337: Telegram

The Secretary of State to the Ambassador in France (Herrick)

Washington, January 12, 1924—6 p.m.

15. L–39. For Logan. Your L–69, December 29.⁷⁰

1. While Department agrees that stockholders have no legal title to the assets of a corporation, it is entirely unable to concur in intimated decision of Tribunal that stockholders have no equitable or beneficial interest in corporation’s assets. Not only have text writers and the courts repeatedly recognized the beneficial interest of shareholders in corporation’s assets, but governments have repeatedly lent diplomatic assistance to support such beneficial interest. As to the position of governments in this respect, see cases cited in Section 20, pages 58 to 74 of first brief filed with Tribunal by Standard Oil. See quotations in Section 19 from Morawetz and German Text Writers. See also German and American cases cited in that section, and particularly the opinion of the Supreme Court in Bacon v. Robinson [Robertson], page 46, wherein the court in part stated that it was the tendency of the courts of the United States and Great Britain:

“to concede the existence of a distinct and positive right of property in the individuals composing the corporation, in its capital and business, which is subject in the main to the management and control of the corporation itself; but that cases may arise where the corporators may assert not only their own rights but the rights of the corporate body.”

Attention is also called to the following American decisions:

“The stockholders … are the ultimate or equitable owners of its (the corporation’s) assets.” Brock v. Poor, 216 New York, 387.

“The share holders are the owners of the corporate property in equity. When the corporation is dissolved and its debts paid, the former corporate property belongs to them as individuals, and, while the corporation exists and does business, the share holders are entitled to control its affairs, in the proportion to the number of their shares, through the instrumentalities which the laws provide for their management.” Doherty and Company v. Rice 186 Fed. Rep. 212.

“It is true that a corporation holds the legal title of, and the right to manage, control, and convey, its property, and that a stockholder is without that title and right. But, after all, the corporation is nothing but the hand or tool of the stockholders, in which they hold its property for their benefit. They are the equitable and beneficial owners of all its property, and it is the mere holder and manager of it for them. The benefit of every increase in the value of its property is their benefit, and the injury or every decrease of the value of its property is their injury. They may, by appropriate action [at] any time require and compel it to sell all its property and to distribute its proceeds among them. … So in reality, as against its stockholders, a corporation has no, and they have all the beneficial interest in its property.” Lynch v. Turrish, 236 Fed. Rep. 656.

These decisions establish very clearly that stockholders are the equitable or beneficial owners of the corporation’s assets.

2. The intimated decision of the Tribunal is diametrically opposed to the action taken by the French and British Governments subsequent to the outbreak of the war with respect to tankers belonging to the D. A. P. G. As indicated in the Department’s L–20,⁷¹ these Governments, in view of the recognized beneficial ownership of the Standard Oil, permitted the tankers to be transferred to the American flag. In fact, in the case of the Leda the bond required by the British Government expressly recited that application had been made on the ground of “beneficial ownership” and that on said application the King had agreed to release the ship to the Standard Oil Company.

3. In view of the position taken by courts and governments as above indicated, Department does not perceive how the Tribunal could decide as intimated. Furthermore, such a decision would be precluded by the recognition by the British and French Governments, with respect to this very company, of the principle of beneficial ownership in the stockholders.

4. Throughout the negotiations the principle of beneficial interest was never in any way questioned, although it is true Bradbury⁷² objected to the Agreement⁷³ specifically defining what should be considered beneficial ownership. This objection it seems was largely based on the fear of such a definition creating a precedent which might embarrass the Reparation Commission in other cases, while the tanker case was considered to be a special one. The fact that the wording of the Agreement was modified from time to time in no way indicated a change in the views of the United States. These were consistently maintained. See Boyden’s B–56, April 29, 1920,⁷⁴ paragraphs fifth to twelfth. Note particularly that, notwithstanding Bradbury’s statement of his understanding in paragraph eighth, Boyden reiterated that the understanding of the United States was that tankers were to be surrendered in proportion to ownership of securities. Note also paragraph ninth, and Bradbury’s view in paragraphs tenth and eleventh. For subsequent discussion of Agreement see Boyden’s B–77, B–92, B–94, and B–109;⁷⁵ and Department’s 934 of May 14 and 1006 of May 26, 1920.⁷⁶

5. Department again calls attention to the fact that all those concerned in reaching tanker agreement considered applicable paragraph 20 of Annex II⁷⁷ and paragraph 5 of the Wilson-Lloyd George Agreement.⁷⁸ Indeed this Government has previously pointed out that both paragraphs were adopted in contemplation of tanker situation. Note in this respect Department’s 3532, October 22, 1919,⁷⁹ to American Mission. It is clear from a review of the tanker discussion that neither United States nor other negotiators considered that paragraph 20 had limited meaning apparently given it by Reparation Commission. Neither the United States nor the Tribunal in any way bound by Commission’s interpretation. In fact, the Commission expressly recognized its decision without prejudice to tanker case. It was because this Government was not represented on the Commission and therefore had no voice in its decisions that the tanker case was submitted to a special tribunal. The Tribunal may have a tendency to lose track of these facts and to follow too closely the decisions of the Commission.

6. Aside from the question of beneficial ownership: paragraph G of the Agreement, as stated in Department’s L–20, contains ample provision for award of tankers to Standard Oil Company to extent of its proved interest in German company, with any necessary accounting to the Reparation Commission for any amounts that may have been received by the latter company from the German Government. It must be borne in mind that not only does the Agreement contemplate compensation to the Standard Oil Company for any loss that it might sustain by reason of the transfer of the tankers, but that such compensation shall be made in tankers rather than money. This was insisted upon by the United States in view of the fact that the tankers are necessary to the conduct of the business. It is inconceivable that Tribunal would ignore clear meaning of the Agreement and render a decision which would have the effect of causing financial loss to the American corporation.

Hughes

70. Ibid., p. 217.
71. Ibid., p. 213.
72. Sir John Bradbury, British representative on the Reparation Commission.
73. Tanker Agreement, see Foreign Relations, 1920, vol. ii, p. 598.
74. Not printed.
75. Telegrams nos. B–77, B–94, and B–109, not printed; telegram no. B–92 printed in Foreign Relations, 1920, vol. ii, p. 592.
76. Ibid., pp. 590 and 595, respectively.
77. Of part VIII of the Treaty of Versailles.
78. Foreign Relations, 1920, vol. ii, p. 512.
79. Ibid., p. 554.