Primer on Beneficial Ownership and Numbered, Shelf and Shell Companies

By Christine Duhaime | April 24th, 2016

Beneficial ownership … Shell companies … Shelf companies … What’s the Difference? 

Since the Panama Papers, there seems to be an increasing interest in the concepts of beneficial ownership, numbered companies, shell companies and shelf companies and people use them interchangeably but they are not the same thing.

1. Shelf Companies 

A shelf company literally means a company sitting “on a shelf.”

This is an area that few people know much about. That is because Big Law firms are the creators and holders of shelf companies.

The way it works is this – Big Law incorporates companies in which the law firm is the incorporator. The company undertakes no business activity and the Minute Book for that company sits on a shelf for a number of years. Eventually, the Big Law firm will have a client who needs or desires a pre-existing company and it will sell to the client, one of its shelf companies. On the rare occasion, a person will create their own shelf company. Once a shelf company is sold, it ceases to be a shelf company.

Big Law has a corporate records department, which is a library with the Minute Books for every company the law firm represents or acts as the Records and Registered Office.

The Big Law firm has another important collection of books – those are deal books, sometimes called closing books, that have the paperwork for M&A transactions and financings. The closing books are material in respect of beneficial ownership, because they often contain the documents evidencing beneficial ownership.

There are two misconceptions about shelf companies that are worth noting:

(a) It is not accurate that nominees are used for shelf companies.

(b) It is not accurate that shelf companies are used when a person needs a company that is “ready to go”. In modern jurisdictions, it takes minutes to register a company. Obtaining a company that is “ready to go” is not the purpose shelf companies serve.

2. Numbered Companies 

Some jurisdictions allow the incorporation of numbered companies, as opposed to a company that has a name. People object to numbered companies without any basis. There is nothing the matter with, or suspect about, a numbered company.

Every company, even those that have actual names, such as Ocean View Holdings Inc., also has a corresponding number and is legally also known as its number not its name, and therefore its legal name may be Ocean View Holdings Inc., ON1568797. It is no different than the company that is a solely numbered company.

The reason people object to numbered companies is because it’s harder for them to recollect the name of a numbered company than a company without a number. In terms of purpose, structure, shareholders and organization, there is no difference whatsoever between a numbered and a non-numbered company.

3. Shell Companies – there are two meanings

A shell company has two meanings.

In the securities law context, it means a company that no longer has business activities, although it once did have business activities, hence it is now a “shell” of its former self, as in “an empty shell.” In the public company context and in the securities law context, a shell company is used for the listing or re-listing process, or when there is a change of material business activities. There is nothing the matter with this type of, or reference to, a shell company.

In the corporate law context, a shell company has a different meaning. A shell company in this context means a company created to obfuscate ownership of shares (the beneficial ownership issue) and the purpose may be criminal or not.

If a person sets up a company in the Cayman Islands, it is not necessarily a “shell company.” It all depends upon how the company is organized in a structural sense and what it is used for.

The key to determining whether a shell company was established with a criminal intent, or is used criminally or to obfuscate ownership for a criminal intent, is to look at beneficial ownership. Not all companies created to obfuscate ownership are criminal either – many people who run companies purposely use nominees to protect their privacy. Famous people do this, for example. In Canada, most infrastructure project firms and asset managers use shell companies in the Cayman Islands.

4. Beneficial Ownership

Beneficial ownership refers to the beneficial owner of the shares of a private company, as opposed to the legal owner of shares of a company, namely the de jure versus de facto ownership of shares.

Beneficial ownership is a common law concept used to distinguish rights held by persons with a beneficial interest in property from those who hold those interests legally (i.e., in name only). In the case of shares, a person can hold shares legally (in their name) or beneficially (as a nominee shareholder – meaning for the benefit of another person). Corporate law protects both de facto and de jure ownership of shares of private companies.

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