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 the term interchangeably but they are not the same thing.
1. Shelf Companies
A shelf company literally means a company sitting “on a shelf.”
The way it works is this – large law firms incorporate 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 law firm will have a client who needs or desires a pre-existing company and it will sell or flip to the client, an asset of the law firm, namely 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.
Large law firms have a corporate records department, which is a library with the Minute Books for every company the law firm represents or acts maintains records for.
Large law firms have 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.
Shelf companies are rarely used for nominees because they literally just sit on a shelf to age and become more valuable until the law firm can flip the asset to a client for between $200,000 to $1 million.
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 Pretty 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 Pretty 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 compared to a company without a number. In terms of purpose, structure, shareholders and organization, there is no difference 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.
In the corporate law and financial crime 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.
It is important to note that the first type of shell, the securities law shell, which is usually a reporting issuer, can be used for criminality and often is when it involves a pump and dump scheme. In that case, the shell is part of a reverse take over where securities fraudsters pump and dump a revived old shell.
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).
In Canada, in financial crime discussions and in some pieces of legislation, people have used the term beneficial owner to refer to the concept of requiring the identity of the natural person behind the shares of any private company but that is not technically what beneficial ownership is and moreover, a beneficial owner can be, in law, a natural or legal person. The confusion arises from the fact that policy makers are technically seeking to identify the control persons behind beneficial owners (the humans calling the shots of the persons or companies named on a share certificate).