If the Internet has taught us anything, it is that we have to be careful with information and value our privacy. In our personal lives, this means doing things like being more aware of what we post on social media or keeping a closer watch on our account passwords and credit record.
However, in some fields, particularly business, security and privacy of information has been taken to a whole new level – anonymity – using today’s word. Looking at the world of mergers and acquisitions, where deals can be broken, publicised, or heavily scrutinised based solely on who is involved in them, privacy and security of information through vehicles like shell corporations can often be the motivating grease that makes the deal move.
While the term shell corporation may not be familiar with most people, the concept surely is.
A shell corporation is a business entity that provides a multitude of options for another business, but has no assets or operations of its own. Just as the name suggests, shell companies are hollow and do nothing but manage the money inside of them in a way that is perfect for owning assets without leaving a trace of whose money it actually is.
Literally breaking it down, being a ‘corporation’, it is a business entity as well as a corporate person, and the ‘shell’ aspect simply means that it is masking or covering up the actions of another entity.
If this seems like a difficult concept to grasp, simply think of the Virtual Private Network that you may use when connecting to the Internet or, in the US, the post office box that you rent. Essentially, using these examples, you are attempting to hide your actual location in order to achieve some advantage (like watching better content on Netflix or not getting salesmen showing up at your front door), which is a small part of what shell corporations can do.
Browsing the Internet, it is easy to find numerous sensational stories of fraud, dark money, and attempted tax evasion involving shell corporations, but, as with most sensationalism in reporting, this is far from the norm.
Shell corporations are far more common and used for far more functions, many of which are legitimate, that people typically understand.
For example, since no company wants to pay more in taxes than is absolutely necessary, many large companies legally use shell corporations to take advantage of lower tax rates in offshore jurisdictions.
Additionally, since some countries, such as China and (formerly, to a large extent) India, restrict foreign-owned corporations from doing business in domestic markets, shell corporations (by way of a joint-venture with a local company) are a way for foreign corporations to gain access and conduct business.
Specifically in the M&A field, shell corporations can maintain anonymity: for example, if a small software company develops a beneficial program, and Amazon wants to buy the company, doing so via a small, unknown, an obscure company will create a lot less media buzz and scrutiny than attempting to buy the company directly (and could likely lead to a lower price too).
And last but not least, shell corporations should not be confused with shelf corporations, business entities that we will cover in one of our next publications.
