Using Multiple Corporations and Special Purpose Vehicles
Whenever feasible, assets, such as real estate and equipment, surplus cash, inventory, accounts receivable, and intellectual property should not be held by the operating corporation.
If the business of the corporation can be divided into separate businesses, both assets and liabilities can be protected or managed through the use of multiple entities, (which may be corporations, LLCs, limited partnerships, or trusts—all of which together are referred to as Special Purpose Vehicles or SPVs). We have seen over the last ten years many abuses of these strategies in now infamous corporate scandals. Enron used multiple corporations and SPVs to remove liabilities from its corporate balance sheet and to disguise its growing losses from investors and regulators. Lehman Brothers, in the years preceding its bankruptcy, and apparently many of the large banks, still regularly shift liabilities to SPVs prior to the end of a fiscal quarter, which effectively overstates the company’s financial strength. Despite these past and certainly ongoing abuses, SPVs allow us to accomplish many legitimate business and legal objectives. In one form or another, most businesses with valuable assets or revenues to protect use multiple corporations or SPVs for structuring flexible financing, issuing securities to investors, and achieving enhanced legal liability protection.
The simplest example of the usefulness of SPVs is a corporation with more than one retail outlet within a single corporation. If business at one of the locations slows down substantially, that outlet may became a financial drain on the others, absorbing all of the available cash in the company. At a minimum, our approach in these situations is to have each store location be separately incorporated. Then, if one were to falter, the liabilities would not drag down the other, still valuable, stores. A judgment creditor of one corporation would not be able to reach the assets of the other companies. An extreme illustration of this is the taxicab company which separately incorporated twenty-six different taxis.
This strategy is also useful for a company that manufactures or wholesales different product lines. Companies in the pharmaceutical business face enormous potential liability for many types of drugs and medical devices. The recent oil leak from an offshore well owned by BP has created one of the greatest environmental disasters in history. The company faces tens of billions of dollars in potential liability claims. It’s impossible to say at this point how BP has segregated ownership of other worldwide assets to limit the impact of liability claims, but whatever tactics the company intends to use will be revealed over the coming months and years. Whenever a particular product may be hazardous, using multiple corporations (or other entities) is an effective technique for insulating each separate product from liability caused by another.