united-states corporate-law oregon
Can a company be a wholly owned subsidiary of its wholly owned subsidiary?
<p>Is it possible for A Inc. to own 100% of B Inc. and for B Inc. to own 100% of A. Inc. simultaneously?</p>

<p>This issue is probably one of first impression in Oregon, which means that a judge would have to evaluate it as the case presented itself and decide how to rule with only slight guidance. A judge could go either way. While this arrangement isn't clearly and expressly forbidden, it is also sufficiently at odds with the purpose of corporate formation statutes that it wouldn't be hard to imagine a judge finding that this arrangement was illegal. Any such arrangement would be in legal limbo.</p>
<p>I would advise a client that it is unwise to use an arrangement like this one without a very good reason and I can't think of any good reason to do so in a for profit entity.</p>
<p><a href="https://www.bvdinfo.com/en-gb/blog/compliance-and-financial-crime/exploring-integrated-ownership-circular-and-aggregate" rel="nofollow noreferrer">This source</a> says no:</p>
<blockquote>
<p>The other can’t, as this structure would form a closed loop without
any ultimate ownership from individuals. But in extreme cases, one
entity can own 100% of the other, and be reciprocally 99% owned. The
remaining 1% then comes from elsewhere.</p>
</blockquote>
<p>I don't see legal authority in support of that conclusion (which appears to be referencing the U.K.'s Office of Foreign Assets Control), however.</p>
<p>It certainly is permissible to have a non-profit corporation with a self-perpetuating board of directors. Indeed, I wouldn't be stunned to see a court find that this arrangement is allowed for a non-profit, but not for a for profit corporation as it is not carrying out any business for the benefit of its shareholders other than itself.</p>
<p><a href="https://steeleglobal.com/exploring-circular-ownership-in-compliance-investigations/" rel="nofollow noreferrer">This source</a> concludes based upon U.K. and European law that such structures may be suspicious, especially when they are 100% circular, but some degree of circularity in ownership isn't forbidden and can arise inadvertently, stating:</p>
<blockquote>
<p>There are legitimate reasons for the existence of circular ownership
within a corporate structure. For example, circular ownership may
evolve inadvertently over time as a corporate structure grows through
mergers, acquisitions, and changes of control (Samsung Group is one
such entity); and sometimes circular ownership structures are created
for legitimate tax reasons.</p>
<p>Other times, however, circular ownership can be intentionally created
by companies or corporate groups as a loophole to mask true ownership
and control for certain purposes, including tax evasion, money
laundering, and/or to avoid sanctions.  The result of utilizing either
of these circular ownership structures can be that the ultimate
natural person owner(s) are masked through this complexity.  Thus, the
ultimate owner may not appear to meet a regulatory threshold such as
25% for due diligence or the OFAC 50% rule. Circular ownership
structures can act as a loophole for ultimate beneficial owners to
avoid detection for sanctions and due diligence purposes.</p>
<p>Note that the legality of circular ownership varies by jurisdiction.
For example, it is legal and used often in Russia; it is legal under
only certain circumstances and at low shareholding percentages in
Italy, the Netherlands, and South Korea; and it is illegal in the UK
and Norway, among other jurisdictions.</p>
</blockquote>
<p>The U.S. is in the process of <a href="https://www.federalregister.gov/documents/2021/12/08/2021-26548/beneficial-ownership-information-reporting-requirements" rel="nofollow noreferrer">drafting new regulations</a> requiring the disclosure to a federal money laundering agency the ownership of closely held corporations, and it isn't obvious to me that a corporation with this arrangement could satisfy the requirement to disclose beneficial ownership in those regulations, although they have not yet been adopted to the best of my knowledge (although they were supposed to take effect in 2022) so it is hard to know.</p>
<p>Circular ownership has long been prohibited <a href="https://www.law.cornell.edu/uscode/text/15/80a-20" rel="nofollow noreferrer">in registered investment companies in the U.S.</a></p>
<p>An Oregon corporation is required to have a lawful purpose. Oregon Statutes § 60.074.</p>
<p>Also, if an Oregon corporation owns its own shares, those shares cease to exist. Oregon Statutes § 60.177. There is a legitimate legal argument, that could go either way, that this arrangement, while indirect, in substance amounts to a corporation owning all of its own shares.</p>
<p>The various grounds upon which a corporation may be judicially dissolved in are set forth in Oregon Statutes § 60.661, which include fraud, the claim that the corporation is a &quot;shell&quot;, or a finding that the corporation owes debts and is insolvent. This statute states (in pertinent parts):</p>
<blockquote>
<p>Grounds for judicial dissolution; finding that corporation is shell
entity; prima facie showing by Attorney General; effects; affirmative
defenses.</p>
</blockquote>
<blockquote>
<p>(1) A circuit court may dissolve a corporation: (a) In a proceeding by the Attorney General if the court finds that: (A) The corporation filed articles of incorporation with fraudulent intent, with fraudulent information or in a manner that otherwise indicates fraud; (B) The corporation has continued to exceed or abuse the authority conferred upon the corporation by law; or (C) The corporation is a shell entity. For purposes of this subparagraph (i)A court may find that a corporation is a shell entity if the court determines that the corporation was used or incorporated for an illegal purpose, was used or incorporated to defraud or deceive a person or a governmental agency or was used or incorporated to fraudulently conceal any business activity from another person or a governmental agency; and (ii) The Attorney General may make a prima facie showing that a corporation is a shell entity by stating in an affidavit that: (I) The corporation did not provide a name or address required by the Secretary of State, or the name or address the corporation provided was false, fraudulent or inadequate;(II) The corporation’s articles of incorporation, a record the corporation must keep under ORS 60.771, or the corporation’s annual report is false, fraudulent or
inadequate; (III) A public body, as defined in ORS 174.109, attempted
to communicate with, or serve legal process upon, the corporation at
the address or by means of other contact information the corporation
provided to the Secretary of State, but the corporation failed to
respond; or (IV) The Attorney General has other evidence that shows
that the corporation was used or incorporated for an illegal purpose,
was used or incorporated to defraud or deceive a person or a
governmental agency or was used or incorporated to fraudulently
conceal any business activity from another person or a governmental
agency. . . .
(c) In a proceeding by a creditor if the court finds that: (A) The
creditor’s claim has been reduced to judgment, the execution on the
judgment returned unsatisfied and the corporation is insolvent; or (B)
The corporation has admitted in writing that the creditor’s claim is
due and owing and the corporation is insolvent.</p>
</blockquote>
<p>This isn't, however, expressly and straightforwardly prohibited.</p>
<p>While this arrangement wouldn't necessarily automatically constitute a &quot;shell&quot; under the statute, it seems very likely that a court that made a finding that a corporation with this structure in Oregon was a shell would be upheld on appeal.</p>
<p>Basically the only form of organization that such entities could have for tax purposes would be as C-corporations. But, they would probably be required to file as a consolidated group, and they might run afoul of the accumulated income tax in addition to the usual corporate income tax, by not paying dividends that removed assets from the affiliated group.</p>
