Wednesday, June 15, 2005
A corporate pyramid is the best way to use minimal amount of equity to control vast amount of assets. For a very simple example that a controlling company A at the top and it holds 2 subsidiaries B and C with A holding each of them only 10%. Repeat the same structure for another layer down then company A will be able to control 22 = 4 companies. Repeat this for the 3rd layer will enable company A to hold 23 = 8 companies. For 3 layers of simple 1 to 2 split, this will enable the controlling company A at the top to control 30 companies with only 10% of total equity. With minorities shareholders of these companies having no say in the operation of these companies, company A will be able to use inter-company trades and transactions to rip off minority shareholders. If company A is managed to sell overpriced product from the top to a 3rd layer company in the pyramid then the amount that can be expropriated will be X(1-OP) where OP is the Ownership Percentage, i.e. 0.14 = 0.0001 in this case, and X = overpriced amount. Therefore people tend to build complicated group structure to evade scrutiny by regulators for inter-company trading for expropriation purposes.
by sfong15 at 3:09 PM