Goldman’s Shell Directors and a Defense?
Following practice, the Goldman deal under attack by the SEC was done using one or more shell corporations organized and capitalized for the purpose, usually incorporated in places like the Cayman Islands and Delaware. The capitalization is extremely thin, often mere hundreds of dollars in equity along with hundreds of millions in debt.
The corporations have no other purpose, employees, assets or knowledge–except one or two members of their boards of directors. These are usually ordinary people, including law and finance professors or local lawyers in the Cayman Islands.
The peculiar thing about these deals is that the related offering circulars, which run hundreds of pages loaded with elaborate technical detail, are said to be made and backed by those corporations, and not by the real institutions, like Goldman Sachs or its affilliates, forming and selling the deal. The directors of the corporations in this deal may be having some restless nights.
They will be remote from legal liability and indemnified to the hilt, one supposes, but it cannot be a pleasant feeling to have been involved, for modest pay, in such a tumultuous event. I know it will make me less willing to say yes when asked if I would be willing to serve as a director of a shell corporation for an asset-backed deal.
This also raises a potential defense: the Offering Circular makes it abundantly clear that all information in it, including representations, is provided solely by the two shell corporations, and not by Goldman Sachs. Will that sort of defense work?