At work, someone asked me to explain a case of circular ownership, and it got me to thinking that the reasoning is interesting to share. I think it’s similar to another piece of commentary I’ve given recently, but still worth explaining in this context…
Company A is 45% owned by Company X, which is on the OFAC SDN List, and 48% owned by Company Y, which is not.
However, Company A owns 100% of Company Y, making the ownership circular.
Should you treat Company A as sanctioned, because Company X also owns a piece of that ownership stake by Company Y, which would put its ownership of Company A over 50%?
As a practical matter (regardless of your willingness to do the math), no you shouldn’t. Here’s why:
When Company Y makes business decisions, Company X does not control a majority of the votes. If Company A were to vote on what Company Y should do, Company Y’s wishes would represent 48% of the votes, and Company X would have 45% of the votes.
Similarly, when Company Y votes its interests in Company A’s affairs, Company X only has a minority share in that decision. Therefore, since Company X does not control how a majority of Company A’s voting shares are actually voted, Company A is not sanctioned.
It’s easiest to consider this case when Company X disagrees with what Company Y wishes to do. Even when Company X wants to control how Company Y’s stake in Company A’s affairs, it does not have the votes to do so.
Because the circular ownership is exercised as a block, and not proportionately, Company A should not be treated as sanctioned.
BTW, is it likely that Company Y’s stake in Company A is restricted as to usage of its voting rights? I am sure.