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Corporate Shell Games Could Elude the Law

May 04, 2003

Re "Senator Proposes 'Three Strikes and Out of Business' State Law," April 30: State Sen. Gloria Romero's (D-Los Angeles) attempt to put thrice-convicted corporations out of business in California is absurdly ill conceived. Here's why: An overwhelming majority of California corporations are tightly held by a small number of stockholders, often company officers and/or their friends and relatives. Facing dissolution, an offending company could quickly create an entirely new shell corporation, perhaps with a similar name and with essentially the same management. Then the offending company sells its assets--but not its liabilities--to the "new" corporation. The old corporation is dissolved or declares bankruptcy, probably leaving its creditors, including rank-and-file employees, holding worthless liens against an empty bag.

This sort of corporate shell game now occurs in California and other states where it is cheap and easy to incorporate.

That Romero or her advisors seem ignorant of this common tactic speaks volumes about the downside of term limits.

Marvin J. Wolf

Los Angeles

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