Of a surety, many may have heard of the word special purpose vehicles or “special purpose entities” before now. The word has become quite common since the last global financial meltdown. I am sure a lot more people would be wondering what they really are. Below we will be giving a very simplified description of what they are and their purposes.

What are Special Purpose Vehicles
A Special Purpose Vehicle (also known as Special Purpose Entity in the U.S.) is a legal and business entity created to fulfill narrow, limited, well-defined, specific or normally temporary purpose/objective. Special Purpose Vehicles (“SPVs”) are usually limited liability companies and in rare cases they can be limited liability partnerships. They are like subsidiaries but are quite narrower in purpose and approach. They can be formed for any narrow lawful purpose. In Nigeria, an SPV is usually registered as a separate business entity (company) under the Companies and Allied Matters Act. This is because they are companies strictu sensu.
SPVs and similar other entities
SPVs are like the usual  companies we know except that they are “one dimensional” in nature- formed for very specific purposes. Companies can be regarded as ‘general purpose vehicles’ and wider in their activities.
SPVs are not subsidiaries. Though a company may be its promoter but SPVs do not have a holding or parent company. They are separate on their own, and from their promoters. The activities of the SPV are distanced from the promoter company. Usually, SPVs operate an arms length relationship with their related companies. A good SPV stands on its own feet.

Any special requirements?

No. SPVs are created like every other company would. They would of course have promoters before their setting up. They must meet up with minimum requirements for setting up of companies.
Why are SPVs created?
They are used to isolate risks from its promoting entity by transferring some of its liabilities to it, hide debt from investors making the company look like it has no liability, hide ownership of an entity (during the banking reforms of 2008 and 2009 a former managing director of a Nigerian bank was accused of setting up several SPVs for the purposes of giving loans to himself and also acquiring large shares in the bank); SPVs are also used to obscure relationships between two companies which are related, used for securitisation of loans, an example was the famous American Enron SPV. They are used to finance large projects without putting the creator at risk. This is one purpose for which many SPVs are used these days especially in emerging and illiquid markets. The concept of using SPV to separate the activities of two otherwise related entities makes every legal sense because as we know a company is a distinct personality from its creator.[1]
They are sometimes set up in tax havens as a means of tax avoidance. A large company may set up an SPV in a country with less taxation to carry out a hugely profitable project. Recently the American software giant, Apple Inc., was accused of using this system to avoid huge taxes in the U.S. By setting up an SPV in the Isle of Man. 
With the phased privatisation of Nigerian power sector, most distribution and generation companies in Nigeria today are SPVs.
To conclude, let me point out that SPVs can sometimes be very advantageous when they are used to isolate the risks of the promoter, this can save the promoter from insolvency and boost the confidence of investors in the promoter company. Also where they are used in securitisation processes. SPVs are not illegal entities. They only become illegal when they are used to achieve illegal purposes. But they present an interesting source of business safeguarding in these fragile economic times.

Y. D. Amakiri advises companies in Nigeria and regulatory compliances.

[1] Salomon v. Salomon [1897] AC 22; See also Habib Nig. Bank Ltd v Ochete (2001) F.W.L.R (Pt. 54) 384.

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Nigerian Law Today

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1 Comment

  • Beautiful. very concise piece. However, i have a question. if a state government wants to float an SPV, are there any limitations? are there any different laws?