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+44 20 3286 8868
+86 21 2052 0623
+1 747 212 0206
+44 20 3286 8868
+86 21 2052 0623Legal entity reduction
Over time, most successful groups naturally become larger and more complex, whether through acquisitions or organic growth. The result is often that the group includes many companies and legal entities that are not contributing anything significant. This makes auditing more difficult and creates various legal and regulatory risks. So from time to time it is necessary to remove some legal entities from the group.
Perhaps the most important aspect of such projects is internal communication. Everyone affected needs to understand the project objective and how it benefits both them and the group. As we have considerable experience of legal entity reduction projects, we can help clients to identify potential problem areas like this, and deal with them before they can hinder the project or even completely derail it.
It’s essential to start with the due diligence: understanding the current legal structure, and the various risks and liabilities that exist. But it’s also critical to avoid getting swamped in detail. It’s a really important skill to know when to stop this part of the process.
If you keep on investigating the detail endlessly then the project won’t progress. One of the ways to get this right is to set a ‘materiality threshold’ – for example, that companies under a certain value will definitely be eliminated. (This can also help with the internal communication aspect.)
Equally, you need to do enough due diligence to spot potential problems, such as invalidating anti-compete agreements or making them unenforceable; or removing an entity which is on an approved supplier list, thereby creating procurement problems. These are just two common examples. A wide variety of hidden assets can provide huge value, and must therefore be noticed and protected.
The solution is to have a carefully structured plan, and to bring the necessary expertise to carry it out successfully.
