This article forms part of our guide to corporate simplification and legal entity reduction projects. Links to the other parts of the guide are at the end of this article.
There are a number of reasons why an organisation might want to simplify its group structure. Here are some of the most common ones.
- Reducing ongoing costs – including costs such as audit fees, tax compliance, company secretarial compliance See the article “What cost savings will my corporate simplification project actually produce?”
- Reducing compliance burden – closely linked to reducing ongoing costs. Can include the management time spent in reviewing and approving regulatory filings and reports for different entities
- Reducing transactional costs – this can be harder to quantify, but is just as valid. The more legal entities a group has, the more complicated the arrangements are likely to be when the group refinances or undergoes some other corporate change. This leads to increase management time as well as professional costs
- Improving governance – making the group structure easier to understand and reducing the number of companies can make it easier for directors to show that they are complying with their legal obligations as directors
- Increasing transparency – having a complicated group structure can support an impression that the group wants to make it more difficult for outsiders to understand its activites
- Removing dividend blocks – allowing funds to move more easily through the group, by addressing companies or activities which have negative reserves or which are subject to volatile profit levels
Typical triggers for action
It’s generally not enough for there to be a recognition of the general benefits of reducing the number of companies in the group. There needs to be a reason to act now.
From that perspective, the trigger for action may be considered to be more significant than the general reasons behind it.
Here are some typical triggers:
- Corporate transactions – transactions such as acquiring a target group or selling assets can create a natural point in time to review the group structure. It also takes advantage of the heightened awareness of the legal entities involved, due to the transactional due diligence processes which have just been carried out
- Changes in tax law or appetite for tax risk – which can mean that existing tax structures are no longer appropriate and need to be reviewed
- New CFO / FD / head of tax / head of legal / company secretary – again, this can create a natural point for reviewing the group structure. The new incumbent will often want to get an understanding of the group’s existing status, and will have less attachment to existing structures
- Pressure from regulators, banks, non-executive directors or the internal audit function – to increase transparency
- Changes in regulatory environment
- Managed exit from a business line – in this situation, the removal of legal entities forms one part of the overall processes which are needed to give effect to the operational change
- Instances of non-compliance – a missed filing deadline, leading to a reminder or other official communication being sent to directors personally, can often cause questions to be asked as to whether the relevant companies are actually required
Read the other parts of this guide to corporate simplification projects: