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The Two Fears Standing Between You And The Group Structure You Deserve

Group Reorganisations

Intercompany Agreements

1 July 2017

This article appears in the July issue of our International Corporate Structures Newsletter.

Picture the scene: a meeting room in central London, just off the Marble Arch end of Oxford Street, 5 years ago. A slightly younger me has been called in to facilitate a workshop on legal entity reduction projects for a well-known corporate group with assets of over US$ 20 billion. The four or five delegates who are participating in the session are very pleasant, polite and interested, but clearly not particularly happy with having been charged with the task of removing over a thousand unnecessary subsidiaries. They have been doing this for a number of years already, as an addition to their ‘day jobs’, and they have no dedicated resource. They seem to have little in the way of senior support or recognition. They are using tired, incomplete checklists. They have managed to strike off a subsidiary which held a major asset - we’re talking a value of a few hundred million. (Of course, this kind of thing happens to the best of teams, but they seemed to have little motivation to improve their processes as a result.) If a meeting could personify the phrase “project fatigue” this would be it.

So what can we learn from this? Of course, there are the usual points: engage director-level support to articulate the aims and importance of the project and to help escalate issues appropriately. Sort companies into batches and create deadlines for each batch to complete defined stages. Ensure that all stakeholders are engaged. Hire a team who knows what they’re doing (like us) to create additional accountability and to ensure that the processes, approaches and documents correspond to best practice. But ultimately, something deeper is at stake.

“Getting one’s house in order” has a powerful psychological impact, whatever the context. (For the domestic equivalent of this, see this book review.) In a manufacturing group with gleamingly clean factory floors, uncovering a shoddy corporate structure would be as disappointing as meeting Jamie Oliver in person and finding out he’s not actually a “good bloke”. (I’m sure he is!)

At an institutional level, and at a personal level, there are two fundamental fears which stand in the way of any project to streamline a corporate group and create a clean, functional and compliant structure. One is the fear of losing a valuable asset. The other is the fear of triggering a significant liability. The root cause of both those fears is the “corporate memory” risk – the lack of reliable information about what any given entity in the group structure has done in the past. Typically, this state of affairs stems from factors such as staff turnover, historic acquisitions followed by the departure of a significant proportion of the workforce of the acquired group, and of course weak governance in the first place.

In fact, the remedy to the corporate memory issue is straightforward. It simply involves the application of a consistent due diligence process, with a clear materiality threshold. However, where a group lacks leadership which has confidence that the risks of corporate memory can be overcome and which implements the necessary organisational and procedural steps to do so, it is no surprise to see a half-hearted and indecisive streamlining project failing to achieve the clean and clear structure intended.

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Article by
Paul Sutton
LCN Legal Co-Founder

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