Corporate groups tend to acquire more and more legal entities over time - whether as a result of M&A activity, SPVs created for specific projects or (in some cases) tax planning.
Most groups therefore need to clear out unnecessary entities from time to time.
Some larger groups have in excess of 1,000 legal entities, and have an ongoing program to reduce that number over time.
One of the risks inherent in legal entity reduction or corporate rationalisation projects is that material assets may be ‘lost’, if they are not identified and dealt with before the relevant entity is dissolved.
A particular risk is so-called ‘hidden assets’ - which may not appear on any balance sheet or transfer pricing policies.
Here’s my personal ‘top 10’ list of hidden asset types:
1. The benefit of contractual rights from M&A transactions (e.g. seller warranties and indemnities; non-compete covenants)
2. The benefit of rights of confidentiality (e.g. from NDAs)
3. Rights of contribution or indemnity under stand-alone arrangements
4. Rights in goodwill and passing off
5. Unregistered land
6. Land registered in the wrong name (e.g. with a typo)
7. Intellectual property applications or registrations in the wrong name (e.g. with a typo)
8. Assets held on trust or as nominee (e.g. shares in subsidiary entities)
9. Minority shareholdings in subsidiary entities
10. Procurement approvals (e.g. if a particular legal entity is an ‘approved supplier’ for the purposes of a significant customer)
And by the way, if you’re involved in this kind of project and you’re not putting in place a ’sweeper’ deed of assignment (or equivalent) before dissolving each entity, you’re making a big mistake.
It’s a key way of reducing the risks relating to hidden assets, and reducing the costs of dealing with them if they are identified later.
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