Why do other groups remove dormant companies?

This article contains an extract from our Free Guide to Removing Dormant Companies, which is written for Group FDs, CFOs, In-house Tax Professionals and Company Secretaries.

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Corporate groups tend to accumulate additional companies over time. This often happens because:

• they acquire other groups, which already have a number of subsidiaries;
• subsidiaries or SPVs are set up for specific joint ventures or projects, or to hold particular assets. Those ventures or projects may come to the ends of their lives, and the relevant assets may be disposed of; or
• companies are created as part of tax planning structures, which later may become ineffective or may be regarded as inappropriate.

The decision to remove unnecessary companies is often made for a number of reasons. Here are some of the most common ones.

• Reducing ongoing costs – including costs such as audit fees, tax compliance and company secretarial compliance. For more information on this, see Chapter 2 of our Guide to Removing Dormant Companies.
• Reducing compliance burdens – this is closely linked to reducing ongoing costs. The overall compliance burden can include the management time spent in reviewing and approving regulatory filings and reports for different entities.
• Reducing transactional costs – 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 takes up management time as well as increasing professional costs.
• Improving governance – making the group structure easier to understand and reducing the number of companies makes it easier for directors to show that they are complying with their legal obligations as directors. Conversely, if directors are not aware of which companies they are directors of, and what those companies actually do, it is very hard for them to defend themselves from personal attack if something goes wrong.
• Avoiding criticism for lack of transparency – having a complicated group structure can support an impression that the group wants to make it more difficult for outsiders to understand its activities. This may be completely misguided, but nevertheless the impression may remain.
• Removing dividend blocks – removing unnecessary intermediate companies often allows 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.

For many groups, all these reasons translate into an ongoing programme to remove unnecessary companies on an annual basis. Other groups may prefer to deal with things on an ad-hoc basis, perhaps triggered by some external event such as a proposed refinancing, a recent acquisition, or a managed exit from a business line.

Sometimes, the trigger is even more basic - simply a missed filing deadline, leading to a reminder or other official communication being sent to directors personally, which highlights the embarrassment factor of why the group structure has been allowed to remain as it is.