After an MA binge, simplifying your firm's structure by offloading unnecessary subsidiaries will yield many benefits, writes George Maloney.
COMPANIES THAT have indulged in the mergers and acquisitions feast over the last few years may now find that their once-trim corporate structures are bloated by unnecessary subsidiaries.
As well as being costly and time-consuming, maintaining these dormant or inactive subsidiaries can pose serious risks to the health of a group and its directors. It is difficult to assess just how obese corporate group structures have become, but anecdotal evidence from the UK is alarming. Recent analysis of the FTSE 100 indicates up to 50 per cent of entities within plcs could be dormant or inactive.
In many cases, directors simply do not know how many dormant subsidiaries lurk within their corporate structures, the reasons for their existence or the risks contained within them.
This corporate memory loss can frequently occur in large groups built up through MA activity as senior managers move on or are replaced. A wide geographic spread or diversity of operations can make the problem worse.
In some cases, dormant entities are justified for tax reasons or because they protect a name, brand, trademark or some other form of non-transferable intellectual property. Others are harmless in isolation but are costly and time-consuming because the parent company must file annual returns for each of them, incorporate them into its consolidated accounts and provide details on inter-company capital distributions.
The most frequent risks posed by a dormant entity are contingent liabilities, such as legacy property lease covenants, long-forgotten guarantees for products or services or legacy employee claims. Once identified, the company can mitigate or remove these liabilities by negotiating a settlement with the parties involved and then seek to wind up the subsidiary.
Dormant subsidiaries can also pose personal risks to company directors. Directors must have full knowledge and control of all entities and are ultimately liable for the corporate governance of these entities. By doing nothing, directors expose themselves and the group to accusations of complacency, incompetence or, in the worst case, negligence.
This may ultimately result in action being taken by the Director of Corporate Enforcement or the Companies Office.
As well as minimising risk, a simplified group structure brings many immediate rewards. Cost savings alone from reduced regulatory compliance and management time mean that corporate structure simplification projects often pay for themselves within two years. The review may also reveal long-forgotten assets that can be realised or distributed up to trading entities where the asset can be put to better use.
There are also longer-term benefits for the company that chooses to lose weight. A simplified structure results in a more efficient use of capital and a stronger balance sheet. The greater transparency will improve its image and communication with its stakeholders, most importantly shareholders, lenders and credit-rating agencies.
Finally, in the event of future MA opportunities, it will be able to realise the highest value for its shareholders or obtain cheaper finance with which to fund acquisitions.
There has never been a better time to consider shedding that excess weight. Losing weight is hard work but the results make it all worthwhile.
George Maloney is a partner at Baker Tilly Ryan Glennon
