CORPORATE SIMPLIFICATION

THE BENEFITS OF CORPORATE DE-CLUTTERING

Corporate simplification

There is a common problem that afflicts many large and acquisitive groups. As acquisitions are made, company structures can become cluttered by dormant companies which no longer trade but still exist as legal entities, potentially for no good reason.

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.

Despite these companies being dormant for trading purposes, they still incur ongoing maintenance costs to the business, including audits, annual returns and iXBRL compliant tax returns, which must be filed every year, even if no trading occurs. It has been estimated that, even for the most simple group, it can cost between £1,500 and £8,000 per entity per year to keep these dormant companies within the group, with costs particularly hitting larger PLCs with their greater corporate governance burden.

These costs alone may be reason enough to shed dormant subsidiaries through a phased liquidation or dissolution process.

Another good reason to keep ahead with group de-cluttering is that, over time, the loss of corporate memory can become a problem for large groups built up on a history of acquisitions. Knowledge of subsidiaries can all but disappear as management move on or are replaced. It can be made worse by a diversity of operations and geographical spread. Once this occurs it makes it harder for the group itself to complete the necessary due diligence to a level which affords the comfort that it is safe to liquidate or dissolve.

Therefore, it is put in the ‘too hard’ basket and the entities are left to remain dormant within the group structure.

It is vitally important that the de-cluttering process is well planned, with relevant due diligence undertaken for each entity that is targeted for liquidation or dissolution. It is possible that, despite every effort to uncover them, hidden liabilities may not have been recognised. For example, both personal injury and environmental claims can arise many years after a company has become dormant or its business and assets have been sold on.

Records may not have been kept of the actions which may have caused the liability to arise. A dormant company will continue to carry this risk and owners may find themselves facing an unexpected bill. Therefore, careful due diligence is required to at least identify risks of claims arising, so they do not come as an unwelcome surprise either to the group or, if liquidation is underway, the liquidator.

Many groups acknowledge that they need to simplify their structure but may not have the time or the in-house expertise, particularly with respect to solvent liquidations, to do the job as efficiently as possible themselves.

Over time, the loss of corporate memory can become a problem for large groups built up on a history of acquisitions.

Simplifying has reduced external and internal associated costs of monitoring dormant companies.

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Our experience: a selection of case studies

� e large, historically acquisitive groupTh is group accumulated companies over the years, primarily in the UK and Ireland, and to a lesser degree in Africa and Latin America, which were no longer needed.

Th e group controller refl ected: “I was fed up of approving numerous statutory accounts of companies that had no reason to exist. I was convinced that we’d ultimately make life easier if we took on the challenge of getting rid of them.”

Th e team, led by the company secretary, comprising representatives from accounting and tax – supported by an extended group of specialists which included legal, property and pensions, set about the careful investigation of all the companies in the UK/Irish group to identify those that might be surplus to requirements.

Th e review ensured that there were no ‘lost’ valuable assets in these companies such as cash in bank accounts, uncollected loans to third parties or forgotten tax losses. It also ensured that there were no outstanding creditors.

“Th e extensive due diligence on all entities meant that when we fi nally handed them over to the liquidator, matters could progress quickly”, says the company secretary, “and we were also able to simplify many of the retained companies.

Th e outcome is that nearly 150 companies are now eliminated from the group and in the hands of the liquidators, whilst the retained UK group comprises some 60 companies, each of which has a specifi c and necessary purpose. Th e project has paid for itself many times over with the assets recovered and one-off savings, whilst also reducing our on-going costs by some £250,000 a year.”

RSM worked alongside the team in both the pre-appointment due diligence stage, answering queries so that matters could be resolved as they arose, and in the post appointment phase to progress the liquidations as quickly as possible, ensuring the project team were on track with their goals.

� e acquisitive, rapidly growing groupAnother large multinational group entity has a global initiative to simplify their cross-border organisational structure by eliminating the redundant legal entities within a reasonable timeframe of them becoming inactive rather than having them sit dormant in the company structure. In the UK, they look to do this once the business has been transferred into the group, normally following an acquisition.

Th e senior fi nance manager responsible for the worldwide co-ordination of this project confi rms that in order to manage risk associated with purchasing groups of companies “where the entity has been active up to the point of transfer, we would generally opt for a member’s voluntary liquidation to wind up the company”.

When asked whether the costs involved in tidying up the group structure are inhibitive, the response was: “In our experience, liquidating a company generally has a short payback period of less than two years.”

� e well-known retail groupTh is group of companies is a well-known presence on the British high street and has, over a number of years, purchased many independent businesses.

Shortly after acquisition, management transferred all business and assets to the group’s main trading vehicle, thus leaving many hundreds of dormant companies.

However, management recognised that there are signifi cant costs in keeping the redundant legal entities and rather than having them sit dormant, the decision was taken to liquidate these surplus entities.

Prior to putting the companies in liquidation, we worked with the group to resolve a number of outstanding matters, such as dealing with an historic pension provision, servicing outstanding lease commitments and undertaking share capital reductions.

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The UK group of companies and LLPs trading as RSM is a member of the RSM network. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm each of which practises in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug.

RSM UK Consulting LLP, RSM Corporate Finance LLP, RSM Restructuring Advisory LLP, RSM Risk Assurance Services LLP, RSM Tax and Advisory Services LLP, RSM UK Audit LLP and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly Creditor Services LLP is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities. RSM & Co (UK) Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice.

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Why RSM

Over the years, RSM has helped many clients to eliminate their unwanted dormant companies in a cost-effective and tax-efficient manner through its corporate simplification team.

For multinational groups we work with our international partners to provide a one stop shop for group rationalisation.

Th e RSM team provides end-to-end help, from identifying potential problems through to overseeing and conducting the liquidation process itself.

� e benefi ts of corporate simplifi cation:• Simplifi ed group organisational

structure;

• Eliminated unnecessary external maintenance costs eg annual filing fees, audit fees, tax compliance fees;

• Reduced related internal costs eg facilitating work around audits and tax returns;

• Mitigates risk of corporate memory loss;

• Better corporate governance.

� e hallmarks of our service:• Resourceful and competitively

priced expertise

• Cross-jurisdictional coverage, utilising the RSM International network, with the fl exibility to choose the most appropriate resource to meet geographical needs

• Fixed price quotations with volume discounts

• Multi discipline team approach

For more information please contact:

Karen SpearsHead of Corporate Simplifi cation Restructuring AdvisoryT +44 (0)20 3201 8421karen.spears@rsmuk.com