Corporate Governance Update: Is Your Company Model Structurally Sound?
27 August 2020
Many businesses in the built environment sector, and the industries within it such as construction and real estate have historically employed the use of special purpose vehicles (known as the “SPV model”) to ring fence costs and potential liabilities. Where assets are being cross-collateralised through financing arrangements, the SPV model may no longer be the most suitable structure. Whether arising out of having adopted the SPV model at a point in your growth or for other reasons, your group structure may be unnecessarily complex. Where it is, corporate simplification is a method of removing unnecessary, companies from your corporate structure, bringing many benefits to your business, including cost savings. A simplified structure can also be more attractive to finance providers.
A key benefit of corporate simplification is the reduction of compliance and administration costs. A business can incur costs and expenses in excess of €8,000 a year to maintain a dormant, or relatively inactive, Irish company. These costs and expenses relate solely to ensuring that the company meets its ongoing compliance, audit and other legal obligations. This amount is in addition to the cost of employee and executives’ time spent in coordinating this compliance and administration. The long term cost savings that can result from a once-off corporate simplification exercise are particularly apparent when an organisation’s structure is no longer meeting the needs of, or providing value to, the business.
Governance standards and transparency
Improved transparency through a simplified structure is likely to be welcomed by investors, finance providers and other stakeholders. With ever changing legal and corporate governance requirements for companies, including health and safety laws, anti-bribery and data protection laws, ensuring that companies are meeting the required standards is an on-going challenge for businesses. It is far easier to maintain these standards with a less complex corporate structure.
Eliminating unnecessary companies allows management, legal, and compliance teams to focus their time on the core companies required to run and expand the business. A less complex structure can also simplify the repatriation of cash from trading subsidiaries and other intra-group financing arrangements. This will also be more attractive to external finance providers.
Sometimes complicated structures can lead to tax inefficiencies such as tax leakage or additional tax compliance burdens when repatriating cash up through the group. Simplifying the complexity of your corporate structure may resolve such tax inefficiencies within the business and allow for improved tax planning.
The existence of a company can expose a business to risk, including error, fraud or failure to meet regulatory or compliance requirements. These risks arguably increase with dormant and inactive companies given the likely reduction in monitoring when executives are focussing on the core companies required to run and grow the business. There is also the risk that, with the passage of time, the corporate memory will disappear making it more difficult to assess whether or not the companies should be retained. There are ongoing personal risks to the executives of a business who act as directors of these companies.
The earlier the steps in a corporate simplification project are taken, the sooner your business can enjoy the benefits. Our experienced teams can assist you in designing and implementing a corporate structure that meets your business needs and improve your business efficiencies, while at the same time helping you to make cost savings.
To register for our Corporate Simplification Guide, please click here. If you would like to further discuss your current corporate structure, or if you are considering a corporate simplification project, please a member of our Corporate Governance & Compliance team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.