The balancing act of corporate group structures

When it comes to corporate group structures, it’s important to balance the benefits and the challenges, says corporate & commercial partner Chris Wills.

There are a number of issues to consider when thinking about putting corporate group structures in place, from commercial and legal to regulatory, tax and financial.

Protecting assets

Corporate group structures can be a useful way of protecting specific assets against the risks associated with ongoing trading activities. Where a company has developed valuable intellectual property rights or has bought its own premises or investment properties using the profits that it has accumulated over time, those assets can be at risk if the company experiences a downturn in trade and starts to accumulate losses. If that company were to become insolvent, those assets may be sold by a liquidator to satisfy creditors. Holding those valuable assets in a separate company allows the trading company to continue to use them, thereby protecting the assets.

We regularly see this as the main reason for considering a group structure.

Centralisation

One useful consequence of seeking to protect assets by holding them in a separate company is that those assets can be centralised and shared throughout a group of companies. This can make it easier to re-allocate resources in the group.

Preparing for sale

Implementing a group structure is a useful way of preparing a company for sale. Any assets or liabilities that a buyer will not want to acquire, or which the shareholders do not want to sell, can be transferred to a separate company.

This leaves the underlying trade held in the original company, which may be more attractive to a buyer. In recent months, we have seen a marked increase in clients using this approach to enable deals to proceed that may otherwise have stalled.

Tax

We always recommend that clients seek tax advice at the earliest opportunity when considering any changes to a company’s structure.

There will almost always be tax consequences to consider, and taking pro-active, early steps can help to mitigate their impact. For example, the implementation of group structures often benefits from seeking clearance from HMRC. For this reason, we regularly work alongside accountants and tax professionals when setting up group structures.

Financial

If a company has any borrowing in place, particularly if it has been secured, it may be necessary to involve the lender as part of the process. As with the tax position, engaging with the lender at an early stage to understand their requirements is crucial.

Is it worth it?

That all depends on the circumstances and the ultimate objectives. It is important, however, to seek appropriate advice at the earliest possible opportunity so that the various factors can be considered, and a plan put in place. The temptation is often to involve the fewest number of professionals as possible until there is some certainty over whether to proceed but, in our experience, this can then lead to significant delays to the implementation of the project.

Should you be considering a corporate group structure for your business, please get in touch; we’d be happy to help.

Chris Wills is a partner in our Legal 500-rated corporate & commercial department. He has over a decade of experience in advising businesses on a range of transactions and issues, including mergers and acquisitions, debt and equity funding, joint ventures and shareholders’ agreements, partnership and LLP agreements, group restructures and commercial collaborations. Chris advises businesses across a broad range of sectors, from start-ups and family businesses to established companies operating on a global scale.