Streamline Your Corporate Structure with Legal Entity Rationalization
Global economic pressures and increased cost sensitivity are prompting many multinational corporations to reassess their legal entity structures. Whether driven by mergers and the resulting need to address redundancies or general fluctuations in business activity, a variety of factors must be considered during the legal entity rationalization process.
Global economic pressures and increased cost sensitivity are prompting many multinational corporations to reassess their legal entity structures. Whether driven by mergers and the resulting need to address redundancies or general fluctuations in business activity, a variety of factors must be considered during the legal entity rationalization (LER) process.
LER is a strategic approach to optimizing a company’s legal structure by evaluating existing subsidiaries and identifying opportunities for consolidation, improvement or elimination of entities. A well-executed LER strategy can reduce complexity, cut costs, enhance risk management and compliance efforts, and bring greater clarity and control to corporate governance.
The following are some common challenges companies face when implementing an LER strategy, along with key considerations to achieve the best possible outcomes.
Common LER Challenges
Managing multiple legal entities presents a range of strategic, legal, operational and financial hurdles, including:
- Difficulty making strategic decisions: A complex and fragmented legal entity structure can obscure valuable performance insights and impede decision-making processes, particularly when coordination and approvals across multiple entities are required.
- Organizational complexity: As businesses grow and contract across borders, they often create or dissolve legal entities to manage local operations. This results in intricate organizational structures that strain resources and increase overall risk.
- Duplication of effort: Operational tasks are frequently duplicated across multiple entities, leading to higher costs and inefficiencies due to a lack of coordination.
- Lack of visibility and inefficient reporting: Without an integrated system to centralize data, managers of multiple entities may struggle to get an accurate and timely view of exposure to risk and legal liabilities. Non-standardized processes also heighten the risk of errors and compromise the integrity of reporting.
- Ineffective risk management and compliance: Managing numerous legal entities increases the likelihood of non-compliance. A minor oversight in one jurisdiction could lead to penalties or legal actions elsewhere. Ensuring compliance with local laws, regulations and financial reporting standards requires ongoing monitoring and updates.
Key LER Considerations
When implementing an LER strategy, there are several things to keep in mind, including:
- Strategic alignment: It is important to evaluate whether the current legal entity structure aligns with the organization’s overall mission and goals. Some entities may be redundant, non-core or no longer viable when measured against the strategic direction of the company. In these cases, the rationalization process could involve merging, selling or eliminating entities.
For example, selling or eliminating entities can be expedited by using a special purpose entity, which acquires and winds down unnecessary legal entities, leaving the company free from wind-down costs and able to focus on other operations.
- Financial impact: Corporations need to evaluate the financial performance of the legal entities in question, along with the financial implications of LER. Identify underperforming entities, those incurring additional costs and opportunities to streamline expenses or consolidate operations. Also, account for any potential tax liabilities related to legal entity restructuring.
- Risk and compliance management: Changes to a company’s legal entity structure can introduce various risk management considerations, such as compliance with local and international laws, tax regulations and industry-specific rules. It is essential to assess whether regulatory approvals are needed for M&A activities and whether any contractual obligations are tied to the impacted entities.
- Operational efficiency: LER provides an opportunity to streamline operations by reviewing the role of each legal entity. Look for overlaps in functions, identify synergies between entities and find ways to improve coordination. During this process, ensure the integration strategy addresses operational risks, including resistance to change, errors in reporting and delays in decision-making.
How Agile Legal Helps
Providing a consultative approach with a strong project management discipline, Agile Legal develops and executes entity rationalization plans with expertise, efficiency, and transparency. Agile Legal’s experienced international services team delivers tailored solutions across all aspects of global entity management – from initial formations and ongoing compliance to support for rationalization and dissolutions.
We recognize that effective entity management is crucial to mitigate risks and optimize operational efficiency. Our hands-on, proactive approach ensures every detail is managed, helping your organization stay compliant with local regulations while minimizing risk and avoiding unnecessary costs.
By partnering with us, you gain a trusted advisor who is committed to supporting your business’s growth and stability.
Contact us to learn more about Agile Legal’s entity management support, as well as our full suite of corporate legal services.
