?As companies grow, merge and enter new jurisdictions, they need to be careful about keeping their legal entity management compliant. This typically includes updating registrations, tax filings and other required submissions to regulators before deadlines.
Legal entities include corporations, limited liability companies, subsidiaries, joint ventures, nonprofits and limited partnerships. These types of arrangements sometimes stem from mergers and acquisitions.
“Legal entity management is complicated, and it seems to be an area that is not receiving the priority that it needs,” said Susanna McDonald, chief legal officer for the Association of Corporate Counsel (ACC), a legal association in Washington, D.C.
“There continues to be the pain point of limited resources from a talent perspective and a financial perspective. There’s a host of competing priorities,” said Michael Rossen, who leads Deloitte’s legal entity management business in Jericho, N.Y.
HR can assist by bringing relevant company departments together to help the company do a better job with legal entity management, McDonald said.
Consequences of Poor Legal Entity Management
If legal entity management isn’t done correctly, fines and lost deals could follow.
“One of the biggest risks is that the entity falls out of good standing with the appropriate regulator governing structures that they reside in. That can have huge tax penalties associated with it,” McDonald said. “If an organization falls out of good standing—beyond the fees and potential penalties that you might have to pay with the local regulators to get it back into good standing—if you have any incident that happens, that could be a ding against you in litigation.”
It’s better to get it fixed earlier rather than later, because the fees can compound over time, Rossen said.
Companies don’t want poor legal entity management to delay or quash a proposed merger or acquisition. A business that didn’t exercise care in its corporate entity records might appear untrustworthy and disorganized to potential buyers or acquisition prospects. Furthermore, if an insurance company surmises that the legal entity records aren’t adequate, it might refuse to underwrite the risk for the transaction.
Research Results
The COVID-19 pandemic, economic uncertainty and shifting regulatory environment prompted a rise in merger and acquisition activity, mounting cost containment pressures, and a slowdown in hiring, all of which led to a greater focus on legal entity governance in recent years, according to new research from Deloitte and the ACC.
However, 25 percent of companies said they have no official policy or process to update company records, including legal entity management systems. More than one-fourth of companies (27 percent) said they have no process to monitor annual compliance obligations, and nearly one-third (31 percent) have no process to enable effective subsidiary governance in general, the survey found.
The survey found that 32 percent of firms reported that updates to their corporate records have been delayed some time over the past two years, and 26 percent said that at least some of their corporate entities have been out of good standing with regulators over that time period. An additional 9 percent said a delinquency regarding an entity’s status with regulators has impacted a business transaction.
Being understaffed may be part of the problem for some companies: 79 percent of companies said they expect their legal entity management staffing levels to remain the same this year, while 14 percent expect an increase.
“Those who expect an increase in hiring cite the need for more staff due to the changing regulatory climate, company growth and more entities to manage, and the overall decision to in-source more work,” the research report said.
Practical Tips
Businesses should develop a compliance calendar with compliance deadlines listed for all the relevant jurisdictions, McDonald recommended. “This really is about timing, so a calendar is a very effective way to manage this process,” she said. “It becomes like clockwork on getting it done.”
The survey found that 30 percent of companies have no annual compliance calendar in place, and 10 percent either have no legal entity organizational chart at all or it is not maintained.
Often, the responsibility for legal entity management rests with the corporate secretary, senior compliance officer or head of the legal department. But what if no one in the organization is handling the legal entity management because no one is sure whose role it is? “That’s not always made clear. That’s where HR can assist with job description management to ensure that somebody has accountability for this,” McDonald said. “Unless somebody is specifically identified as accountable, this can fall by the wayside. It can be forgotten.”
Excel was the most common platform that companies used to keep track of their legal entity management, the survey found.
“Technology is an enabler, and it’s very important for organizations to assess the technology that’s available to them as they address effectiveness of legal entity management,” Rossen said. “If they have technology in place, consider whether it’s efficient for them.”
Sometimes organizations complete a big initiative on legal entity management and think that it’s done, so they don’t return to it for a long time. But that’s a mistake. “Over time, there could be changes within the organization—growth and acquisitions. The landscape the organization is in can change,” Rossen said. Legal entity management “needs to be constantly revisited to make sure it still fits the needs of the organization.”
