The ability to execute mergers & acquisitions and other corporate transactions is one of a General Counsel’s top performance metrics. Failure to successfully execute corporate transactions can harm a legal team’s reputation among the executive team, investors, and the Board of Directors.
How does subsidiary entity management reduce risk and costs in M&A and corporate transactions? Sellers that have effective subsidiary management programs increase the buyer’s confidence in the overall state of the business and buyers are often willing to expedite due diligence, deal timeline, and even offer a higher price. If a seller has a disorganized subsidiary management process leaving buyers with unanswered questions and unknown surprises, they are likely to increase their due diligence scrutiny, extend deal timelines, and lower their offer. Often, sellers will engage law firms to help them fill records gaps and alleviate buyer concerns causing professional services fees to increase.
“If a target has organized books and records, it conveys a feeling that management is on top of their company. Whether you are outside counsel or a potential buyer, it’s comforting when you see that an investment has been made in keeping those records clear. It suggests a strong compliance program beyond just the minute books. It is people who run due diligence and those people extrapolate from the data they have. They can feel a general uneasiness if you’re selling a business that’s a mess. - Francesca Campbell, Vice President and Chief M&A Counsel, Carrier”
According to a 2021 survey and report by Deloitte, The Value of Entity Management: The Impact on Mergers & Acquisitions, ineffective subsidiary legal entity management can have negative consequences in the following six areas:
1. Jeopardize the Credibility of the Company and its Management
59% of respondents said that poor entity management causes buyers to question whether subsidiaries are actually wholly owned by sellers.
2. Slow Deals Down—or Even Kill Them
According to 33% of respondents, unclear director and officer appointments and resignations is one of the primary causes of delays. Disorganized entity management has caused significant closing delays, typically averaging four weeks.
3. Increase deal risk for all parties and introduce personal liability for directors and officers
Issues that cannot be resolved before closing may result in insurer’s refusing deal risk coverage and require personal indemnification from the seller’s management team or board of directors.
4. Lost Tax Planning Benefits
Sellers that have mismanaged or lost track of subsidiary information, particularly around ownership, to the point that it cannot reduce tax exposure – that are otherwise standard in the market - will have lower purchase price to offset that unavailable benefit.
5. Force a Restructuring of the Deal with Attendant Tax Disadvantages
50% of respondents say poor subsidiary entity governance can result in restructuring deals. An obvious example is transitioning from purchasing the entities to purchasing the assets of the business to avoid acquiring unknown compliance, legal, or tax problems.
6. Grossly Inflate Professional Fees
If subsidiary management issues are discovered in due diligence or closing, sellers will often engage their legal counsel on the deal to resolve them quickly, paying $800 to $1,200 per hour to fix administrative issues. According to Deloitte, most deals involve $20,000 to $30,000 of corporate records clean-up costs. However, respondents have seen costs increase into the millions if there are non-US jurisdictions involved or for entities in regulated industries where additional regulatory approvals are required to changes to the corporate governance of a subsidiary.
How Does Athennian Help Legal Teams be Deal Ready?
Having a centralized source of truth and a compliant, organized entity portfolio that can easily be shared internally and externally accelerates deals:
A. Due diligence: Athennian helps complete due diligence on the corporate structure in days not weeks. The old method of legal due diligence is for the sellers to provide access to huge volumes of documents for the buyers to parse out data on corporate identity, ownership, and control. When the sellers provide permissioned access to Athennian, it accelerates the due diligence analysis by providing those professionals with organized data in an intuitive, graphic interface with productivity tools such as tables, point-in-time reports, etc., rather than a mountain of PDFs to parse through.
B. Post M&A Integration: Post transaction, the acquirer needs to analyse how the assets of the acquired business will integrate into the acquirer's operations. There are two ways this can occur: (A) to merge subsidiaries together or (B) to transfer the assets from one subsidiary to another one. There a variety of tax and legal considerations in this process. There are usually tight timelines for a company to complete the execution of (A) or (BO (usually less than 12 months). Athennian provides a central source of truth for entity data that these teams can rely on to make critical M&A integration decisions. Often this process is called entity rationalization, although entity rationalization frequently occurs outside of M&A as well when companies just want to consolidate the size of their corporate structure.
Athennian is a modern business entity and subsidiary governance platform that powers teams to be transaction, audit, and compliance ready. Legal, finance, and tax professionals use Athennian to automate workflows for ownership, governance, tax, and corporate compliance.