Corporate entity information is critical data that underpins nearly every business process. Maintaining and operationalizing this data for several different strategic purposes is a large part of today’s legal landscape.
However, as recently reported by EY, 89% of legal department leads face substantial challenges with their entity management, causing significant concerns about their deal readiness. Transactions get delayed because subsidiaries aren’t in good standing, have outdated appointee records, or encounter other administrative friction.
The Importance of Subsidiary Management
The fundamental reasons for creating subsidiary entities are:
- Establishing a presence in a new jurisdiction (having a bank account, employees, tax IDs, contracting, etc.)
- Protecting a parent company’s assets from liability for actions of a subsidiary company that it owns (“piercing the corporate veil”.)
- Being transaction ready to support friction on financings, M&A integration, divestitures, re-organizations, IPOs, and other important corporate events.
- Acting as guarantors and grantors of security if the parent company must secure credit financing.
The Challenge of Subsidiary Management
However important this data is, it is equally complex to manage. Often, entity management is a shared responsibility between legal tax and finance departments, causing communication gaps across departments. Collaboration between multiple teams is usually a substantial challenge for most large organizations that leads to friction around ownership and responsibility.
Systematic entity management maintenance is also hindered by outdated technology. 96% of legal departments report issues with their legal entity management software. 72% find it difficult to keep systems updated and 62% found it challenging to track governance activity statuses.
In addition, many organizations tend to naturally leverage a decentralized mesh of law firms by managing entities for basic statutory compliance. This model can create coordination and cost management challenges. Currently, 47% of legal departments currently operate in this decentralized model.
Best Practice: Creating a Framework
Companies with advanced entity management functions align on an established and common framework for their entities, whether documented in a playbook, SLA, or Subsidiary Governance Framework.
These systems establish a consistent approach for governance and set minimum standards for activities such as:
- Subsidiary to parent reporting content and cadence.
- Financial and regulatory controls.
- Guidance about formation, composition of subsidiary boards, appointment and termination of directors, onboarding, and training.
- Guidance on how to conduct subsidiary board meetings and record minutes.
- Procedures for incumbency and secretary’s certificates, powers of attorney, notarizations, and apostilles.
- Subsidiary director and officer training, indemnification, and signing authority.
- Compliance monitoring programs to ensure the framework requirements are appropriately satisfied.
For more best practices and an in-depth overview of Subsidiary Governance Frameworks (with examples), you can access Athennian’s free eBook, "Best Practices in Subsidiary Management."