Firms like PricewaterhouseCoopers (PwC) are seeing a surge of solvent liquidation activity at the moment, with three trends driving the simplification of groups’ ownership structures. Some clients are motivated by corporate governance concerns; many are cost-cutting; others are establishing a Societas Europaea (SE).

The European Company Statute, which comes into effect in October 2004, will give groups the option of forming a European company or an SE. An SE will be able to operate on a Europewide basis and be governed by EU law. The many companies operating across European borders could benefit from the new law, but groups wanting to maximise the benefits of this transformation need to instil a practice of entity reduction now, before they embark on major changes. Many current subsidiaries will be superseded by the SE and become surplus, so advisers to groups considering an SE need to ensure clients address corporate simplification.

Many groups’ inexperience will mean they struggle to achieve the benefits of an SE. First, the low visibility of corporate simplification issues means they are often not a priority for managers, who find that higher profile activity such as M&A attracts more praise from senior management. The result is that mergers are thought to have been completed once businesses are combined, but the legal entities that housed them are left to multiply. Second, there are often information capture issues that make it difficult for management to see the full picture. Much historical knowledge about old subsidiaries is held in the head of an individual rather than logged more formally. Many of the larger corporate simplification exercises the PwC team has been involved in have started when a key individual is about to retire and recognition has dawned that a large slice of the group’s corporate history is about to leave. Were I an in-house counsel, I would be seeking to establish a corporate registry to track the matters that bear on a company’s end date.

PwC has noted a shift in culture, however, as recent major corporate failures have put simplification on to the board’s agenda. Following the collapse of a number of high-profile companies, analysts and the financial press now want to know what the group organisational chart reveals or hides. As a result, although solvent companies are not comfortable talking about ‘liquidation’ (‘corporate simplification’ is a healthier term and in the UK includes striking-off as well as the Insolvency Act’s liquidation process), many chief executives are focusing on the complexities of their group’s ownership structure, which is often unnecessarily complex.

Although the board’s attention to corporate simplification is typically pulled into focus by corporate governance concerns, it is sustained by the discovery that there are significant cost savings to be made, largely caused by the management time spent dealing with the paperwork. PwC clients quote figures of between £4,000 and £6,000 per company as the cost they are seeking to avoid.

How many companies are inactive and serving no business purpose? Estimates vary, but PwC has seen groups where more than 75 per cent of the companies are inactive. A good test is to compare the number of companies on the corporate chart with the number of companies on the tax department’s group relief schedules – often less than half. A conservative estimate is that 20 per cent of the 1.6 million UK incorporated companies are inactive, and if you assume it costs a conservative £4,000 to maintain each of them, UK plc is wasting more than £1.2bn per annum.

Realisation of the issue’s magnitude has seen groups appoint structure managers to focus on simplification. It is a challenging role, particularly when it is on a pan-European or global basis. The project management aspects of the task are as critical to success as the technical and legal issues that must be addressed.

PwC advises a number of such structure managers. As liquidators, we are reassured that they see the real potential of their role. Dealing with surplus companies is excellent training for dealing with post-merger integration issues and experience in both areas is essential for tackling the challenges of any large-scale business transformation project – and there will be a growing number of these with the upcoming European Company Statute.