In the contemporary business landscape, many organisations have developed multi-layered, complex corporate structures to manage risk, optimise tax efficiency or facilitate international expansion.

It is difficult to justify a business culture where the UK’s largest provider of residential care was at one time a group consisting of 158 separate legal entities, seven of which were spread across four different offshore jurisdictions. Two of its major competitors had almost as complicated structures, also involving financially significant subsidiaries located in secretive offshore countries. One of these other companies had a thirteen-layer structure.

While such arrangements can offer legitimate advantages, they also pose significant downsides; which we consider below.

Reduced transparency and increased regulatory scrutiny

One of the primary limitations of these types of structure is the loss of transparency. As ownership and control become obscured by multiple holding companies, subsidiaries and offshore entities, it becomes difficult for regulators, investors and even senior management to obtain a clear view of the organisation’s operations and financial flows.

One high profile example was the collapse of Enron in the early 2000s, caused at least in part by a web of special purpose entities and off-balance-sheet arrangements that concealed both the company’s true financial position and a major accounting fraud from stakeholders and regulators.

This type of opacity often attracts heightened regulatory scrutiny, especially in more highly regulated industries and can result in costly compliance investigations.

Risk assessment barriers for stakeholders

A whole range of commercial interests may be put off engaging with these sorts of complex groups, or individual entities within them, including suppliers, trade insurers, landlords, lenders, customers and potential senior hires.  If the risk can’t be either identified or quantified, why take it?

Increased administrative and compliance costs

The concentration of both the media and public opinion has been firmly on the government’s woes on the revenue raising and spending sides of the fiscal equation. Much less attention has been paid to its commitment to increased public sector capital investment, announced in its first Budget in 2024.

This a mixed blessing for the private sector. The eventual positives will be better infrastructure, improved transport links, a more skilled labour force and a healthier population, all of which are good for business. In the short run, this expenditure will create opportunities, especially for businesses that trade directly with the public sector.

Unfortunately, the downside last year came when the government added the cost of these worthwhile initiatives onto the cost base of the private sector, particularly on consumer-facing industries. The sharp increases in Employers’ National Insurance contributions have caused havoc with many vulnerable smaller companies. The concern over the past year has been that an increase in the size of public sector investment will almost inevitably act as a limiter on private sector growth.

Slower decision-making and reduced commercial agility

Complex structures can hinder swift decision-making. When authority and responsibility are distributed across numerous entities, obtaining approvals for strategic initiatives or responding to market changes can become a dangerously lengthy process. By way of example, a global retailer with separate regional holding companies may struggle to implement a unified digital transformation strategy if each entity requires separate board approval. The resulting bureaucracy can stifle innovation and erode competitive advantage.

Internal fraud and mismanagement risks

With multiple layers and dispersed oversight, the risk of internal fraud or mismanagement increases. Rogue employees or managers may exploit gaps in control between entities to siphon off funds or engage in unethical practices.

The Parmalat scandal in Italy in 2003 was a classic case, where intricate cross-ownership and inter-company loans masked a multi-billion-euro fraud for years. Such incidents can lead to catastrophic financial losses and legal consequences.

The collapse in 2018 of the major UK construction group, Carillion featured persistent manipulation of its financial position in published financial statements over a number of years. In this instance there were 58 entities in the group and the only external stakeholder who managed to penetrate the deception was a US-based hedge fund, using some extremely sophisticated financial analytics to spot unexplained discrepancies in cash positions around the structure.

Difficulties with M&A and disposals

Complex structures often complicate corporate transactions and lead to major errors of executive judgment. Potential counter parties may be deterred by the difficulty of untangling ownership chains or assessing the true value of assets, or where unduly extensive due diligence is required to ensure hidden liabilities or contingent risks buried within subsidiaries are uncovered. Similarly, divesting a business unit from a tangled group can be time-consuming and expensive

The disastrous acquisition of ABN AMRO by Royal Bank of Scotland in 2007 was in part due to the Dutch bank’s labyrinthine structure obscuring its true financial position and risk profile.

Reputational risk and public perceptions

There is growing scepticism among the public, media and regulators regarding complex corporate arrangements, particularly when used to shift profits or minimise taxes. High-profile cases, such as the Panama Papers leak, have spotlighted the use of shell companies and offshore structures to obscure ultimate beneficial ownership. Even when legal, such strategies can damage a company’s reputation, undermine stakeholder trust and provoke calls for regulatory reform.

Considerations

While multi-layered corporate structures can offer operational and financial benefits, they also introduce significant risks and challenges. Reduced transparency, higher costs, slower decision-making, increased fraud risk, transactional complexity and reputational issues all warrant careful consideration. Businesses must weigh these downsides against the potential advantages and ensure robust governance and compliance frameworks are in place to mitigate associated risks.

If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.