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In the business world, companies often adopt various organisational structures to optimise their operations and achieve their strategic goals. One such structure gaining prominence is the dual company structure. This article aims to provide a detailed analysis of the dual company structure in the United Kingdom, examining its definition, characteristics, benefits, drawbacks, and legal considerations.
What is a Dual Company Structure?
One key characteristic of a dual company structure is the legal separation between the parent company and the operating company. Each entity possesses its distinct legal personality, allowing them to enter into contracts, hold assets, and assume liabilities independently.
There are various advantages and disadvantages to operating a dual company structure, which we can explore below.
Advantages
1. Liability Protection
The dual company structure offers limited liability protection for shareholders. The operating company, responsible for day-to-day operations, carries most operational risks because the companies are separate entities.
This separation shields the parent company’s assets from potential claims or liabilities arising from the operating company’s activities, including any investigations by the Financial Conduct Authority (FCA).
2. Tax Planning
Dual-class structures can also provide tax advantages. By allocating profits and expenses between the parent and operating companies, dual company structures can optimise their tax liability.
This dual-company corporate structure enables the utilisation of tax incentives, reliefs and exemptions available to specific entities, leading to potential tax savings.
3. Simplified Ownership Changes
In case of ownership changes, the dual company structure provides flexibility. The parent company’s ownership can be transferred while the operating company continues its operations unaffected. This arrangement simplifies the process of attracting investors, raising capital, or engaging in mergers and acquisitions.
4. Protection Against Hostile Takeovers
Contracting voting power in the hands of a select group of shareholders makes it difficult for an acquirer to gain control through a simple majority vote. This protection can provide stability and continuity for the company’s operations and share price on the London Stock Exchange or other public markets.
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Disadvantages
1. Increased Complexity
Implementing a dual company structure requires careful planning and ongoing management. Maintaining separate legal entities necessitates additional administrative efforts, including accounting, financial reporting, and compliance obligations for both the parent and operating companies.
2. Regulatory Compliance
Operating with a dual company structure means complying with the legal and regulatory requirements applicable to both entities. This includes applicable laws, regulations and listing requirements, which may include specific restrictions or disclosure obligations.
Failure to meet compliance obligations can result in penalties, reputational damage, or legal consequences. Businesses must ensure proper governance and oversight across the entire structure.
3. Imbalance of Power
There is a common perception that dual company structures can result in an imbalance of power. For example, this may occur when the parent company makes decisions which may not be in the best interests of the operating company.
This is because the parent company may have various operating companies and make decisions with a bigger picture in mind. Accordingly, it may make decisions that do not benefit the operating company. To combat this, some dual company structures include corporate governance rules to protect operating companies’ interests.
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What Legal Considerations Apply to a Dual Company Structure?
Running a company through a dual company structure involves certain legal considerations, including the following.
Incorporation and Registration
Establishing a dual company structure involves incorporating parent and operating companies as separate legal entities. This requires filing the necessary documents with the appropriate regulatory authorities, such as Companies House in the UK.
Shareholding and Control
The parent companies typically own all or a majority of the shares in the operating company, enabling them to exercise control over strategic decisions. This may involve the use of dual-class shares rather than ordinary shares. Shareholders’ agreements and voting rights provisions should be carefully drafted to define the relationship and responsibilities between the parent and operating companies.
Transfer Pricing
Transfers of goods, services, or intellectual property between the parent and operating companies must comply with transfer pricing rules to ensure fairness and avoid tax avoidance. Companies must establish arm’s length prices for such transactions, adhering to guidelines set by tax authorities.
Key Takeaways
The dual company structure provides a unique corporate arrangement for companies in the UK, enabling them to balance control, attract capital and talent, and focus on long-term objectives. While it offers numerous advantages, it is crucial for companies to carefully consider the potential challenges and implications associated with this structure.
However, adopting a dual company structure requires careful consideration of the associated complexities and compliance obligations. Therefore, seeking professional advice from legal and tax experts is crucial to ensure successful implementation and long-term success. If you need legal assistance creating a dual company structure in the UK, our experienced business structure lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
This type of system enables the parent company to retain voting control over the operating company with shares that have enhanced voting rights and has become very popular in recent years. Essentially this results in the parent company having weighted voting rights to retain complete control over the operating company.
These types of company set-ups are becoming increasingly common, particularly for innovative companies and those wishing to float on worldwide stock markets.
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