Getting Your House in Order: Why Corporate Records Matter

Recently, the Corporate Team at Leathes Prior Solicitors has found itself undertaking more and more rectification work on behalf of corporate clients, whether this is in preparation for an exit or as part of a restructuring.

It is quite understandable how such matters can be so easily overlooked by directors of a company. The day-to-day demands of running a business leave little time for corporate housekeeping, until a sale or restructuring turns it into an urgent priority.

One of the first things we do when onboarding a corporate client is to undertake a detailed assessment of its position at Companies House. This allows us to ‘take a look under the hood’ of the company prior to any transaction, restructure or corporate venture, getting ahead of any issues before they threaten to delay a matter.

Most of the issues we see are administrative rather than substantive. Typical examples include:

• share allotments or transfers that were agreed but never filed or recorded in the register of members;

• director appointments or resignations that were not notified, or were filed with incorrect dates;

• information about persons with significant control (PSCs) that was not updated following a change in ownership; and/or

• missing board minutes or resolutions for decisions that were properly made in practice, but where the necessary paperwork was not produced.

These issues very rarely impact the day-to-day trading of the business, only becoming a roadblock over the course of a significant corporate transaction or restructuring.

For example, in the context of a share sale, a buyer acquires a company including its full history, so any discrepancies must be resolved before the deal can progress (otherwise these discrepancies are inherited by the acquirer). In the context of a restructuring, an unclear share history can halt any work while the correct position is established, to ensure that any further work is undertaken with knowledge of the correct company history. Without this initial step, discrepancies can be ‘baked in’ to the restructuring, which in the best case can make the matter more difficult to rectify, and in the worst case can threaten the validity of the restructuring (which can come with significant tax consequences).

Rectification work, when identified during the due diligence stage of an acquisition, has the potential to delay any transaction, and in some cases cause a buyer to walk away. Typically, a prudent buyer will want to agree the method of rectification and the form of the documents used to rectify any issues, which adds time. Additionally, a well-advised acquirer will often ask for indemnities from the seller, increasing that seller’s liability exposure associated with their exit.

There is nearly always a solution to such discrepancies, and the earlier they are identified, the simpler and quicker the fix tends to be. At Leathes Prior we can:

• carry out a corporate health check, reviewing Companies House filings against the statutory registers of your company;

• prepare the resolutions, minutes and corrective filings needed to correct the record; and

• conduct a pre-sale or pre-restructuring due diligence review, so that issues are identified and dealt with before the transaction or restructuring process begins.

The aim is not to find fault, but to give businesses confidence that their records are accurate. Increasingly, buyers are asking at an early stage whether a target company has undertaken its own due diligence review or is currently doing so. A seller who can answer ‘yes’ signals a well-run business that is ready for sale or can deal with any issues on its own timetable rather than under pressure. Where no review has taken place, a buyer may assume problems are yet to surface and may be conscious of potential delays. Accurate records make a company considerably more attractive to serious buyers.

If a sale or restructuring is on the horizon, a review now can save considerable time, cost and stress later on. If you would like to discuss how we can help, please do not hesitate to contact Leathes Prior’s Corporate and Commercial Team on 01603 610911 or at info@leathesprior.co.uk.