Compliance Health Checks: a vital component of governance best practice

In 2018 both global and US corporate Mergers & Acquisitions (“M&A”) activity hit record highs, driven by deal-making in the energy, media and healthcare sectors. As M&A deal flow inevitably leads to increased scrutiny for portfolios and entities, we have seen strong demand from businesses for full forensic compliance health checks (CHC) this year. These checks, pioneered by Citco GSGS, ensure that all a business’s entities are compliant, and are increasingly becoming an integral part of corporate governance best practice.

Why CHCs are essential

There are very few companies whose corporate governance is perfect. The most common pitfalls are often basic errors – like updates to the register of shareholders or directors – but cannot be ignored. The missed filings with the Commercial Registers might cause significant consequences. Recently, on onboarding, the GSGS team found, during a routine CHC, that an Irish branch had actually been deregistered and needed re-registration due to missing filings of the financial statements. In another similar case, a US entity was found to have been de-activated due to the missed filing of annual returns.

The implications for non-compliant entities can be serious and, while they will vary from country to country, can lead to financial penalties for the company, penalties for the directors, suspension of other filings requested and even the closure of affiliates. Citco GSGS recently advised in a case where a company acquired a portfolio including an entity based in Argentina which had already been liquidated for several years, but still owed multiple years’ payments to the Incorporation Office. Fortunately, the CHC ensured that the issue was able to be resolved swiftly without additional penalties.

Usually, the penalties for missed filings increase the longer the problem is left unaddressed. In some countries, there is even personal liability for company directors for these missed filings. In Singapore, if a company misses its deadline to hold its AGM, the local director will receive official notification from the authorities with request to attend a hearing in person, unless it is remedied in good time.

CHC: both diagnosis and a remedy

Very simply, a compliance health check procedure identifies the status of all filings and governance obligations as well as any remedial actions that are necessary. Without remedial action, the consequences for mistakes can quickly compound. For example, mistakes accrued in the filing of financial statements may mean you cannot register new directors before remedying.

The CHC outlines which remedial actions are essential and which are merely ‘nice to have’, but these decisions can only be made once the health check has been conducted. In this sense the health check provides a practical framework for identifying governance priorities.

A CHC will ensure that you are able to meet your essential compliance requirements, including:

- Necessary number of directors
- Required amount of share capital, and
- Residency requirements, if any, for directors
- CHCs should be carried out regularly

It is a misconception that a compliance health check is only necessary after a burst of M&A activity. A CHC should be considered as a regular on-going part of a group’s governance activity. Errors do not only occur around major transactions, but can also stem from any of the usual day-to-day activities of a business, arising for example from missed filings or a failure to register a new director.

For this reason, it is best practice to ensure that your company’s CHCs are regular and are able to ensure the continual maintenance of your entities’ compliance.

A case study - Schneider Electric

Citco GSGS recently conducted CHC work for Schneider Electric, the global specialist in energy management and automation. Citco provided CHC reports for existing Schneider Electric Group companies and continues to regularly prepare CHC reports in conjunction with the M&A due diligence process.

CHCs often uncover areas that need to be addressed, including:

- Incorrect or out-of-date registry data
- Lack of updated shareholders registers
- Necessary amendments to key corporate documents, and
- Assistance with other remedial work identified during CHCs

Mary Kibble, Assistant General Counsel, Global Corporate Governance at Schneider Electric, said “We have worked closely with Citco GSGS on several highly complex and sensitive projects. The compliance health checks they perform have become an invaluable part of our corporate governance framework and give Schneider Electric confidence in the compliance status of our entities.”

By Jurate Kisieliene Client Servicing Manager
Citco GSGS Focus, Winter 2019

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Jurate Kisieliene

Jurate Kisieliene

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Mercator by Citco

T+370 5 204 7372

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Robert-Jan Kokshoorn

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Mercator by Citco

T+1 415 470 1935