Q1.2 Rationale for groups (Section 1.3)
There are a number of advantages of conducting business activities using multiple entities rather than a single entity. The Companies and Securities Advisory Committee (2000) identified the following potential benefits of conducting economic activity through a corporate group structure.
1 Reducing commercial risk or maximising potential returns through diversification. Often diversification is achieved through incorporating or acquiring new companies.
2 Attracting capital without forfeiting control. Management may not wish to allow outside investors to increase their level of control of the parent entity, but want outside investment as part of their overall business. This can be achieved by allowing outside shareholders to acquire shares in a subsidiary.
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3 Lowering the risks of legal liability, including environmental and consumer liability. By setting up a number of separate subsidiaries, other group assets can be isolated and protected from high liability risks. In other words, high-risk activities are ¡®quarantined¡¯ in a limited liability entity.
4 Providing better security for proposed loans. By transferring assets into a separate entity, a potential lender will have the opportunity to obtain a first charge over specific assets. This could benefit the group by facilitating a lower cost of borrowing, particularly through project financing.
5 To comply with regulatory requirements. Some multinational groups need to comply with the foreign rules which require that business operations be conducted through a subsidiary that is incorporated in the foreign jurisdiction.
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