Why Shell is scrapping its dual listing structure

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Why Shell is scrapping its dual listing structure
Royal Dutch Shell CEO Ben van Beurden. Photo: Horacio Villalobos/Corbis/Getty

Royal Dutch Shell (RDSA.L) (RDSB.L) announced a major overhaul of its operations on Monday, with plans to ditch its dual listing structure and move its headquarters from the Netherlands to the UK.

The oil giant has suffered deteriorating relations with its home country recently as Dutch pension fund ABP said it would drop the company from its portfolio without prior warning, while a court in The Hague ruled it had to slash emissions faster than planned.

Shell has been registered in the Netherlands for tax purposes since 2005, but its origins as a dual company dates back to 1907 when Koninklijke Olie merged with Shell Transport and Trading. It was largely driven by the need to compete globally with Standard Oil.

However, the company said that at the time it was not envisaged that the share structure would be permanent.

Although still listed in London, Amsterdam, and New York, the company will scrap “Royal Dutch” from its name — an element that dates back to 1890 when the Royal Dutch Petroleum Company was formed.

Royal Dutch was granted its name after receiving a royal charter, from King William III of the Netherlands, to carry out oil exploration in what is today known as Indonesia. 

"Carrying the Royal designation has been a source of immense pride and honour for Shell for more than 130 years," it said. 

"However, the company anticipates it will no longer meet the conditions for using the designation following the proposed change."

It will instead be shortened to Shell Plc.

Read more: Unilever to ditch dual structure for single HQ in London

The shake-up follows a similar move by consumer products giant Unilever (ULVR.L) last year which also ditched its dual Anglo-Dutch structure in favour of a single London-based entity.

Here is a breakdown as to why it is scrapping its dual listing structure:

Performance

The move means that the Anglo-Dutch firm will simplify its structure to a single class of shares to boost shareholders payouts. It will create a larger single pool of ordinary shares that can be bought back by the company.

Shell said on Monday that it aims to “strengthen its competitiveness” and “increase the speed and flexibility of capital and portfolio actions''.

It also comes less than a month after Wall Street activist Third Point revealed a $750m (£558m) stake in the company. The investor, run by billionaire Dan Loeb, had previously called for the firm to split into multiple businesses to increase its market value and improve performance.

It demanded the split to attract investors leaving the energy sector over concerns over climate change. Third Point accused Shell of having “an incoherent, conflicting set of strategies attempting to appease multiple interests but satisfying none”.

“The change to the share classes removes a disadvantage Shell had versus its peers,” Oswald Clint, analyst at brokerage firm Sanford C. Bernstein, said. “It will end the misalignment of two different tax and revenue authorities, removing friction and withholding tax issues around buybacks, while allowing them to increase materially.”

Watch: Third point buys stake in Shell

Climate

Shell has set targets to gradually shift from oil and gas to greener energy. It has outlined a multi-decade strategy to rein in its emissions, including selling more low-carbon fuels.

The simplification helps to accelerate the delivery of its strategy to become a net zero emissions business.

“The current complex share structure is subject to constraints and may not be sustainable in the long term,” Sir Andrew Mackenzie, Shell's chairman, said.

“At a time of unprecedented change for the industry, it’s even more important that we have an increased ability to accelerate the transition to a lower-carbon global energy system.

A simpler structure will enable Shell to speed up the delivery of its Powering Progress strategy, while creating value for our shareholders, customers and wider society.”

Read more: Shell to ditch dual listing structure and move from Netherlands to UK

Meanwhile, Laura Hoy, equity analyst at Hargreaves Lansdown, said: "The long-term growth story for Shell still rests heavily on the oil price.

"For now, buoyant oil prices are keeping the group’s cash coffers topped up, which has had a positive impact on debt and given the group the means to boost shareholder returns.

“However, with the inevitable shift to more sustainable energy picking up steam we suspect the need to invest in greener operations will keep a lid on what the group can pass on to shareholders.”

Court ruling

In addition to this, a court in the Netherlands said in May that Shell had to reduce its emissions by 45% by 2030, compared with 2019 levels.

This was much faster than planned after environmental charity Friends of the Earth and more than 17,000 co-plaintiffs successfully argued that Shell had been aware of the dangerous consequences of carbon emissions for decades.

However, the decision only applies in the Netherlands, and the FTSE 100 group said in July that it would appeal the ruling.

MacKenzie insisted that the simplification would have “no impact” on legal proceedings related to the Dutch court ruling, and that Shell was “rising to meet the court’s challenge”, with a pledge to halve its carbon emissions by the end of the decade.

Shell shares were up on Monday. Chart: Yahoo Finance
Shell shares were up on Monday. Chart: Yahoo Finance

However, analysts at investment bank Jefferies said: “We believe that a clearer separation from the Netherlands could also have positive implications for the Milieudefensie case on Shell’s carbon emissions as it would make it harder to claim that the Dutch Court has jurisdiction.

Post-Brexit Britain

While the Netherlands withholds a 15% tax on dividends for Dutch-domiciled companies, Britain does not.

Under Shell’s dual class share system, holders of the “A” shares receive normal dividends and are subject to the tax.

However payments for “B” shares are distributed through a “Dividend Access Mechanism” that essentially sees them streamed through a trust registered on the Channel Island Jersey, avoiding the Dutch withholding tax.

Read more: £34bn Brexit VAT bill pushes companies to the brink

The arrangement was approved by Dutch tax authorities in a confidential deal, although its legality under European Union law was doubted by some tax experts.

Shell and Unilever had both previously lobbied for the Dutch to get rid of their dividend withholding tax. It was later revealed to be a "decisive" factor for Unilever when it decided to locate to London.

“This is a clear post-Brexit win for the UK,” Stuart Joyner, specialist sales at Redburn, said. “It is unclear what leaving the Netherlands will mean for the Dutch litigation process given sizable operations will remain.”

Watch: Shell CEO: It Was Appropriate to Step Up Buyback

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