Royal Dutch Shell’s UK Move
Much to the chagrin of the Dutch government, oil and gas supermajor Royal Dutch Shell plc (RDS) announced plans on Monday to move its head office and tax residence to the UK. The move is intended to revamp the company - through ditching the Dutch (both literally and figuratively), and more importantly, ditching its complex dual-share structure.
RDS’ dual-share structure
RDS’ dual-share structure is a remnant of its 2005 Anglo-Dutch merger. Until 2005, RDS as we know today was comprised of a British and a Dutch company which operated as a single-unit partnership. As a dual-listed company, the British and Dutch companies maintained separate legal existence and separate stock exchange listings: the British company listed in the LSE, and the Dutch in the NYSE. Accusations of oil reserve overstatements in late 2004, however, prompted Shell to rebrand itself. On 20 July 2005, the British and Dutch companies merged to form a new parent company in the form of RDS, a company incorporated in the UK but with Dutch tax residence. Most notable about the merger is the creation of a dual-share structure - a stock with two classes, the ‘A’ shares (RDSA) and the ‘B’ shares (RDSB).
Ditching the Dutch
The move to the UK means that the company will ditch the ‘Royal Dutch’ part of its name for the first time in 114 years, becoming Shell plc. The move will also see the company align its tax residence with its country of incorporation, and the A/B share bifurcation replaced by one single line of shares under English law.
What precipitated the company’s capital restructure?
RDS’ move must be viewed in light of its share buyback plans. In July, the oil group announced a $2bn buyback, and intends to pay out another $7bn from the sale of its Permian US onshore assets to ConocoPhillips. More is expected to come - the tacit understanding with its investors is that more money should flow to shareholders when energy prices are high. A less tacit understanding is that RDS wishes to mollify Third Point, who has called for the company to follow the trend set by General Electric, Toshiba and Johnson & Johnson and split its business-- one for ‘legacy’ (or soon to be unimportant) assets oil and gas and another for renewable energy.
RDS’ appetite for buybacks, however, cannot be satiated under the current dual-share structure. Its payments for ‘A’ share buybacks are subject to a 15% withholding tax imposed by the Dutch government, rendering ‘A’ share buybacks uneconomical. Repurchases of ‘B’ shares, while free from the 15% tax because payments (including dividends) are routed through Jersey, are limited by the trading volume to $2.5bn a quarter. By issuing only a single line of UK shares, RDS can expect more cost-effective repurchases.
Ditching the Dutch also means that RDS gets to distance itself from mounting pressure to decarbonise. In what was deemed a ‘cataclysmic day’ in May for oil companies, the Hague District Court interpreted the duty to act according to ‘proper social conduct’ under Dutch tort law to include obligations to reduce carbon emissions. RDS as a result will face penalties in the Netherlands if it will fail to cut emissions from oil and gas by 45% by 2030. As if to rub salt in wounds, the Netherland’s biggest state pension fund stopped investing in RDS after the Dutch court’s decision. The Dutch business environment is increasingly hostile and moving to the UK promises smoother and less costly business operations - which facilitates RDS to increase distributions to keep shareholders on board.
Opinion
The move is a win for the company, which has every reason to keep its shareholders happy as it engages with a series of renewable energy projects that are yet unprofitable:
● December 2019 - RDS joined the Porthos project, working with Air Liquide, Air Products and ExxonMobil to work on capturing carbon dioxide in Rotterdam.
● March 2021 - became the full owner of the Netherland's first offshore wind farm
● July 2021 - announced plans to build a 200 megawatt hydrogen electrolyser
● September 2021 - committed to building a 820,000-tonnes-a-year biofuels facility at RDS Rotterdam facility
Of course, share buybacks may be used to artificially inflate share prices, and thus increase executive compensation.
For the more environmentally conscious, news of RDS’ move leaves a bitter aftertaste. Questions can be raised as to whether the money spent on share buybacks can be put to better use, that is to further develop green energy given the steady decline of oil and gas as China and the EU commit to carbon neutrality by 2050.
The view from the UK
Something good is happening. RDS’ move is the latest affirmation of the trend of corporate behemoths ditching the Dutch and their dual-share structures. Just last year, consumer goods giant Unilever ended its dual Anglo-Dutch listing and moved its headquarters from Rotterdam to London. In 2017, data and information giant RELX dropped its dual structure in favour of a single London Listing.
The trend is set to continue as business environments worldwide look less and less business-friendly. Ireland has shot itself in the foot with the October decision to give up its lucrative 12.5% corporate tax for a global minimum rate. To fund his sweeping domestic policy package, President Biden has proposed to increase corporate tax rates from 21% in the Donald Trump era to 28%, and unveiled the billionaire’s tax which targets corporate giants. The EU is also itching to ramp up taxes as it confronts a record high government debt-to-GDP ratio of 90.1%. The global picture is clear: more and more companies will be looking to shift camps to business-friendly, low tax jurisdictions.
A two-line tweet from Business Secretary Kwasi Kwarteng, describing RDS’ move as a ‘vote of confidence in the British economy’, is insufficient. The UK ought to capitalise on this trend and work to attract more multinationals. The leap in corporate taxes to 25% as announced in the March budget already looks like a mistake. Understandably, the corporate tax hike is needed to fund Boris Johnson’s Levelling Up agenda. The UK government should at least consider giving tax breaks to major companies that switch their domicile to the country. The view from the UK is rosy and the government should work to keep it that way in the long run.
By Oscar Wong