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Priority shares held Shell in an iron grip

Financial Times: Priority shares held Shell in an iron grip

By James Boxwell

FT.com site; Jun 17, 2004

Posted 18 June 2004

No one thought it would happen, at least not this soon. Yet Royal Dutch/Shell’s decision to abolish its priority share structure, which allows the Dutch half of the business to block any unwelcome takeover approach, marks a considerable concession on behalf of the company’s management.

The Royal Dutch Priority Shares Foundation was set up in 1968 with the simple aim of protecting the company from predators. But, over time, the Foundation has come to exert power not just over any potential bid, but over management of the company itself.

With just 1,500 priority shares, the priority shareholders control the nomination of new directors to the Royal Dutch supervisory and management boards.

Those they appoint to the management board then automatically become members of the Committee of Managing Directors, which includes the Shell executive directors and oversees the running of the combined Dutch and UK businesses.

Not everybody can be a priority shareholder. The shares are not traded on any exchange. Currently, it is the non-executive and executive directors of the company who make up the Foundation. Each non-executive and executive director of Royal Dutch is given six priority shares when he, or she, joins the board.

Because of their control of the priority shares, the foundation’s consent must be sought for any changes to Royal Dutch’s articles of association or for any dissolution of the company.

The removal of the priority shares will therefore leave Royal Dutch/Shell open to a takeover or a break-up, which, even though extremely unlikely, is something that would have been blocked before.

The priority shareholders also control the nomination of new directors to the Royal Dutch supervisory and management boards.

Executive directors of the Royal Dutch management board automatically become members of the Committee of Managing Directors, which oversees the running of the combined Dutch and UK businesses, Royal Dutch/Shell.

The use of priority shares as an anti-takeover mechanism is rare in the UK but some Dutch companies still have such measures in place.

A new Dutch regulatory code was introduced in January aimed at ending their use. However, the code is similar to the UK’s Combined Code in that companies can either comply with the rule or explain why they are failing to comply at each annual shareholder meeting.

With Royal Dutch/Shell already facing the wrath of institutional shareholders, it is understandable why they have decided to comply rather than explain.

The Royal Dutch board will ask its shareholders to abolish the shares at its annual meeting next year, which is expected in April. The matter is entirely internal for Royal Dutch and does not require any acts of parliament.

Each share is worth a nominal €448. Each one gives the holder voting rights worth 800 ordinary shares, although given the vast number of Royal Dutch/Shell shares in issue, this is immaterial.

The real power is the ability to block dissolution and the appointment of directors. Investors will welcome the news that this anachronism has been removed.

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