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Shell makes historic leap to unified structure, but will it do any good? It’s a tough call

The Independent (UK): Jeremy Warner’s Outlook: Shell makes historic leap to unified structure, but will it do any good? It’s a tough call

Wednesday 29 June 2005

Shareholders duly voted through proposals to get rid of Shell’s dual domicile and capital structure yesterday, but if you can fully get your head around the supposedly simpler structure that’s replacing it, then you are a better man than me. For many shareholders, it looks as if one form of complexity has only been replaced by another, while a minority – admittedly smallish – is seriously disadvantaged by the changes.

The genesis of these reforms lie one and a half years ago in the revelation that Shell, up until then a presumed model of corporate rectitude and good behaviour, had been deliberately exaggerating its disclosed reserves.

The fault was reasonably thought to be largely attributable to corporate governance failings, in part deriving from the confused chain of command that lay at the heart of the company’s dual domicile structure. There were two boards, two listings and the company straddled two different jurisdictions – Britain and the Netherlands.

Shell seemed to be lacking in even the most basic standards of accountability, the absence of which had led not just to the scandal of the overstated reserves, but had caused the company to slip seriously behind its two leading competitors, BP and Exxon Mobil, in developing new sources of supply and keeping pace with key rations of industry performance.

The solution settled upon is to move to a unified board and a unified capital structure. In future, there will be just one Shell, not two, one board, and one domicile, allowing for more rapid fire decision making, better accountability, and hopefully a more entrepreneurial and performance-driven culture.

Yet the vagaries of the two jurisdictions’ tax systems mean that Shell has been unable to escape the dual capital structure entirely. Shares in Royal Dutch Shell are to be replaced with A shares and those in the British half of the enterprise, Shell Transport & Trading, with B shares. This is because the Dutch government has a higher withholding tax on dividends than Britain. Just to add a further layer of tax complexity, British resident holders of Royal Dutch shares will have to pay capital gains tax when they swap into the A shares.

Already the B shares are trading at a significant premium to the A shares, this despite the fact that the company has promised to commit its entire buy-back programme to the A shares. One reason for the differential is that indexed British funds are being forced to buy large numbers of addition Shell shares so as to reflect that the company’s weighting in the FTSE 100 is about to more than double. Confused? Who wouldn’t be after all that.

Will these changes, costing some £63m to push through, make any difference to the company’s performance? Theoretically, they should do, yet it’s going to be some years before we know for sure. By that stage, Jeroen van der Veer, chief executive, and the everyone else responsible for yesterday’s upheaval, will have moved on.

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