Ostensibly for simplicity’s sake, Unilever’s bosses want to scrap the group’s dual-parent structure, which dates back to 1930. They will replace the two – PLC in the UK and NV in the Netherlands – with a single holding company, New NV, which will be Netherlands-based and subject to Dutch tax laws.
And therein lies the risk for UK-based PLC shareholders. Unilever’s Dutch unification is predicated on the abolition of the 15 per cent withholding tax that Dutch companies pay on their dividends. The trouble is that scrapping the tax, once a foregone conclusion, is now running into political opposition. At an annual cost of approaching £2bn to the Dutch treasury, why wouldn’t it in these times of straightened circumstances and heightened national sensibilities? Why subsidise foreign capitalists at the expense of worthy Netherlanders is the understandable response.
Sure, the withholding tax isn’t due to be abolished until 2020 anyway and Unilever has a short-term solution that will leave UK shareholders in PLC no worse off. That stop-gap could be extended, perhaps for many years, but why should shareholders put it to the test?
More of that in a moment. Meanwhile other issues have commanded more attention but, from the perspective of retail shareholders in PLC, they aren’t that important. These revolve around the opposition of those UK institutional investors who would be forced sellers of the new NV shares, which – incidentally – PLC shareholders will receive on a one-for-one basis.
That’s because, despite a UK listing and trading on London’s main market, New NV won’t be eligible for inclusion in FTSE’s UK share indices, which means passive funds tracking such indices will have to sell. That would be partially balanced by New NV’s added presence in some Euro Stoxx’s indices, but some active funds would find that Unilever’s overseas status would force them to sell; worse, some might be hit by a liability for capital gains tax.
Yet these factors shouldn’t bother retail investors. True, forced selling won’t help the share price in the short term, but it won’t alter the underlying value of Unilever’s shares since – unlike the withholding-tax issue – it won’t affect cash flows by a penny.
Besides, there are unstated factors behind Unilever’s decision to re-locate wholly to Rotterdam that annoy UK investors. Chief of these is the close juxtaposition of a crude takeover pitch by US foods group Kraft Heinz (US:KHC) for Unilever early last year and the proposal to drop dual-nationality status. By locating its sole holding company in the Netherlands, runs this argument, Unilever is removing itself from a takeover-friendly location to one where it could rest easily behind a legal moat almost as deep as the ones they dig in France and Germany.
That notion doesn’t really stack up. In a very Dutch way to be seen to be playing fair, Unilever’s bosses plan to give shareholders extra power. For instance, clubbing together just 1 per cent of New NV’s voting rights will permit shareholders to table a resolution at a general meeting, including a call to sack directors. And shareholders speaking for 3 per cent of the votes will have the right to convene a general meeting within eight weeks. Most noticeable, however, Unilever promises that New NV will not shelter behind a ‘stichting’, a peculiarly Dutch legal entity which has proved singularly useful functioning as a poison-pill mechanism for embattled companies.
In other words, if Unilever was vulnerable to a bid when almost half of its corporate self was UK domiciled – which, actually, it probably wasn’t – then it will be hardly less vulnerable under its planned new regime.
Still, talk of stitching – or something like it – also stirs the suspicion of stitch up in the whole move back to the Netherlands. After all, if there was one way to persuade Unilever – and perhaps also Royal Dutch Shell (RDSB) – to become a wholly Dutch company after Brexit then that would be removing Dutch withholding tax on dividends, thus equalising that aspect of its tax regime with the UK’s. What a coincidence that Unilever should announce its removal plans so soon after a new Dutch government provisionally altered the withholding tax rules.
That alone is enough for UK interests to get irate and almost certainly there is a jingoistic element in their complaints; at least, one can hardly imagine there would be such a fuss if Unilever planned to shift its domicile wholly to dear old Blighty. That the man fronting the move – Unilever’s chief executive, Paul Polman – seems to epitomise the rootless, liberal elite it’s now obligatory to denigrate is all the more reason – instinctively at least – to oppose Unilever’s move.
Amusing as these thoughts might be, they are not relevant. For retail investors it is only about withholding tax. Unilever has a stop-gap solution to pay quasi-dividends out of capital, which would be free of the tax. If need be, it reckons it can create about £52bn for such payments – enough to last 11 years, assuming the pay-out rises by 5 per cent a year, and much could happen in that time.
But retail investors don’t even have to think about that. Until the issue of withholding tax is finally sorted out, come October’s vote they should tell Unilever’s bosses they are not going Dutch.
