It’s a shame that Unilever pulled its shareholder meeting about simplifying its structure, for had it gone ahead, it would have exposed a smouldering issue that’s been lurking under the radar for far too long. It’s something that’s been highlighted several times by Investors Chronicle – the voice that small shareholders have in public-listed companies.
Unilever’s Simplification Scheme needed a 117-page document to cover all the legal implications. Buried on page 43 was a line explaining that the UK High Court required the UK Scheme to “be approved by a majority in number of those PLC Shareholders who are present and vote, either in person or by proxy, at the PLC Court Meeting and who represent 75 per cent or more in value of the PLC Shares voted by such PLC Shareholders”. (And yes, if you had to read that twice, you were not alone.) It suggests that each shareholder would have had one vote. Pass this hurdle and then the Extraordinary General Meeting would have taken place requiring a 75 per cent majority based on the more familiar one-share/one-vote poll.
Nanny nominees
The High Court assumed that Unilever knows who ultimately owns each of its 3,025m shares. One report suggested that it has 8,500 institutional investors and 35,000 private shareholders, but nobody can be sure. Companies can identify those on their share registers, but many investors, whether private or institutional, hold their shares in nominee or custodian accounts. This makes administration easier, but it also means that share registers record nominee holding companies rather than the ultimate ('beneficial') owners. So, for example, State Street Nominees might be on the register – but they don’t make the investment decisions. They simply register the shares for someone else.
Often, the nominees recorded will carry a designation to show which institution they act for. This helps, but where the nominees are undesignated, who knows who the ultimate owner of the shares really is? True, the Companies Act allows searches to be made, but if these just reveal other nominees or other legal entities, you have to search those too, and the whole process can become a bit like taking apart Russian dolls. It’s unlikely that Unilever would have been able to track down all its ultimate owners.
If, like many, you own Unilever through an individual savings accout (Isa), the provider of the Isa investment platform would appear on the register and so would have voted on your behalf. The same goes for a self-invested personal pension (Sipp). You own the shares, and think of yourself as a shareholder, but the register says otherwise. Unilever’s Court vote gave the providers a chance to differentiate themselves. Hargreaves Lansdown, for example, reportedly said that all its clients’ holdings in Unilever had to be amalgamated into a single Court vote. AJ Bell, in contrast, was said to have found a way to allow each holder on its books to be counted individually.
This situation is nothing short of a scandal. If you invest through a fund, investment trust or exchange traded fund (ETF), you have delegated investment decisions to the respective managers, so you could argue that it’s okay for them to vote on your behalf at shareholder meetings. But where you make investment decisions yourself, shouldn’t you be the one to have the say?
Lobby for reform
The UK Shareholders Association and SharesSoc have been vocal about this for some time. They say that “currently only 6 per cent of retail shareholders vote at AGMs [annual general meetings]” because of the difficulties created. Yet, they say, all the ultimate owners should be able to vote as a right. “Currently, HM Government has no plans to change this, despite it being a clear objective of the EU Shareholder Rights Directive. Being able to communicate with shareholders would allow the registrars to offer an alternative service to platforms.”
The Financial Conduct Authority (FCA) is due to produce a final report on investment platforms early next year. UKSA and ShareSoc are outraged that voting rights were excluded from its consultation. They have other concerns too. They argue that “the requirement to use nominee accounts for Isas and Sipps is deeply uncompetitive” because in practice, impediments in the shape of costs and delays inhibit clients from switching platforms. They also criticise the inadequate legal protection for clients and the lack of financial protection provided by the Financial Services Compensation Scheme. But, above all, to give private shareholders both the ability and the right to vote, they urge the FCA to require a new “name on register” electronic system to be set up to identify the true beneficial owners.
Company structures
So what prompted Unilever to simplify itself? The reason dates back to just a few weeks before the Wall Street Crash, when on 2 September 1929, the snappily named Naamlooze Vennootschap Margarine Unie agreed to pool its interests with the soap manufacturer, Lever Brothers Limited. To avoid disruption (and penal taxes), the two companies kept their legal autonomy and they have since evolved into Unilever N.V. and Unilever PLC. We think of Unilever as a single company, but it actually continues to be two separate holding companies glued together by a series of business agreements, such as sharing brands and technology, mutual guarantees of borrowings and that the boards of each will have the same directors.
Each of these companies has headquarters in its own country and its own stock exchange listing. If you have a PLC share you own the same proportion of Unilever as if you had an N.V. share, but the share prices are different. They fluctuate separately and they’re not fungible, meaning that one can’t be swapped for the other. They pay similar dividends, but the Dutch withhold tax and the British don’t. The Dutch government (a fragile four-party coalition) proposed scrapping this tax to encourage “foreign investment”, but with Unilever’s re-domicile in doubt, this seems less likely to happen.
Contrast this with Shell, another Dutch-Anglo company. It too used to consist of separate companies, the Royal Dutch Petroleum Company and the Shell Transport and Trading Company Limited. Like Unilever, its registered ownership was about 60 per cent Dutch and 40 per cent British, with a similar dual listing and operating through a business, but not a legal, merger. Then its directors bit the bullet. On 20 July 2005, the two companies were unified under a single parent, Royal Dutch Shell plc, incorporated in England and Wales, but headquartered in The Netherlands for Dutch and UK tax purposes. It has a primary listing in London (with a ticker RDSB) and secondary listings in Amsterdam (RDSA) and New York (RDS.B and RDS.A) and these share prices also often diverge from one another.
So there’s the precedent. What Unilever proposed was similar, but with one critical difference: the unified Unilever would have been incorporated in the Netherlands and so categorised as a Dutch company. That would have disqualified it from the FTSE100. This would have forced index funds to sell, and investors feared a lower share price. Rule number one in change management is: avoid creating losers, so why simplify Unilever this way? That was bound to be asked, so it’s extraordinary that Unilever seems to have been blindsided by the shareholder reaction.
Near-death survival tactics
“Quite simply, we should have done a better job of landing the message,” chief financial officer Graeme Pitkethly was quoted as saying, not recently, but after seeing off the hostile Kraft-Heinz bid last year. He might wish to dust off the same words again. Simplification would have cut bureaucracy and improved corporate governance. As part of the deal, Unilever planned to do away with some defences against hostile bids, such as by scrapping preference shares that carried enhanced voting rights and by promising not to adopt poison pill charitable foundation ('stichtingen') arrangements.
Until the Kraft-Heinz bid, Unilever had been a bulwark against short termism. Chief executive Paul Polman had aligned Unilever with consumers – understand them intimately and operate responsible brands, he argued, and shareholder value will follow. He had made public statements about human rights, sexual discrimination, sustainable development and climate change. Critics thought him complacent.
The bid changed all that. Years of painstaking development risked being ripped apart for the sake of a few fast bucks. Kraft had form with Cadbury’s. Richard Buxton of Old Mutual Global Investors caricatured the bid as having been “a near-death experience” for Unilever but feared an overreaction. “Do not succumb to the voices of short termism,” he advised Mr Polman in an open letter. “Rally your board, employees and shareholders around your business model and balance sheet. It is not just Unilever at the crossroads, the right or wrong of capitalism is at stake.” Mr Polman set about unlocking shareholder value faster by cost-cutting, selling off under-performing businesses, increasing debt, buying back shares, increasing the dividend – and simplifying the twin-company structure.
Uncertain politics
“In the UK, although you have it written that the board needs to protect the interests of a broad range of stakeholders, it is very much shareholder-oriented,” he wrote to Theresa May. “Some other countries have a broader view.” Meaning the Netherlands. The Dutch are prepared to guarantee Unilever’s future. Mr Polman sought a similar assurance, but Britain prefers to rely more on market forces.
It’s not unimaginable that Unilever might return to its re-domicile plan later on. If the UK opposition Labour Party’s “Inclusive Ownership Fund” comes into being it would grab 1 per cent of the equity of UK companies each year. For Unilever, that’s over £1bn. Since less than 5 per cent of Unilever’s global workforce is in the UK, over 90 per cent of the dividends generated in the Fund would go in tax. Labour says the intention is to deliver employee share ownership, as if it’s a new thing. But most UK companies already achieve this through their existing employee share plans although, believe it or not, no company knows how many shares its employees actually own. Why? Because once shares are released from the plans into Isas and Sipps, they become concealed behind those nominee names on the share register.
So for various reasons, Unilever, like all companies, has a vested interest in making its share register more transparent. Those UKSA and ShareSoc proposals deserve serious consideration.
