William John Market Report 29-11-21
William John looks at the consolidation of Shell’s share structure which has provoked major backlash in The Hague.
Shell, Energy, CommonStock, Equities, Markets, Consolidation, WilliamJohn

William John Market Report 29-11-21

William John Market Report 29-11-21

Category: Reports

A few weeks ago, Royal Dutch Shell announced plans to ditch its dual share structure, which consists of Class ‘A’ and Class ‘B’ shares. The move, which will see Royal Dutch Shell be renamed Shell Plc, will establish the Oil & Gas giant in London on a full-time basis (moving away from The Hague). The new class of shares will still be traded on the New York Stock Exchange, Euronext Exchange, and the London Stock Exchange. 

Primarily, the move is seen as a consolidation and a simplification aimed to appease investors as Dutch legislation enforces a 15% dividend withholding tax (a 15% tax on dividend income). Subsequently, the company has used a dual share structure of Class A shares which are subject to the tax and Class B shares which receive a dividend via the “dividend access mechanism” (in other words, a complex navigation of Anglo-Dutch tax laws), although both classes of shares have the same number of rights per share. 

Maintaining a dual share class structure is generally more expensive than having a single classification of shares and by moving permanently to the UK, the company will be under a more accommodating tax residency for its shareholders and investors, who will not be subject to Dutch dividend withholding taxes under U.K. law. 

Additionally, the Company rationalised its decision on the basis that streamlining the classes of shares will make buybacks easier and open the possibility for faster and more efficient acquisitions, spinoffs, and divestitures, according to the Financial Times. This comes at a time where American activist investor, Third Point, has built up a significant stake in the company (worth in excess of $750 million according to the New York Times), arguing for it to spin off its traditional oil and gas extraction business from its emerging renewable energy business to exploit efficiencies and focus its business models. Looking at the share (Class A) price of Royal Dutch Shell over the past six months on the London Stock Exchange:

Source: William John Analytics, Yahoo Finance

Whilst the share price has climbed by approximately £3 since January, it is just 0.64x its trading price in July 2019. With activist investors such as Third Point pushing for change, the company needs to restructure itself as it looks to evolve into a renewable energy business and reinvigorate its shareholders. There is no question that streamlining its equity offerings will enable it to undertake transactions to reshape the company with greater ease, with the added advantage of offering investors a more accommodating environment regarding its tax residency. 

Although the backlash from the Dutch government has been strong, this represents a positive new chapter for Shell Plc. The company, regarded as having some of the strongest fundamentals in its industry, should reap the rewards over the coming years. With this move, the Dutch government must take action to address its financial services legislation, having lost both Unilever and now Shell to London within the space of two years. The question is, who will follow next? 

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.