Daily Telegraph: Personal view: Going Dutch? For some shareholders it is a far from equitable split: “There have been a number of less-than-ideal constructions and reconstructions recently where the smaller shareholder feels hard-done by. Take the case of Shell, or Royal Dutch Shell as it is now known, as a particularly harsh example. Following on from its failure to state its oil and gas reserves correctly, it has instigated many changes, of which one is the "reunification" of the company.”: Monday 19 Sept 2005

By Angela Knight (Filed: 19/09/2005)

The British buy shares in companies and always have, but the privatisation of companies such as British Telecom in the 1980s, and demutualisation of the Halifax Building Society and others in the 1990s widened share-holding dramatically.

Now, although our major plcs may be "owned" by institutional fund managers and the like, 12m individuals hold shares and in more than one company. These days the UK is both a property and a share-owning democracy.

The question is, though, do these listed companies always treat their shareholders fairly? The answer is that shareholders do not always think so.

There have been a number of less-than-ideal constructions and reconstructions recently where the smaller shareholder feels hard-done by. Take the case of Shell, or Royal Dutch Shell as it is now known, as a particularly harsh example. Following on from its failure to state its oil and gas reserves correctly, it has instigated many changes, of which one is the "reunification" of the company.

Until this summer, Shell was in two main parts: Shell Transport & Trading in the UK and Royal Dutch Petroleum in the Netherlands. Each business had its own separate accounts, administration and board of directors.

After spending $115m (£63.5m) on advisers, a reunification prospectus was launched to create one company called Royal Dutch Shell under one board and to give "new shares for old".

Those who held shares in Shell Transport were to get "new" Royal Dutch Shell B shares and those who held Royal Dutch were to get "new" Royal Dutch Shell A shares.

But although the Shell Transport share exchange was straight forward, the Royal Dutch construction involved a complex mix of creating shadow shares in a depository in Netherlands which magically transformed into "new" Royal Dutch Shell B shares on vesting day.

For the US and Dutch holders of Royal Dutch this presented no problem. However, for those in the UK who were shareholders in Royal Dutch, this complex share exchange falls foul of the UK roll-over relief rules, which in turn means that these individuals will be charged capital gains tax at a rate of 40pc or so, as if they had sold their Royal Dutch shares, even though they have not.

Clearly Shell cannot be held responsible for the UK's Byzantine capital gains tax regime, but equally the company was well aware of the problem it would be presenting to its loyal UK private investors in Royal Dutch, even before it launched its prospectus.

It should have taken action to relieve this problem for this group of shareholders and there are a number of options that could have been offered such as a loan note alternative which is tax efficient, or re-jigging the offer, or making a subsequent secondary offer to those who have been caught by these tax rules.

These are all steps that other companies have taken when faced with a similar problem, so there would have been no danger of Shell setting a precedent. So far, though, Shell has refused to do anything about this, and has hidden behind the thinnest of thin veils, saying that the law only requires it to be fair to all of its shareholders on a pre-tax basis.

Technically this might be correct but they certainly have taken steps to make life on a post-tax basis fine for their Dutch shareholders. They have also managed to avoid a substantial stamp duty bill and indeed we now have the bizarre situation where Royal Dutch Shell A shares are trading successfully on the Euronext Amsterdam exchange without stamp duty being paid, and on the UK London Stock Exchange where stamp duty has to be applied.

This is a personal problem. Look at the 3,000 or so UK private shareholders in Royal Dutch: they are overwhelmingly elderly, they are all angry, confused, frustrated and upset as they have lost both capital and income as a consequence of this construction.

Many of them have held their Royal Dutch shares for a generation and many are former Shell employees. They get their retirement income from these shares and so will be put in the situation whereby they will have to sell around a third of their shareholding to pay a tax bill which is not of their making.

Around 400 of these brave souls have held on to their Royal Dutch shares and refused to take the offer. There is time, and the ability and the precedent, to do something better for them in the current unfair exchange. Most of them are in their 80s and frankly, at this age it is unlikely that they will be able to make up either the capital or income lost in this way.

This case highlights four key points. Company advisers may charge high fees but we should not assume they will get their advice right for the small shareholder. Second, boards need to think through their proposals rather better to see how it affects all their shareholders.

Third, that while the corporate governance lobbyists are quick to shout if they think a chief executive's pay is too high or that his bonus is being based on a target they do not like, when it comes to the serious stuff of disenfranchising shareholders they remain entirely silent. And finally, while all shareholders are equal, some seem more equal than others.

Angela Knight is chief executive of the Association of Private Client Investment Managers and Stockbrokers

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