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Article by Eunice Foo
Following Unilever’s plan of abandoning Rotterdam to become a solely UK business, Shell has decided to scrap its dual-listed structure, jettison the “Royal Dutch” part of its name for the first time in 114 years, and move its tax-based and chief executive to the UK.
The Reasons for its Departure
Shell has been at the end of its tether regarding its relation in the Netherlands: a court in The Hague had ordered the giant oil company to cut more emissions (by net 45%) by 2030, coupling with the added pressure from Third Point, an activist investor to simplify its business structure so that it’s easier for the company to reach towards a greener future, it’s not surprising Shell decides to take this big step following Unilever.
In addition, Dutch pension fund ABP said last month that it will “divest 15 billion euros ($17.2 bn) of fossil-fuel assets by early 2023” including Shell “from its portfolio without warning”, adding on to the threat of an additional exit tax by Dutch opposition parties, GroenLinks, triggered by Shell’s decision to end its dual-structure. These factors may have played a part in hastening the global oil giant’s departure.
Evidently, governments from both countries have a contrasting view on the sudden split, with Britain wanting to be the leader in “energy transition and getting to net zero” and regain its standing in the global financial market due to the “loss of financial institutions from the city to Amsterdam because of Brexit complications”, welcomes the change with a “clear vote of confidence in the British economy” as it will “attract investments and create jobs”, says UK Business Secretary Kwasi Kwarteng.
On the other hand, the Dutch government was “unpleasantly surprised” as said by Dutch Minister for Economic Affairs and Climate Policy Stef Blok, by the sudden departure and added that they were in conversation with Shell’s top management about the consequences for jobs and investment decisions.
Better Things Shall Now Fall Together?
By transforming its 114 years business model, only UK shares would be issued and, Shell reckoned, a single pool of shares would double the amount of cash return to shareholders via share repurchases to more than $5bn a quarter, without worrying about the withholding tax– although Shell faces a tall order of finding $7bn quickly to ensure returns from the recent sale of a shale oil business to ConocoPhilips.
Also, Chairman Andrew MacKenzie said that the simplification would normalise the share structure under the “tax and legal jurisdiction of a single country”, therefore making Shall “more competitive” and in a better position to “seize opportunities and play a leading role in the energy transition”. That is to say, it is easier for top management to decide on M&A and restructuring options, make it easier to buy back shares and push up stock prices for shareholders.
Internal Commercial Awareness
Shell choosing a more tax-friendly jurisdiction to appease shareholders (ThirdPoint etc.) is not necessarily a positive move without drawbacks.
Although Shell intends to return double the amount to its shareholders via buybacks while shifting towards a clean energy future, Shell may be deprived of reinvestments necessary to create sustainable earnings. This is because buybacks can be used to artificially inflate share prices, with a major portion of it being spent on executive compensation. However, buybacks may help assure Shell’s investors a balancing of both decent return and the need to ensure the large oil and gas company keeps its pledges around greener transition.
Shall possibly need advice from firms such as Clifford Chance to restructure its investment fund formation to help boost its reinvestment towards greener energy while ensuring returns to its shareholders.
External Commercial Awareness
Dual-listed energy companies like Shell must now balance between keeping investors “onside with cash flows from fossil-fuel assets” and, if in opting for such corporate shift, building a new business that, at the moment, has been cut down in size.
Furthermore, the fossil fuel industry has the largest delegation at COP26 than from any single country, and it has been raised that oil and gas industries should be banned to reduce the climate crisis. Law firms, such as Dentons and Allen & Overy, that have a strong presence in the US in oil and energy may be sought to advise European companies that have ties with US power generators on the potentially short-term growth of the use of coal due to the surge of natural gas prices after Covid-related shutdowns, leading to a switch from gas-fired units to coal-fired units. Also, law firms might need to direct companies on how such companies can address the general shift away from coal to maintain corporate social responsibility and at the same time generate returns to keep investors happy.
Moreover, we may see a rise in these types of efforts, not only within the oil and gas industry but also in industries such as the lighting sector. A transition into LEDs and control and software has already happened, but with existing sales and services channels such a rise may not fit into that new vision. There might be considerations of a split to streamline and make restructuring easier.
Similarly, building controls technologies have one foot in hardware-based increasingly on outdated tech and the other in software that is increasingly under threat from Silicon Valley. This type of business shift can place such companies in a more advantageous position and attract more investments for growth.
In conclusion, the oil and gas industry first biggest breakup may lead dual-listed companies in the future to actively seek and create a business environment in which higher returns and social responsibility can both be achieved.