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Shell seeks to retain investors by eliminating Dutch base

Royal Dutch Shell’s decision to move its executives and tax residency from the Netherlands to the UK caused disappointment in The Hague and rare political cheer in London.

But the most immediate impact of the restructuring will have little to do with politics, jobs or even Shell’s tax burden. Instead, executives and analysts say, it has more to do with the oil group’s need to keep shareholders happy as it tries to make a challenging transition into new forms of business. greener energy.

A deep understanding among energy investors and executives is that when companies invest less in oil, more money goes to shareholders when energy prices are high. Shell said simplifying its structure would allow it to bypass rules that limit the number of share buybacks it can make in any given quarter.

“Our initial impression is that this is a sensible simplification that will allow the company to return more efficiently to its shareholders,” said Nick Stansbury, head of climate solutions at 20 leading shareholder Legal & General Investment Management said.

Under Shell’s current dual share structure, withholding tax on the company’s Dutch A shares makes UK B shares the only economic option for redemption. But buybacks of UK B shares are capped in proportion to their trading volume, thus capping the company at $2.5 billion per quarter.

That is no longer enough. Shell kicked off a $2 billion buyback plan in July but has since promised to return an additional $7 billion to shareholders from the proceeds from the sale of its Permian shale business in October. 9.

Flowchart showing Shell's new simplified structure

One shareholder in the top 10 predicts the pace of acquisitions may increase after the restructuring to $6 billion per quarter. “Given the high volume of buybacks that are such an important part of the Shell investment case, this would be a positive,” the shareholder said.

A portfolio manager at a second-largest investor described the move as “well managed”. “If you start with a blank sheet of paper now, you won’t have a maze-like structure,” he said.

That complex structure is the legacy of the 2005 merger between Koninklijke Nederlandsche Petroleum Maatschappij and Shell Trading and Transport, the company that created Shell today. That means for the last 16 years Shell has been incorporated in the UK but maintains dual shares and Dutch tax residency. It has also given the company the name “Royal Dutch”, which will be dropped if the proposal is approved by shareholders at the December 10 general meeting.

In an 11-hour effort to keep Shell in the country, officials in the Netherlands told the Financial Times they were seeking a last-minute majority to eliminate the holding tax on stock dividends. However, it was not clear on Monday whether they would be successful – or whether that alone would convince the company to continue operating.

Shell, Bernstein analyst Oswald Clint, has faced calls to simplify its structure for years.

“I don’t know anyone who would not be pleased except the Dutch government,” he said. “This makes them nimble, agile, and move faster as the energy system moves faster, so they need to be in front.”

But while greater financial flexibility is seen as crucial to the energy transition, people familiar with Shell’s thinking say the business and political climate in the Netherlands is also a factor. element.

Members of an environmental group celebrate the court's ruling in The Hague, Netherlands
Members of an environmental group celebrate a court ruling against Shell in The Hague, Netherlands in May © Peter Boer / Bloomberg

A court in The Hague ruled in May that Shell needed to reduce its carbon emissions faster and ordered more cuts by 2030. Then, in a move analysts say Reflecting growing public animosity towards the company, Dutch pension fund ABP – a large Shell shareholder – announced plans to sell fossil fuel companies entirely.

“The fact that The Hague court case is probably the final straw, after Groningen and other issues, and the general public perception in the Netherlands about the company,” said one, referring to the gas field. Groningen is run by Shell, which the Dutch government says will close in 2022 to limit seismic risks in the area.

After years of deliberating over the company structure, the arrival of Andrew Mackenzie, the former Scottish chief executive of BHP Billiton, is also likely to have accelerated the pace.

A fund manager with a large stake in the company said: “Andrew Mackenzie is a very knowledgeable person, adding that Shell has been looking at the move for years.

Column chart of Common Share Repurchases (USD billion) showing Shell repurchases

Since Mackenzie was appointed in March, the Dutchman Maarten Wetselaar, the former Dutchman who was the frontrunner as the next chief executive, has left the company and been replaced on the executive committee by an Australian, increasing strengthen the international presence in the senior management team that was previously half. Dutch.

Shell has sought to lessen the impact on the Netherlands, emphasizing that large parts of the business, including its upstream division, will remain headquartered in the country.

Under the plan, Shell’s chief executive and chief financial officer will have only 11 people move to London in the short term, according to Morgan Stanley. However, all board and executive committee meetings will be held in the UK.

Shell also said the move would not affect legal proceedings related to the Dutch court ruling, and Mackenzie added that the group was “working hard to meet the court’s challenge” to cut reduce emissions, even as they appeal the decision.

The Dutch branch of Friends of the Earth, which initiated the Shell case, said the company would have to comply with the ruling regardless of where it is headquartered, warning that a move to the UK could open “a new front” on the legal future. cases.

The proposal is another blow to the Netherlands, after consumer goods giant Unilever ended its Anglo-Dutch dual listing last year and moved its headquarters from Rotterdam to London.

The Dutch business association VNO-NCW lamented the move as “a loss for the Netherlands”. But others, such as Dutch social democrat MEP Paul Tang, are less forgiving.

“Shell is fleeing a country where they have lost goodwill and their lobbying has become less effective,” he said.

Additional reporting by Emma Agyemang

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