Thursday, October 4, 2007
This is the first in what may be a longer series, if readers like it. Today, I'll be looking at the dual listed company structure. It's something that any good M&A will love for its complexity and real legal "thought" required to implement. The dual listed company is where M&A lawyers truly add value.
A dual listed company structure is a virtual merger structure utilized in cross-border transactions. The companies do not actually effect an acquisition of one another, but instead enter into an unbelievably complex set of agreements in which they agree to equalize their shares, run their operations collectively and share equally in profits, losses, dividends and any liquidation. Examples of these arrangements are BHP/Billiton (BHP an Australian company and Billiton an English Company), Carnival (an English and Panamanian company), and Rio Tinto Group (an Australian and English company).
The structure is usually characterized by the parties as a true merger of equals since there is no acquiring company. It is a way for companies in different jurisdictions to preserve beneficial dividend treatment (e.g., the franking credit in Australia) and inclusion in their home country indexes. It is also a mechanism to stem flow-back into one country or another as the shares in one company are not exchangeable for the other. Finally, because no company actually takes over the other and each remains domiciled in their home country, it is one way to salve issues of nationality or national security. Often, the arrangements are viewed a stepping stone to a full merger (as was the case of Brambles which unwound in 2005). But these arrangements are unwieldy and governance of multiple boards and nationalities sometimes a problem. This was why Unilever (the Anglo-Dutch DLC) unwound its structure in 2005. After Unilever, these structures fell out of favor -- viewed by practitioners as too unwieldy, though this appears to be no longer the case. And finally, there can be some bizarre results -- it is sometimes rumored that BHP/Billiton will make a bid for Rio Tinto Group; if it does so, the BHP English company would likely make a bid for RT's English pair; the BHP Australian company for RT's Australian pair. How the mechanics of each jurisdiction would work to accommodate this bid is uncertain.
The pending Reuters/Thomson transaction is the latest to use the DLC structure and sparks a single deal resurgence. The parties there likely employed a dual listed structure in order to preserve the inclusion of the combined company in the FTSE 100 among other reasons. I am not aware of any prior Canadian/English DLC. So the complex tax, accounting and legal aspects of a DLC structure have no doubt perplexed Thomson's and Reuters' attorneys and accountants for awhile. And for that matter there is still no true U.S. DLC. BP came close in 1998 with Amoco, but the SEC refused to allow pooling accounting and so it was at the last minute converted into a true acquisition [NB. I was tangentially involved in that deal and I've never seen attorneys work harder -- all of the dual listed company agreements were finalized at the time the SEC blew-up the structure -- Wachtell and Sullivan -- deal counsel on that transaction still have them in their files for those who contemplate this structure again]. But Carnival is pretty close, the Panamanian company has equivalent U.S. corporate governance provisions and is treated as a U.S. tax-domiciled entity.
Legal geeks should note that the SEC recently revised its position on the requirement to register the shares of newly-formed DLCs. Historically, the SEC did not require a new registration statement to be filed as the shares of both companies remained outstanding and there was no triggering offering. But, with the Carnival DLC the SEC took the position that the changes in the character of the securities of the company were so fundamental that a registration statement is now required with respect to both sets of shares of the DLC. More ways for U.S. lawyers to earn money.
And for those looking for M&A nirvana, there is always the tri listed company to shoot for. This would encompass a current dual listed company adding a third leg forming the world's first tri listed company. The agreements to do this would reach new levels of complexity (hence my thoughts of M&A nirvana), and the operation of the company could become a bit complex to say the least. For example, the shareholder meeting for the company may have to last a full day depending upon their location in order to encompass meetings on multiple continents for three companies. But the structure is theoretically feasible. I thought this might come to pass with Rio Tinto's bid for Alcan, but instead it was structured as a full acquisition. Still, M&A lawyers can dream.