Royal Dutch Shareholders Form Group to Complain About Capital Gains Tax Liability

In May 2005, the boards of Royal Dutch Shell and Shell Transport & Trading announced the terms of the merger of the companies to form a single holding company. Previously the two aforementioned companies had separate stock exchange listings. Most UK private shareholders held shares in Shell Transport & Trading, and received replacement shares in the merged entity, with no capital gains tax liability. However, holders of shares in Royal Dutch Shell were advised that for reasons which are not totally clear, the exchange of their shares for shares in the new company would crystallize a UK capital gains tax liability. 

Also the company offered no loan note alternative, or other ways around the above problem, and did not seem to realise the size of the potential tax liabilities, or have much idea as to how many shareholders would be affected. But shareholders were advised, both by Shell and their stockbrokers to accept the new shares in lieu of their existing ones, as otherwise they would end up holding shares in an unlisted company, and might be subject to a “squeeze out” where their shares would be forcibly acquired.  

It seems that about 3000 UK shareholders are affected by the above problem, and although most of them accepted the replacement shares as they had no apparent alternative, as many as 500 refused. APCIMS (the Association of Private Client Investment Managers and Stockbrokers) got a lot of press coverage on the problem, and both they and many shareholders made representations to the boards of the Shell companies, initially to no avail. However, subsequently the company reconsidered and did offer a loan note alternative, but that was too late for those people who had already accepted the offer, which was generally the case.

On the 26th October 2005 a meeting was hosted by APCIMS at which many private UK shareholders who held such shares were present, along with stockbrokers representing numbers of their clients. Roger Lawson represented UKSA at the meeting and made a number of suggestions about how to move matters forward. 

The meeting discussed various possible courses of action, including legal action against the companies and their directors, or requests for a taxation waiver from the Government. But the immediate agreed action was to form a committee of interested people to take more specific action and seek the necessary legal and tax advice. UKSA offered to advise and assist the new group.

Note that UKSA considers this a good example of how the rights of private shareholders are often ignored by companies. In the case of the Shell merger, previous certificated shareholders were also moved by default into a corporate nominee account, which UKSA has also criticised as undermining shareholder rights.

Subsequent to the above mentioned meeting, and after considerable effort had been put into researching the legal and tax position and what had actually taken place in the restructuring, the committee formed the view that there was an arguable case that in fact the transaction that took place was in effect a simple share exchange and hence no tax was due. A letter is available from APCIMS (or UKSA) that confirms that and which can be used as a submission to HM Revenue & Customs accordingly.

Roger W. Lawson 26/10/2005 (Revised 24/8/2006)