Dual Listed Companies - an endangered species?
The likely extinction of Dual Listed Companies (DLCs) has loomed larger in the last 18 months. "DLC", in this context, means a structure involving two separately listed companies, each with its own shareholders, combined into one economic entity by contractual and other arrangements.
It's a rare and endangered beast, not to be confused with companies listed on more than one exchange, of which there are many.
When activist fund Elliott renewed its call for unification of the BHP DLC in February 2018, it noted that only 7 remained of the 15 DLC structures used in the last 25 years, with another – the Dutch/UK DLC, Unilever – actively considering unification. Since then, two others have been unified: Relx (formerly, Reed Elsevier) in September 2018, and Mondi last month.
The remaining DLCs appear to be biding their time. Unilever did put forward a unification proposal last September but withdrew it in October following strong opposition from UK institutional shareholders. The Australian/UK DLCs – BHP and Rio Tinto – both say they regularly review their DLC structures but have not yet decided to propose unification. No doubt, for DLCs with a UK arm, the outcome of Brexit will be important.
DLC structures are all bespoke to some extent. They are extremely complex, expensive to establish, and need to comply with the highest standard set by regulatory requirements in either of the DLC’s “home” jurisdictions. To work well, they also usually need an appropriate balance between the businesses in each DLC arm. Imbalance was one of the reasons for the recent unification of the South African/UK DLC, Mondi. In its last full financial year, the UK arm of Mondi accounted for over 90% of the group’s underlying earnings.
There is no denying the significant disadvantages of DLCs. Nevertheless, they have been used with considerable success where they offer benefits – not available under other structures – that outweigh those disadvantages. If the benefits relate primarily to facilitating a combination, and are not ongoing, the structure may be essentially a transitional one, smoothing the path to a takeover.
One factor relevant to the likelihood of DLCs returning from the brink of extinction is their treatment in international trade and foreign direct investment. That may be particularly important if we see a continuing trend toward bilateral rather than multilateral trade agreements, trade wars, growing emphasis on national security risks and greater populism and xenophobia in politics. A DLC might be regarded as a "local" in both of its home jurisdictions, "foreign" in both, or a combination. Under the first of those, a DLC might be a useful bridge to lessen the impact of trade wars and related trends.
Ironically, the disadvantages of DLCs strengthen their case to be treated as locals. Willingness to contemplate the effort and expense of establishing and maintaining a DLC may itself evidence a measure of genuine local commitment. Inevitably, approvals, waivers or exemptions will be required to address conflicts between the laws of the home jurisdictions. That will likely give governments and regulators greater leverage to impose conditions, such as resident senior management or local headquarters, which may help justify local status.
A carefully structured DLC might also go some way to addressing governmental security concerns by providing a locally incorporated company, with directors and management within the jurisdiction and beyond the reach of directions and enforcement action by foreign governments. In theory at least, a properly structured Australian arm of a DLC – the other half of which is in China or Singapore – could give the Australian government a level of confidence on some matters equivalent to a comparable stand-alone Australian listed company. Could such a structure have enabled Huawei to provide 5G technology, the CKI consortium to acquire APA, or ASX to merge with SGX? Probably not, but no one could say for sure without knowing the government's exact concerns and what structures foreign parties would have been willing to entertain.
Whether the above possibilities for DLCs can be realised as a practical matter remains to be seen and may depend in part of the approach taken by governments in matters such as the regulation of foreign investment, trade agreements and tax treatment. There may be a case for governments facilitating use of DLCs, within appropriate bounds. Where benefits to shareholders justify a DLC, flow-on benefits for the national interest may also be significant, especially for smaller economies like Australia's. If we are forced to pay the price of trade wars of others, the more bridges over the divide the better.