rothmans restructuring practicallawdotcom 1993

11PPLLCC SEPTEMBER 1993

NEWS BRIEF

In June, Rothmans, Richemontand Dunhill announced a pro-posed restructuring of the threecompanies tobacco and luxurygoods businesses into two newlisted groups - New Rothmans(tobacco) and Vendme (luxurygoods).

The cornerstone of therestructuring is two schemes ofarrangement (of RothmansInternational and DunhillHoldings). If approved,shareholders will receiveentirely distinct units in each

of New Rothmans andVendme. Both groups will havea dual holding companystructure. Vendme units willcomprise twin shares in a UKholding company, VendmePLC, and in a Luxembourgholding company, Vendme SA.New Rothmans units willcomprise twin shares in a UKholding company, NewRothmans PLC and in aNetherlands holding company,New Rothmans NV. Broadly, itis intended that the Britishcompanies will own the UK

Rothmans restructuringThe tax advantages of twinned shares

(C) 1993 Legal & Commercial Publishing Limited. Subscriptions +44 171 401 7878

businesses and the overseascompanies, the non-UKbusinesses.

Twin share or similar structureshave become increasingly pop-ular amongst multinational companies as a way of reducingthe adverse tax consequences of paying cross-border divi-dends.

Many jurisdictions impose a div-idend withholding tax on divi-dends declared and paid betweencompanies and their foreignshareholders. This invariably re-sults in a resident receiving morefavourable tax treatment than anon-resident shareholder. Adouble tax treaty may reduce thisdisadvantage but will not neces-sarily remove it altogether.

This problem has been reducedfor groups of companies withinthe EC by a directive that pro-vides, broadly, that there shouldbe no withholding tax on a divi-dend paid by a subsidiary in oneMember State to a parent com-pany in a different Member Stateand that dividends receivedshould be either exempted fromtax or subjected to tax but withcredit for underlying tax out ofwhich the dividend is paid

(Council Directive 90/435/EEC,PLC, 1992, III(7), 31).

Although dividends receivedfrom other EC countries may notsuffer any significant UK taxcosts, advance corporate tax(ACT) paid on dividends dis-tributed to shareholders remainsan effective tax cost to UK com-panies on dividends received.

ACT is an advance payment ofthe companys UK corporationtax liability. Where the companyis a holding company for compa-nies abroad it may not haveearned sufficient UK profits tooffset the ACT; its profits willhave been earned abroad, andACT cannot be set off againstoverseas tax on those earnings.The ACT thus becomes an actualtax charge rather than an advancepayment.

Enhanced scrip dividends havehelped to relieve the surplusACT problem (see PLC, 1993,IV(5), 21). The government has

also announced proposals to re-lieve surplus ACT on foreign in-come dividends. But until thislegislation is enacted, surplusACT remains a significantproblem for UK companies withsubstantial overseas operations.

Units comprising twin shares in aUK and foreign holding com-pany help to avoid this problembecause dividends can be de-clared and paid directly to over-seas shareholders by the foreigncompany without being chan-nelled through the UK.

The underlying principle of theRothmans and Vendme units isthat holders should be put in thesame position for all practicalpurposes as if they held shares ina single company, but with theability to receive dividends fromeither holding company. A number of provisions havebeen inserted in the constitu-tional documents of the compa-nies to achieve this aim. Theseinclude:

12 PPLLCC SEPTEMBER 1993

NEWS BRIEF

Before the restructuring

Richemont

Before the restructuring each of Rothmans and Dunhill hold a mixture of tobacco and luxury goods assets.

Other Rothmans

shareholders

Rothmans

Dunhill

Other Dunhill

shareholders

62% 38%

58% 42%

After the restructuring

Richemont

After the restructuring the tobacco and luxury goods businesses will be divided between two groups - New Rothmans (tobacco) and Vendme (luxury goods). New Rothmans and Vendme will each have a dual holding company structure in which shareholders will hold units comprising twinned shares in a UK company (New Rothmans plc or Vendme plc) and a Dutch company (New Rothmans NV) or a Luxembourg company (Vendme SA). It is intended that the UK companies will own the UK based businesses and the overseas companies will own the non-UK based businesses.

Dunhill and Rothmans

shareholders (other than Richemont)

NewRothmans

UK-based tobacco business

Vendme

39% 30%

Dunhill and Rothmans

shareholders (other than Richemont)

PLC NV PLC SA

Non-UK-based

tobacco business

UK-based luxury goods

business

Non-UK-based luxury goods

business

61% 70%


l Issue and trading. Shares inthe relevant holding companieswill only be issued in the form of units. If either holdingcompany within a twinned pairissues shares for cash, securitiesor other consideration (for ex-ample, if it buys assets in ex-change for shares), it will paycash to the other holding com-pany equal to the nominal valueof its shares issued as part of theunits to the extent that the nom-inal value is not paid by a thirdparty or by capitalisation of re-serves.

Holders of units will only be ableto trade them in unit form and the

shares comprising the units willnot be capable of being tradedseparately.

l Dividends. Holders of units will be able to elect to re-ceive dividends from either theUK holding company or the rele-vant overseas holding company.

Dividends will be equalised atthe gross level so that the divi-dend paid by the relevant over-seas company will equal the netdividend paid by the UK compa-nies together with the associatedUK tax credits.

The directors of each holding

company retain a discretion notto apply the equalisationprinciple. One circumstance inwhich this discretion may beexercised is disclosed in thelisting particulars of NewRothmans. Unless the necessarytax confirmations are given bythe Inland Revenue, the greatmajority of the Dutch holdingcompanys assets will be heldthrough a wholly owned UKholding company. In thecircumstances, the Dutchcompany board may considerexercising its discretion toreduce the amount paid by theDutch holding company and soencourage shareholders to electto receive dividends from theultimate UK holding company.

Presumably the directors mayalso use their discretion not toapply the equalisation principleif one company within a twinnedpair has substantially greaterdistributable profits than theother.

l Management. The boards ofeach company within a twinnedpair will be identical.

l Alterations to share capital.Resolutions which may alter theshare capital of either companywithin a twinned pair or other-wise have an effect on thetwinned share principle must beconditional upon a resolution ofsubstantially similar effect beingpassed by shareholders of thetwin company.

If (and when) the foreign incomedividend legislation comes into force in the UK, the taxreasons for twinned sharestructures may become lesscompelling. But they are likely toremain popular where amultinational has a significantnumber of overseas shareholdersand operations in countries thatimpose withholding tax ondividends and a double tax treatydoes not reduce the problem.CJM

13PPLLCC SEPTEMBER 1993

NEWS BRIEF

The twin share structure usedin the Rothmans restructuringis an example of one of anumber of methods that can beused to reduce adverse taxtreatment of internationalgroups.

At the time of the SmithKlineBeecham merger, US share-holders received specialshares in the US subsidiarystapled to ordinary shares inthe UK parent. US residentshareholders received divi-dends direct from the US sub-sidiary. This means that USprofits do not have to flowthrough the UK parent (andthrough the UK tax jurisdic-tion), thus avoiding the tax dis-advantages this causes forboth the shareholders and thegroup.

The merger between WigginsTeape Appleton (WTA) andArjomari in December 1990resulted in a variation of thestapled share structure. Themerger was structured so thatdividends from Arjomari Eu-rope (the principal French op-

erating subsidiary) could bepaid to a French holding com-pany and on to French share-holders without having to bepaid through WTA and suf-fering UK tax (see PLC, 1991,II(4), 3).

When Reed and Elseviermerged in January 1993, eachretained their separate corpo-rate existences. Shares in thetwo companies are traded sep-arately: there is no packagingor stapling. In the mergedgroup, the underlying busi-nesses have been combinedunder two companies in whicheach company has half of thevoting rights. Equalisation ar-rangements have been adoptedto ensure that dividends paidby the two companies are in aratio that is, broadly speaking,constant. The same ratio isalso applied to capital. Therisk of the two parent compa-nies adopting different distri-bution policies and hence therelative market values of thetwo companies fluctuating hastherefore been minimised (SeePLC, 1993, IV (1), 15).

Alternative structures


rothmans restructuring practicallawdotcom 1993

Documents