Dual-listed company
Encyclopedia
A dual-listed company or DLC is a corporate structure in which two corporations function as a single operating business through a legal equalization agreement, but retain separate legal identities and stock exchange
listings. Virtually all DLCs are cross-border, and have tax advantages for the corporations and their stockholders.
In a conventional merger or acquisition
, the merging companies become a single legal entity, with one business buying (for cash or stock or for the mix of the two) the outstanding shares
of the other. However, when a DLC is created, the two companies continue to exist, and to have separate bodies of shareholders, but they agree to share all the risks and rewards of the ownership of all their operating businesses in a fixed proportion, laid out in a contract
called an "equalization agreement." The equalization agreements are set up to ensure equal treatment of both companies’ shareholders in voting and cash flow rights. The contracts cover issues that determine the distribution of these legal and economic rights between the twin parents, including issues related to dividends, liquidation, and corporate governance. Usually, the two companies will share a single board of directors
and have an integrated management structure. A DLC is somewhat like a joint venture
, but the two parties share everything they own, not just a single project.
Other companies were formerly dual-listed:
could be owed if an outright merger took place, but no such tax consequence would arise with a DLC deal. Differences in tax regimes may also favour a DLC structure, because cross-border dividend payments are minimized. In addition, there may be favourable tax consequences for the companies themselves. Once companies have chosen a DLC structure, there can be major tax obstacles to cancelling the arrangement. Issues of national pride may sometimes also be involved; where both parties to a proposed merger or takeover are in a strong position and do not need to merge or accept a takeover, it can be easier to push it through if the country with the smaller business is not "losing" its corporation. A third motive is the reduction of investor flow-back, which would depress the price of the stock of one of the firms in their own market if the merger route were used instead. That is, some institutional investors cannot own the shares of firms domiciled outside the home country or can only own such shares in limited quantity. In addition, in a merger, the non-surviving firm would be removed from all the indices. Index tracking funds would then have to sell the shares of the surviving company. With the DLC structure, all of this would be avoided. A fourth motive is that DLCs do not necessarily require regulatory (anti-trust) consent and may not be constrained by the requirement of foreign investment approval. Finally, the access to local capital markets may be reduced when a quotation disappears in a regular merger. This is based on the idea that local investors are already familiar with the company from the pre-DLC period. However, the DLC structure also has disadvantages. The structure may hamper transparency for investors and reduce managerial efficiency. In addition, issuing shares in a merger and capital market transactions (such as SEOs, share repurchases, and stock splits) are more complex under the DLC structure.
(the Dutch stock market index) the stock price of Reed International PLC generally tends to rise relative to the stock price of Elsevier NV. De Jong, Rosenthal, and van Dijk (2008) report similar effects for nine other DLCs. A potential explanation is that local market sentiment
affects the relative prices of the shares of the DLC parent companies.
Because of the absence of "fundamental reasons" for the mispricing, DLCs have become known as a textbook example of arbitrage
opportunities, see for example Brealey, Myers, and Allen (2006, chapter 13).
positions in DLCs. These arbitrage strategies involve a long position
in the relatively underpriced part of the DLC and a short position in the relatively overpriced part. For example, in the early 1980s an arbitrageur might have built up a long position in Royal Dutch NV and a short position in Shell Transport and Trading PLC. This position would have yielded profits when the relative prices of Royal Dutch and Shell converged to theoretical parity. An internal document of Merrill Lynch
http://pages.stern.nyu.edu/~msiegel/merrill.doc investigates arbitrage opportunities in six DLCs. Lowenstein (2000) describes arbitrage positions of Long-Term Capital Management
(LTCM) in Royal Dutch/Shell. LTCM established an arbitrage position in this DLC in the summer of 1997, when Royal Dutch traded at an 8 to 10 percent premium. In total $2.3 billion was invested, half of which long in Shell and the other half short in Royal Dutch (Lowenstein, p. 99). In the autumn of 1998 large defaults on Russian debt created significant losses for the hedge fund and LTCM had to unwind several positions. Lowenstein reports that the premium of Royal Dutch had increased to about 22 percent and LTCM had to close the position and incur a loss. According to Lowenstein (p. 234), LTCM lost $286 million in equity pairs trading and more than half of this loss is accounted for by the Royal Dutch/Shell trade.
The example of LTCM is a good illustration of why arbitrage by financial institutions has not succeeded in eliminating the mispricing in DLCs. An important characteristic of DLC arbitrage is that the underlying shares are not convertible into each other. Hence, risky arbitrage positions must be kept open until prices converge. Since there is no identifiable date at which DLC prices will converge, arbitrageurs with limited horizons who are unable to close the price gap on their own face considerable uncertainty. De Jong, Rosenthal, and van Dijk (2008) simulate arbitrage strategies in 12 DLCs over the period 1980-2002. They show that in some cases, arbitrageurs would have to wait for almost nine years before prices have converged and the position can be closed. In the short run, the mispricing might deepen. In these situations, arbitrageurs receive margin call
s, after which they would most likely be forced to liquidate part of the position at a highly unfavorable moment and suffer a loss. As a result, arbitrage strategies in DLCs are very risky, which is likely to impede arbitrage.
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
listings. Virtually all DLCs are cross-border, and have tax advantages for the corporations and their stockholders.
In a conventional merger or acquisition
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
, the merging companies become a single legal entity, with one business buying (for cash or stock or for the mix of the two) the outstanding shares
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
of the other. However, when a DLC is created, the two companies continue to exist, and to have separate bodies of shareholders, but they agree to share all the risks and rewards of the ownership of all their operating businesses in a fixed proportion, laid out in a contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
called an "equalization agreement." The equalization agreements are set up to ensure equal treatment of both companies’ shareholders in voting and cash flow rights. The contracts cover issues that determine the distribution of these legal and economic rights between the twin parents, including issues related to dividends, liquidation, and corporate governance. Usually, the two companies will share a single board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
and have an integrated management structure. A DLC is somewhat like a joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
, but the two parties share everything they own, not just a single project.
Examples
Some major dual-listed companies are listed in :Category:Dual-listed companies; they include:- BHP BillitonBHP BillitonBHP Billiton is a global mining, oil and gas company headquartered in Melbourne, Australia and with a major management office in London, United Kingdom...
(Australia/UK 2001- ) - Carnival Corporation & plcCarnival Corporation & plcCarnival Corporation & plc , is a American-British Company, and the world's largest cruise ship operator. It is a dual listed company, with headquarters at Carnival Place in the Miami suburb of Doral, Florida, USA, and at Carnival House in Southampton, England, UK...
(Panama/UK 2003- ) - Investec BankInvestec BankInvestec is an international specialist banking and asset management group. It provides a range of financial products and services to a select client base in three principal markets: the United Kingdom, South Africa and Australia. Investec is listed on the London Stock Exchange and the...
(South Africa/UK 2002- ) - Royal Dutch ShellRoyal Dutch ShellRoyal Dutch Shell plc , commonly known as Shell, is a global oil and gas company headquartered in The Hague, Netherlands and with its registered office in London, United Kingdom. It is the fifth-largest company in the world according to a composite measure by Forbes magazine and one of the six...
(UK/Netherlands 1907- ) - Reed ElsevierReed ElsevierReed Elsevier is a publisher and information provider operating in the science, medical, legal, risk and business sectors. It is listed on several of the world's major stock exchanges. It is a FTSE 100 and FT500 Global company...
(UK/Netherlands 1993- ) - Rio Tinto GroupRio Tinto GroupThe Rio Tinto Group is a diversified, British-Australian, multinational mining and resources group with headquarters in London and Melbourne. The company was founded in 1873, when a multinational consortium of investors purchased a mine complex on the Rio Tinto river, in Huelva, Spain from the...
(Australia/UK 1995- ) - UnileverUnileverUnilever is a British-Dutch multinational corporation that owns many of the world's consumer product brands in foods, beverages, cleaning agents and personal care products....
(UK/Netherlands 1930- ) - Mondi (South Africa/UK 2007- )
- Tata MotorsTata MotorsTata Motors Limited is an Indian multinational automotive corporation headquartered in Mumbai, India. Part of the Tata Group, it was formerly known as TELCO...
(India/US)
Other companies were formerly dual-listed:
- EurotunnelEurotunnelGroupe Eurotunnel S.A. manages and operates the Channel Tunnel between Britain and France. The Company operates the car shuttle services and earns revenue on other trains passing through the tunnel...
(France/UK 1986-2005) - FortisFortis (finance)Fortis N.V./S.A. was a company active in insurance, banking and investment management. In 2007 it was the 20th largest business in the world by revenue but after encountering severe problems in the financial crisis of 2008, most of the company was sold in parts, with only insurance activities...
(Belgium/Netherlands 1990-2001) - ABB Group (Sweden/Switzerland 1988-1999)
- SmithKline Beecham (UK/US 1989-1996)
- DexiaDexiaDexia N.V./S.A., also referred to as the Dexia Group, is a Belgian-French financial institution active in public finance, providing retail and commercial banking services to individuals and SMEs, asset management, and insurance...
(Belgium/France 1996-2000) - Nordbanken/MeritaNordeaNordea Bank AB is a Stockholm-based financial services group operating in Northern Europe. The bank is the result of the successive mergers and acquisitions of the Swedish, Finnish, Danish and Norwegian banks of Nordbanken, Merita Bank, Unibank and Kreditkassen that took place between 1997 and 2000...
(Sweden/Finland 1997-2000) - Allied Zurich (now Zurich Financial Services) (UK/Switzerland 1998-2000)
- Brambles IndustriesBrambles IndustriesBrambles Limited is a support services business listed on the Australian Securities Exchange.-History:Brambles traces its history to 1875, when Walter Bramble began his career in Newcastle, north of Sydney, Australia. Brambles Industries Limited first listed in Australia in 1954...
(Australia/UK 2001-2006 ) - Thomson ReutersThomson ReutersThomson Reuters Corporation is a provider of information for the world's businesses and professionals and is created by the Thomson Corporation's purchase of Reuters Group on 17 April 2008. Thomson Reuters is headquartered at 3 Times Square, New York City, USA...
(UK/Canada 2008-2009)
Motivations for adopting a DLC structure
A dual-listed company structure is effectively a merger between two companies, in which they agree to combine their operations and cash flows, and make similar dividend payments to shareholders in both companies, while retaining separate shareholder registries and identities. In virtually all cases, the two companies are listed in different countries. There are often tax reasons for companies from different jurisdictions to adopt a DLC structure instead of a regular merger where a single share is created. A capital gains taxCapital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
could be owed if an outright merger took place, but no such tax consequence would arise with a DLC deal. Differences in tax regimes may also favour a DLC structure, because cross-border dividend payments are minimized. In addition, there may be favourable tax consequences for the companies themselves. Once companies have chosen a DLC structure, there can be major tax obstacles to cancelling the arrangement. Issues of national pride may sometimes also be involved; where both parties to a proposed merger or takeover are in a strong position and do not need to merge or accept a takeover, it can be easier to push it through if the country with the smaller business is not "losing" its corporation. A third motive is the reduction of investor flow-back, which would depress the price of the stock of one of the firms in their own market if the merger route were used instead. That is, some institutional investors cannot own the shares of firms domiciled outside the home country or can only own such shares in limited quantity. In addition, in a merger, the non-surviving firm would be removed from all the indices. Index tracking funds would then have to sell the shares of the surviving company. With the DLC structure, all of this would be avoided. A fourth motive is that DLCs do not necessarily require regulatory (anti-trust) consent and may not be constrained by the requirement of foreign investment approval. Finally, the access to local capital markets may be reduced when a quotation disappears in a regular merger. This is based on the idea that local investors are already familiar with the company from the pre-DLC period. However, the DLC structure also has disadvantages. The structure may hamper transparency for investors and reduce managerial efficiency. In addition, issuing shares in a merger and capital market transactions (such as SEOs, share repurchases, and stock splits) are more complex under the DLC structure.
Mispricing in DLCs
The shares of the DLC parents represent claims on exactly the same underlying cash flows. In integrated and efficient financial markets, stock prices of the DLC parents should therefore move in lockstep. In practice, however, large differences from theoretical price parity can arise. For example, in the early 1980s Royal Dutch NV was trading at a discount of approximately 30% relative to Shell Transport and Trading PLC. In the academic finance literature, Rosenthal and Young (1990) and Froot and Dabora (1999) show that significant mispricing in three DLCs (Royal Dutch Shell, Unilever, and Smithkline Beecham) has existed over a long period of time. Both studies conclude that fundamental factors (such as currency risk, governance structures, legal contracts, liquidity, and taxation) are not sufficient to explain the magnitude of the price deviations. Froot and Dabora (1999) show that the relative prices of the twin stocks are correlated with the stock indices of the markets on which each of the twins has its main listing. For example, if the FTSE 100 rises relative to the AEX indexAEX index
The AEX index, derived from Amsterdam Exchange index, is a stock market index composed of Dutch companies that trade on Euronext Amsterdam, formerly known as the Amsterdam Stock Exchange. Started in 1983, the index is composed of a maximum of 25 of the most actively traded securities on the exchange...
(the Dutch stock market index) the stock price of Reed International PLC generally tends to rise relative to the stock price of Elsevier NV. De Jong, Rosenthal, and van Dijk (2008) report similar effects for nine other DLCs. A potential explanation is that local market sentiment
Market sentiment
Market sentiment is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, seasonal factors, and national and world events.For...
affects the relative prices of the shares of the DLC parent companies.
Because of the absence of "fundamental reasons" for the mispricing, DLCs have become known as a textbook example of arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
opportunities, see for example Brealey, Myers, and Allen (2006, chapter 13).
Arbitrage in DLCs
The mispricing in dual-listed companies has not gone unnoticed in the financial industry. There are a number of known cases of financial institutions that have tried to exploit the mispricing by setting up arbitrageArbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
positions in DLCs. These arbitrage strategies involve a long position
Long (finance)
In finance, a long position in a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns the security and will profit if the price of the security goes up. Going long is the more conventional practice of investing and is contrasted with...
in the relatively underpriced part of the DLC and a short position in the relatively overpriced part. For example, in the early 1980s an arbitrageur might have built up a long position in Royal Dutch NV and a short position in Shell Transport and Trading PLC. This position would have yielded profits when the relative prices of Royal Dutch and Shell converged to theoretical parity. An internal document of Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
http://pages.stern.nyu.edu/~msiegel/merrill.doc investigates arbitrage opportunities in six DLCs. Lowenstein (2000) describes arbitrage positions of Long-Term Capital Management
Long-Term Capital Management
Long-Term Capital Management L.P. was a speculative hedge fund based in Greenwich, Connecticut that utilized absolute-return trading strategies combined with high leverage...
(LTCM) in Royal Dutch/Shell. LTCM established an arbitrage position in this DLC in the summer of 1997, when Royal Dutch traded at an 8 to 10 percent premium. In total $2.3 billion was invested, half of which long in Shell and the other half short in Royal Dutch (Lowenstein, p. 99). In the autumn of 1998 large defaults on Russian debt created significant losses for the hedge fund and LTCM had to unwind several positions. Lowenstein reports that the premium of Royal Dutch had increased to about 22 percent and LTCM had to close the position and incur a loss. According to Lowenstein (p. 234), LTCM lost $286 million in equity pairs trading and more than half of this loss is accounted for by the Royal Dutch/Shell trade.
The example of LTCM is a good illustration of why arbitrage by financial institutions has not succeeded in eliminating the mispricing in DLCs. An important characteristic of DLC arbitrage is that the underlying shares are not convertible into each other. Hence, risky arbitrage positions must be kept open until prices converge. Since there is no identifiable date at which DLC prices will converge, arbitrageurs with limited horizons who are unable to close the price gap on their own face considerable uncertainty. De Jong, Rosenthal, and van Dijk (2008) simulate arbitrage strategies in 12 DLCs over the period 1980-2002. They show that in some cases, arbitrageurs would have to wait for almost nine years before prices have converged and the position can be closed. In the short run, the mispricing might deepen. In these situations, arbitrageurs receive margin call
Margin Call
Margin Call is a 2011 American independent drama film, written and directed by J.C. Chandor. The film has an ensemble cast that includes Kevin Spacey, Demi Moore, Paul Bettany, Jeremy Irons, Zachary Quinto, Stanley Tucci, Simon Baker, and Penn Badgley...
s, after which they would most likely be forced to liquidate part of the position at a highly unfavorable moment and suffer a loss. As a result, arbitrage strategies in DLCs are very risky, which is likely to impede arbitrage.
External links
- Background information, literature, data, and research on DLCs on the website of Mathijs A. van Dijk.
- Jaideep Bedi and Paul Tennant, Dual-listed companies, Reserve Bank of Australia Bulletin, October 2002.