It is impossible to understate the significance of Unilever’s decision to drop its controversial plans to scrap its dual-listed structure and move its headquarters to the Netherlands.
City investors have been regularly criticised for appearing too supine when up against a determined company board: nodding through takeovers that often turn out to destroy shareholder value; protesting against executive pay policies with votes that are not binding and ignored by boards; and, worse still, not even voting their shares on occasion.
In this instance, they have bared their teeth, and how: the third biggest company in the FTSE-100 has received the bloodiest of noses. It is one of the biggest and most resounding victories for shareholder democracy that the City has seen in many, many years. Every other chairman or chief executive will be watching Unilever’s spectacular climb-down today and concluding that, in future, it might be advisable not to take their shareholders – their owners – for granted.
On the face of it, what Unilever was proposing was perfectly sensible. Instead of having two holding companies, each with their own stock listings – Unilever plc on the London Stock Exchange and Unilever NV on the Amsterdam Stock Exchange – Unilever proposed to have a single holding company, incorporated in the Netherlands.
There would be one class of shares, Unilever NV, listed in Amsterdam, New York and London. Unilever argued this was a logical simplification of its shareholder structure and corporate governance that would give it greater flexibility to buy and sell assets in future.
The problem was that the move would have resulted in Unilever being ejected from the FTSE-100 index. Investors who run funds tracking the performance of the Footsie would have been obliged to sell the shares.
This, shareholders argued, would not only result in a drop in Unilever’s share price with so many forced sellers being ushered to the exit at the same time. It also represented, they said, an effective takeover of Unilever with no premium.
There were other criticisms, too. Unilever got the fright of its life when, in February last year, US food giant Kraft Heinz approached it about a $143bn takeover. This restructuring was seen as a way for the company, which has a Dutch chairman and chief executive, to avoid such incidents in future because the Netherlands has tougher takeover laws than the City. Mark Rutte, the Dutch prime minister and a former Unilever employee, did his bit to smooth the way by promising to abolish a tax on dividends that made holding the shares in the UK more attractive than in the Netherlands.
One by one, the big battalions of City fund managers, many of whom prefer to speak on an anonymous basis to the financial press, broke cover to say what a dreadful idea this was: Colombia Threadneedle, Lindsell Train, Schroders, Aviva Investors, M&G and Royal London all publicly stated their opposition. With Unilever needing the backing of 75% of UK investors to go ahead with the reorganisation, it was starting to look like a close-run thing.
Yet that was not the only difficulty that emerged for the consumer goods giant.
The influential Financial Times columnist Neil Collins, the most vocal critic of the move from the start, spotted in the small print of the particulars sent to investors that Unilever also required a simple majority of shareholders taking part in the vote for the motion to be passed. In other words, a small shareholder with only a handful of shares would carry as much weight as a big City institution with millions of them.
This represented a threat to Unilever’s plans as most of the financial press, including The Times, The Guardian, the FT and the Daily Mail, had all attacked the proposals. There was also a risk to Unilever in this being presented as a vote of no confidence in post-Brexit Britain – although the company, whose products are found in almost every kitchen and bathroom in the land, was always careful not to say that publicly.
Unilever responded by taking out adverts in newspapers. Graeme Pitkethly, the company’s popular Scottish chief financial officer and seen as a candidate to succeed Paul Polman as chief executive, was wheeled out to defend the move.
City investors continued to voice their opposition. Legal & General added its voice to that of the critics. It left only the two biggest investors, BlackRock and the Leverhulme Trust (the trust that holds the shares originally owned by William Hesketh Lever, the founder of Lever Brothers, which merged with Dutch firm Margarine Unie in 1930 to form Unilever), left to declare.
However, with shareholders owning at least 12% of Unilever’s shares already having declared their opposition, it was looking increasingly likely that Unilever was facing defeat. There was a feeling of inevitability about today’s announcement.
Unilever now has a problem: it has alienated a lot of its shareholders. Mr Polman, who is expected to retire next year after a decade’s distinguished leadership, risks leaving under a cloud. Moreover, the credibility of Marijn Dekkers, the chairman, looks shot to ribbons. He and the Unilever board cocked a deaf ear to the concerns of the company’s owners.
The irony is that this row could have been avoided. Unilever could have sounded out its investors more carefully before announcing this move. It could have offered its UK shareholders a special dividend or some form of takeover premium to persuade them to back the move. Or it could have sought to persuade the London Stock Exchange to change the rules to allow Unilever to remain in the Footsie.
Or, if the planned restructuring was solely about giving it a cleaner acquisition currency in future, Unilever could have decided to move its domicile and primary stock listing to London – just as another big Anglo-Dutch company, the business information provider Relx, recently did.
This is unlikely to be the end of the matter. Unilever will now need to engage with its shareholders and mend some bridges. Having argued so strongly for this restructuring and its merits, the company needs to come up with another way of achieving it, perhaps by replicating the arrangements at Royal Dutch Shell, another giant Anglo-Dutch business and the biggest company in the Footsie.
And there may be further repercussions. Most of Unilever’s 36,000 small shareholders hold their shares in ‘nominee’ accounts administered by popular investment platforms run by companies like Hargreaves Lansdown, AJ Bell and Barclays Smart Investor. Under the Companies Act, a nominee counts as just one shareholder, which would have taken away the ability of small shareholders to block the measure – obliging investors to hold their shares via old-fashioned certificates.
The UK government may well find itself under pressure to amend the Companies Act so that it genuinely is a case of ‘one shareholder, one vote’ in future.
(c) Sky News 2018: Unilever U-turn a resounding victory for shareholder democracy