Dual listed companies: understanding conflicts of interest for directors



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UNSW Law Journal Volume 25(2)


DUAL LISTED COMPANIES: UNDERSTANDING CONFLICTS
OF INTEREST FOR DIRECTORS


MATTHEW HARDING*

I INTRODUCTION


Since 1995, Australian commerce has witnessed the use of the dual listed company structure by companies seeking to operate together across national boundaries. The dual listed company structure offers particular benefits to companies that wish to retain their national and legal identities while reaping the advantages of merged operations. Such benefits flow largely from the fact that shareholders in companies that utilise the structure do not need to deal with their shares in any way for the structure to become effective. The dual listed company structure is still a novelty in Australia although it has been used for many years in Europe.1 In fact, Australian companies have brought themselves within the dual listed company structure in only three instances. The first of these, in 1995, was the case of CRA Ltd and RTZ plc, which are now known as Rio Tinto Ltd and Rio Tinto plc.2 The Rio Tinto case was followed, in the first quarter of 2001, by Brambles Industries Ltd and Brambles Industries plc (formerly GKN plc), and by BHP Ltd and Billiton plc. These two latter dual listed company transactions, which were among the largest in Australian corporate history, effectively merged assets of A$20 billion and A$58 billion respectively.3

Given the rarity of dual listed companies in Australia to date, it may be thought that an examination of conflicts of interest for the directors of such companies is unwarranted. This is wrong for several reasons. The first is that the dual listed company structure, due to the particular benefits that it offers to companies that utilise it, is set to assume greater significance in the field of options available to corporate actors that seek to merge their operations with other entities in foreign jurisdictions. This is especially true of Australian companies, notably Australian resource companies, which have an interest in retaining a strong national identity and not being subsumed by foreign giants while at the same time exposing themselves (if indirectly) to the advantages of global alliances. A second reason for studying dual listed companies is that as their numbers increase, they and their directors will be more likely to become the subjects of litigation. Scholarship is needed on the peculiar position of these directors so that guidance is available when courts are called upon to consider that position, and so that the directors themselves know how to act in managing their companies. A third reason for being interested in the position of the directors of dual listed companies is that their position offers an opportunity to examine longstanding principles relating to directors’ duties from a fresh perspective. In an area of the law that has been the subject of so much academic attention, it is refreshing to have a new angle from which to consider old principles.

The status of dual listed companies — separate legal entities that regard themselves and wish to be treated as a single economic entity — gives rise to some unique issues.4 Among these are corporate governance matters arising in connection with the management of such companies. In particular, directors of dual listed companies confront unique circumstances in discharging their fiduciary obligation not to place themselves in a position of conflict in respect of their duties to each of their companies.

This article focuses on the conflict of interest issues associated with dual listed companies. It begins with a brief description of the dual listed company structure, identifying three types of such structure. It then considers the unique position of directors of dual listed companies before identifying the conflict of interest issues that arise from that unique position. In identifying these conflict issues, the article examines the equitable rule against fiduciaries’ conflicts of interest. The special treatment of directors of corporate groups is then discussed, and it is argued that directors of dual listed companies are in a position analogous to the position of directors of companies within a corporate group. Having regard to the principles governing conflicts of interest of directors of corporate groups and the idea of the dual listed companies as a single economic entity, it is concluded that the unique conflict of interest issues in this situation can be solved largely by the application of concepts already available in the general law. However, in the scenario where one dual listed company seeks to resile from its obligations under the structure, the development of new principles is recommended.

II WHAT ARE DUAL LISTED COMPANIES?


In broad terms, the formation of dual listed companies can be described as follows. First, two companies, each resident in a different jurisdiction and each listed on a different stock exchange, seek to merge their operations without wishing to cease having separate legal personalities, separate residences for tax purposes and separate stock exchange listings. The two companies enter into a set of contractual arrangements, under which they agree to operate as a single economic entity. The contractual arrangements do not affect the legal personalities, residences or stock exchange listings of either company, and the shareholders of each company retain their shareholdings in the relevant company. Through contractual provisions and amendments to the constitutions of each company, all of the shareholders of both companies are placed in an identical situation in respect of voting at general meetings, the receipt of dividends and returns of capital. Shareholders’ rights, therefore, resemble the rights they would have if the two companies were actually merged. The complexities of this ‘equalisation’ process are beyond the scope of this article, but they are at the heart of the dual listed company structure.5 The contractual arrangements between dual listed companies also involve each company guaranteeing certain liabilities of its counterpart, the result being that those liabilities are treated as the liabilities of a single entity.6 Again, this is consistent with dual listed companies operating as a single economic entity.

Each company maintains its own board of directors, because it is required to do so under the companies legislation in the jurisdiction of its incorporation.7 However, the companies agree that their boards of directors must always consist of exactly the same persons. As a result, the boards of the two companies are identical and remain so throughout the life of the dual listing. The unique position of boards of directors of dual listed companies is explored in greater detail in Part III below.

Dual listed company structures that are formed in this general way can be classified according to three types: the combined entities, stapled stock and separate entities structures.8

A Combined Entities Structure


The first type of dual listed company structure involves two companies seeking to merge their operations by holding their assets through one or more jointly owned holding companies. Equalisation arrangements are put in place between the two companies at a level above the jointly owned holding company or companies. The combined entities structure is illustrated below in Figure 1.9

FIGURE 1

B Stapled Stock Structure


Where two companies use the stapled stock structure to merge their operations as dual listed companies, shares in each of the two companies will be paired together so that they cannot be traded separately. Again, equalization arrangements will be put in place to ensure that shareholders’ voting, dividend and capital return rights are identical in the case of each company. The stapled stock structure is illustrated in Figure 2.10

FIGURE 2


C Separate Entities Structure


In a case where the separate entities structure is implemented, the two companies that seek to merge their operations will simply, by contract, institute equalisation arrangements to ensure that all shareholders in each company are in the same position with respect to voting, dividend and capital return rights. No other structural arrangements will be necessary. The separate entities structure has been adopted in the three cases to date where an Australian company has brought itself within a dual listed company structure.11 This is probably because all three have been companies that operate in joint ventures with parties outside the dual listed company structure. The separate entities structure, involving as it does no movement of assets or shares, is less likely than other types of dual listed company structure to trigger pre-emptive rights in joint venture agreements.12 For this reason, it is likely to remain a popular structure among Australian resources companies. The separate entities structure is illustrated below in Figure 3.

FIGURE 3



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