The grass is not always greener for shareholders in low-tax states

RELOCATING overseas is becoming a fashion. This week it was reported that online bookmaker Betfair is considering a move after a row over tax. It follows building services firm Wolseley’s recent announcement that its base will move to Switzerland for tax reasons.

Wolseley’s decision was welcomed by analysts and shareholders who saw a company seeking to manage its tax burden and apparently saving £23m. When a company redomiciles, it is often for tax reasons and sometimes to align the nationality of its headquarters with that of its business. However, if more companies follow Wolseley’s lead and depart the UK, are they leaving behind more than high tax rates? Is a move always in the interests of shareholders? Are there more than financial considerations at play?

Let’s examine some of the positives about being a UK registered company. The UK legal framework determines the duties of directors and puts in place important restrictions such as the ability of directors to receive loans from the company or to make political donations. It is also the source of those shareholders’ remedies of last resort: power to remove directors, power to requisition shareholder resolutions and the power to mount a derivative action against directors on the part of the company. Though seldom used, these provide shareholders with a measure of protection when required.

Wolseley’s chosen mode of exit (using a company incorporated in Jersey but resident in Switzerland for tax purposes) preserves key shareholder protections, but in other cases many of these protections cannot be taken for granted, even for non-UK companies listed in London. Governance protections are increasingly converging, with non-UK companies listed in London now expected to comply or explain against the UK Corporate Governance Code. But certain key protections simply do not apply to many overseas companies even though they are London listed.

Similarly, the Takeover Code provides significant protection for shareholders in UK companies. The Code stipulates that all shareholders must be treated equally; it regulates when and what information companies must and cannot release publicly in relation to a potential bid and sets timetables for certain aspects of the bid. Does the new domicile of the company afford such protection? Could there be a scenario where the company became the subject of a hostile takeover bid and shareholders were simply left in the dark?

With the success of the company in mind, the board must consider whether foreign jurisdictions offer shareholders anything other than just a sunny tax haven. Shareholders must consider which protections come with the law of the company’s country of incorporation, or not as the case may be. As a Jersey incorporated company, Wolseley’s shareholders are still afforded protection under the Takeover Code and will enjoy the best of both worlds. By contrast, shareholders of companies incorporated in jurisdictions which do not offer the same protections as the UK may be at a disadvantage if the relevant law falls short of the UK regime. Such companies may attempt to replicate UK safeguards in their constitutional documents. For example, a number of offshore companies have been known to replicate the Takeover Code’s key minority shareholder protections in their articles of association as a safety blanket for shareholders. This is not a perfect solution as shareholders do not have the benefit of the Takeover Panel standing behind the protections and all of the associated infrastructure, but it may be a satisfactory compromise should the allure of the tax benefits outweigh these other factors.

With many companies considering moving overseas, shareholders should think seriously about the protection the UK affords them. There are real advantages in being a UK registered company and not all foreign jurisdictions have equal protection. Shareholders should ensure the baby is not being thrown out with the bath water.

Richard Brown is a partner at Hogan Lovells and leads the firm's equity capital markets practice.