Why are UK shareholders revolting against Unilever's restructuring plans?

Why are investors kicking up a fuss over Unilever’s corporate restructuring plans?

Unilever launched a strategic review of its business following the shock £115bn takeover attempt from Kraft Heinz in February 2017 and the scrambled defence that eventually saw off the bid. Part of that review was to examine Unilever’s corporate structure – namely its dual British-Dutch operation, which stems from 1929 when Unilever was formed by the merger of Dutch Margarine Unie and British soapmaker Lever Brothers.

In March, Unilever announced it would shift its corporate HQ to Rotterdam – further clarifying plans from earlier this month in which shares in UK-listed Unilever plc will be replaced with one new share in Dutch-listed Unilever NV, and the two parent holding companies replaced by a single Dutch entity.

Unilever shares will continue to be traded in London and New York – as well as the Netherlands – but Unilever will drop out of the FTSE 100 and FTSE All Share indexes as it no longer has a UK corporate HQ.

Why is it leaving the UK?

The decision looks to be heavily influenced by the Kraft Heinz saga.

A single and simpler corporate structure will create a more “agile” business, according to Unilever. This means it can react more quickly to head off any future hostile bids and will make it easier and quicker to buy and sell assets as it simplifies the process of raising capital through the issuance of new shares.

Why it picked a single structure based in the Netherlands rather than the UK is a more contentious question.

Unilever points to 55% of its shareholders being based in the Netherlands and its Amsterdam shares being more liquid.

Most outside observers pointed to the tougher takeover rules in the Netherlands in comparison to the UK, which will bolster Unilever’s defence against any future hostile bid.

The Netherlands has also taken a number of pro-business measures in recent times, including a move to scrap a dividend tax to make it a more attractive location for investment.

The elephant in the room is Brexit. Unilever has strongly denied Brexit played a part in its decision, but others have suggested Unilever is mitigating against any regulatory and wider economic uncertainty it has triggered.

Those that have suggested Brexit threatens the UK’s status as the financial capital of Europe have pointed to Unilever’s decision as proof that the corporate centre of balance is shifting to Europe. Those of a more pro-Brexit position have seized on Unilever’s pledge to keep two of its three business units – its beauty & personal care division and its home care division – based in London.

What are the implications for shareholders?

The major cause for concern for UK shareholders is that Unilever will drop out of the FTSE 100 benchmark index if the relocation plans are approved.

This has real-world implications for UK investors as passive funds that track the index and other funds that have investment rules regarding the location or nature of their investment will be forced to sell their holdings.

How have investors reacted?

Opposition to the proposals seems to be mounting in recent weeks.

This weekend, Legal & General Investment Management, which is the sixth-largest shareholder in Unilever’s UK-listed entity, has come out against the plans.

L&G’s opposition adds to that already stated by Schroders, M&G Investments, Columbia Threadneedle and Aviva Investors.

David Cumming, chief investment officer at Aviva Investors, said: “Unilever’s decision appears to be a defensive response to recent governance challenges and consequently will not create any value for shareholders.”

The FT calculates that investors holding around 11.8% of Unilever’s UK stock have already come out against the plans, with a further 4.7% likely to vote against the move given their investment mandates.

However, its two largest shareholders, BlackRock and Leverhulme – both of which hold more than 5% of the company – have yet to comment.

What can they do to stop it?

Unilever needs at least 75% of shareholders by value of each of its listed entities to back its plans.

If there are already around 16.5% of UK investors – by share value – against the deal, it only requires a further 8.5% to block the deal.

Additionally, Unilever needs more than 50% of backing of shareholders by volume – this could be even trickier to achieve as some 36,000 individual investors hold shares enabling them to vote individually on the proposals.

There is controversy here too though, as thousands of investors have bought shares through trading platforms such as Hargreaves Lansdown or Barclays Smart Investor. These shareholders will not currently have an individual vote under the voting rules, with the platforms counted as a single vote for volume purposes as the shares are held in one collective nominee account.

Hargreaves Lansdown alone has 20,000 clients with investments in Unilever.

What happens now?

Dutch investors will vote on the proposals on 25 October, but this is not expected to provide an obstacle to process.

The big day is 26 October, when Unilever will hold a special shareholder meeting in London for UK investors to vote on the proposals.

Unilever is clearly not counting its chickens, and seems particularly concerned about winning the backing of 50% of shareholders by volume. Last week it took out adverts in the UK national press and placed a column by chairman Marijn Dekkers in the Telegraph calling on individual shareholders to back the proposal.