In 1999 we reviewed 12 different dual-headed structures and analysed the various advantages and disadvantages of this type of structure (see "When two heads are better than one", ). In the three years since then, half of the examples considered have, for various reasons, been converted into new, unified groups. More recently, however, there has been renewed interest in the dual-headed structure, as illustrated by BHP Billiton, P&O Princess/Royal Caribbean and GKN/Brambles, for example.

www.practicallaw.com/A11253In light of these developments, this article revisits dual-headed structures and in particular:

UK Takeover Panel developments are also considered (see box "Takeover Panel control").

A dual-headed structure allows two companies to combine their operations while retaining a degree of separation. This is achieved by retaining the merging companies as separate legal entities but putting in place arrangements to ensure that the group as a whole operates as if it was a single enterprise. This achieves certain political, commercial and tax advantages that may not be achieved through a conventional merger.

Dual-headed structures usually consist of the two merging companies (top-tier companies) with the combined group organised beneath those top-tier companies in one of three different ways:

In February 1999, the ABB ASEA Brown Boveri dual-headed structure was reorganised into a unified group (see box "ABB" in pdf version). This was followed by the unification of other dual-headed structures in 1999 and 2000: Merita Nordbanken, Dexia and Zurich Financial Services (see boxes "Merita Nordbanken", "Dexia" and "Zurich Financial Services" in pdf version). The Rothmans/Vendome structure was separated and Rothmans merged with British American Tobacco plc in June 1999 and the proposed Aventis/Rhone-Poulenc dual-headed structure was never implemented as it took effect as a full merger in 1999. In 2001, Fortis went some way to unifying its structure by creating a new single listed security comprising one ordinary share in Fortis SA/NV twinned with one ordinary share in Fortis NV (rather like the twinned share structure of Eurotunnel) (see box "Fortis" in pdf version).

The other dual-headed structures previously reviewed are still in place. These are: Royal Dutch Shell, Reed Elsevier, Unilever, RTZ/CRA and Eurotunnel.

While dual-headed structures have many advantages, they also suffer from disadvantages. Many of these disadvantages were common among the structures that were subsequently unified. They include:

In addition, a dual-headed structure may simply be a transient step in a group's evolution.

Corporate/management complexity. Dual-headed structures are complex as they include two top-tier companies, two sets of shareholders, often two sets of management and various governing mechanisms. Having two sets of management can slow down the decision making process. Furthermore, the fact that there are two listed companies means duplication of effort as both companies must comply with full disclosure regimes for the relevant stock exchanges (rather than the lesser requirements of a secondary listing). Both sets of shareholders must be treated equally (despite having differing disclosure requirements) and this often results in the companies having to disclose the same information in two different formats. In addition to this, extra effort must be made to ensure that the market understands the structure and its advantages. Communication to the market is critical to the success of these structures.

The governing mechanisms that hold the structures together are known as "equalisation" or "governing agreements". These can be complex and contain many constraints. For example, these mechanisms may prevent one company acquiring holdings without the consent of the other or implementing divergent dividend policies. There are also often strict rules on the appointment of management, for instance a director cannot be appointed to one board without being appointed to the other.

The shareholdings themselves can also be complex. For example, the ABB group had four different classes of shares, each with different voting rights and different nominal values. The unification of ABB created a new single class of shares with a simplified "one share, one vote" structure. In a similar vein, the creation of the new single class Merita Nordbanken share is thought to have created a more substantial currency for further mergers and acquisitions and to enable capital increases.

While all of these elements are inherent in the existence of a particular dual-headed structure, they add layers of complexity that are not encountered with single merged groups. The unification of a dual-headed structure results in a simplification of the shareholdings, management structure and decision-making process. This reduces the legal and operational risks associated with having two different holding companies and speeds up the decision making process which can, in turn, allow a faster development of the business.

Share price discrepancies between the top-tier companies. Despite every effort being made to create the impression that shareholders were investing in one entity, discrepancies have arisen between some top-tier companies resulting in one top-tier company's shares trading at a premium or discount relative to the other. This was the case in the Merita Norbanken, Dexia and Zurich Financial Services structures, and one of the main reasons for their unification.

Share price discrepancy may arise for various reasons. One reason is that there may be a change in tax legislation in one or both of the relevant jurisdictions of the top-tier companies which is not incorporated in the equalisation agreement, thus causing differences to arise. For example, in the Dexia structure, the differences between Belgian and French tax legislation created disparities in the dividend policy of the top-tier companies which was designed to distribute, on a net basis, an equal dividend. This illustrates that equalisation cannot always be achieved.

Discrepancies may also arise as a result of the different stock market index membership of the top-tier companies. Membership of a certain index will often be of fundamental importance to institutional investors. Membership of a major index means that the company will have a high level of liquidity. Also, some investors are index tracker funds, so by definition will invest in companies in certain stock market indices. The two top-tier companies are considered separately in respect of pan-European or supranational indices and often only one is admitted to a particular index. The fact that only the shares of one top-tier company are included in such an index can result in the discount of the shares of the other.

It is also thought that the discrepancy between the top-tier companies' shares may arise as a result of the different currencies in which the shares trade. Currency fluctuations between the two sets of shares may give rise to arbitrage opportunities which are not factored into the equalisation arrangements.

Further, discrepancies may arise due to different policies on the distribution of reserves, or the behaviour of investors in different markets (for example, short term investment behaviour versus long-term investment behaviour).

Index weighting and liquidity. As top-tier companies are considered separately for stock market index membership, one of the main rationales for the unification of dual-headed structures is that they do not fully benefit from their market size as a result of this "split" of index weightings of the shares on major stock market indices. Each top-tier company is included in an index at its individual market capitalisation, with the result that the group's overall market capitalisation is divided by something approximating to two.

A unified single share structure combines the market capitalisation of the group and results in an increased index weighting. This allows the shares to be included in major international and pan-European indices, which, in turn, increases demand for the shares from fund trackers and other investors. The increased financial liquidity enhances long-term value for shareholders and can improve the company's capacity to finance its developments. In particular, it allows the company to handle acquisitions by using equity capital as well as debt financing. In a dual-headed structure, equalisation arrangements may provide for the raising of equity capital by including anti-dilution adjustments to maintain original shareholder value. However, this again adds another layer of complexity to the structure. This type of mechanism was included in the Fortis structure where, although each top-tier company had a 50% vote in the intermediate holding companies, each had a variable economic interest of between 30% and 70% in the combined group to allow Fortis to use stock in acquisitions.

The unification of Fortis resulted in a single listed entity with a market capitalisation of more than EUR30 billion (about US$29.5 billion), ranking Fortis as one of the top 20 largest listed financial institutions in Europe. Previously, Fortis Belgium and Fortis Netherlands were only included in major share indices at their individual market capitalisations, so the group had not fully benefited from its market size.

On unification, the full market capitalisation of the Fortis share resulted in the doubling of its weighting in the MSCI (Morgan Stanley Capital International) indices (which fund managers use as a global benchmark). Its increased financial liquidity allows Fortis' shares to be traded on the Amsterdam and Brussels Euronext.

The unification of other dual-headed structures has had a similar effect. For example, the single ABB shares are now included in the main Swiss, Swedish and European indices. The Merita Norbanken, Dexia and BAT/Zurich structures have also reaped the benefits of such changes.

Lower market visibility. By unifying the group and thereby increasing index weighting and trading liquidity, a group's market visibility will increase. In the case of some dual-headed structures, their specific aim in unifying was to achieve certain listings. For example, it was a particular aim of the ABB group to achieve a full US stock exchange listing and, since 6th April, 2001, the single ABB shares have been traded on the New York Stock Exchange.

The Zurich Financial Services group also announced that it expected the unified structure to facilitate its intention to seek a listing on the New York Stock Exchange. This listing has not yet taken place. Currently, Zurich Financial Services shares have a primary listing on the Swiss Market Index, a secondary listing in London (it is not eligible for inclusion in the FTSE UK indices) and has American Depositary Receipts in the US. This aim was also important to the Merita Nordbanken group, and the Nordic Baltic holding is now listed on the Stockholm and Helsinki stock exchanges.

Limitation of synergies. Maintaining two listed companies, with all the regulatory requirements involved inevitably costs more than having one holding company (see above "Corporate/management complexity"). There is also a concern that it is more difficult to allow cost-savings and synergies to flow through a dual-headed structure to the ultimate shareholders than with a conventional "single" structure. In a dual-headed structure, these may need to be routed through two companies with the possibility of additional tax consequences.

Misunderstanding among investors. The added layers of complexity in a dual-headed structure can lead to misunderstanding or miscommunication among investors, which can in turn lead to difficulties for these structures. Management of dual-headed structures will always have to work harder to ensure that the different sets of shareholders are treated equally and also that the market understands and accepts the structure. Different accounting rules of the different jurisdictions and equalisation arrangements may also confuse investors and lead to a misunderstanding of the financial results of the group.

Conflict between the top-tier companies. The purpose of the equalisation agreement is to co-ordinate the top-tier companies and any intermediate companies so that they effectively operate as a single unit. The equalisation agreement will cover many aspects such as dividend policy, the appointment and removal of directors and shareholder voting mechanisms. It is key to the success of a dual-headed structure.

Despite every effort being made to coordinate the top-tier companies' policies, there will sometimes be divergence. For example, one set of shareholders may wish to appoint a director that is not favoured by another set of shareholders, or one company may wish to implement an acquisition that is not considered to be favourable for the other company. In this event, there is a risk that the decision making process may be interrupted and delayed. In some cases, activity at an intermediate or operating company level may even stop. The directors of one top-tier company are then left with a choice: either to do what they believe to be in the best interests of their company, or to follow "group" requirements. Whichever option they choose may leave them the subject of criticism, which in turn can lead to adverse publicity and have an impact on share value.

The latest dual-headed structures of P&O Princess, GKN/Brambles and BHP Billiton have taken the possibility of divergence into account and provide mechanisms to deal with it within the policies of the top-tier companies (see below "The dual-headed structure: alive and well").

Disadvantages of takeover protection. There is a danger that a third party may bid for one of the top-tier companies but not the other, upsetting the carefully constructed equilibrium. Dual-headed structures often include provisions to protect against this in the form of disincentives to the bidder. For example, the ZFS structure provided that in the event of a third party bid for one company, the non-target company could exercise an option to buy all or some of the shares that the target company held in the intermediate holding company, ZFS, thereby disincentivising the bidder. While such provisions may be helpful to the unity of the dual-headed structure, they also have the effect of decreasing the attractiveness of the companies to third parties. This reduces potential speculation and further restructuring, which may be beneficial to the group.

Transient step in evolution. For many dual-headed structures, unification was always intended. The dual-headed approach was a transient step in the group's evolution. Dual-headed structures often involve the merger of two well established, large groups of companies with strong national links and sensitivities. These companies have often evolved to the fullest extent possible on their own and need to merge with an equal in order to expand further. Due to national sensitivities and a reluctance towards being seen as having been taken over by another party, a conventional merger may not be suitable. The dual-headed structure allows such companies to merge while maintaining a degree of independence. This gives shareholders a period of time to become accustomed to the match before the structure evolves to a fully-merged entity. While this process of evolution can be costly and time-consuming, it may be the only way to achieve the intended merger.

This rationale can be seen in a number of the dual-headed structures. In the Dexia example, it would have been impossible for political and business reasons for the French and Belgian banks to merge. One would effectively have been seen to have taken over the other. The initial dual-headed structure avoided the takeover scenario and preserved the national character of each of the banks, while creating a basis of co-operation. It also gave employees and shareholders time to adjust to the new brand of "Dexia". At the time of the announcement of the merger of Merita and Nordbanken in 1997, the parties agreed that the initial dual-headed structure was a temporary solution and agreed to aim for a simpler structure in the near future. In 1999, the group unified.

The proposed Aventis-Hoescht/ Rhone-Poulenc dual-headed structure was intended to be a temporary structure before a full merger but the dual-headed structure was never implemented and the group went straight to a full merger.

Experience has shown that unifying a dual-headed structure can be as difficult as creating one. Two methods have been used in the unification cases examined:

Exchange offer. In the Dexia example, Dexia Belgium launched a public tender offer to acquire all shares in Dexia France in September 1999. One Dexia Belguim share was offered in return for one Dexia France share. At the closing of the offer, 94.1% of Dexia France was acquired. The remaining shares were cancelled by means of redemption proceedings in which cash compensation was paid to the remaining shareholders. As a result of the exchange offer, "Dexia" is the sole holding company, owning the entire shareholdings in the operating companies, Dexia Banque Belgium and Dexia Crédit local. Since unification, they have tried to maintain the bi-national character of the group by reorganising Dexia management so that the Dexia board of directors is composed of an equal number of Belgian and French directors.

In Merita Nordbanken, the Swedish company, Nordbanken Holding AB, made a public tender offer to acquire all the shares and convertible bonds in the Finnish company, Merita plc, in exchange for new shares and convertible bonds in Nordbanken Holding AB. The exchange ratio reflected the 40/60 economic relationship agreed in the 1997 co-operation and merger agreements. 95.9% of the Merita shares were tendered and the remaining shares were cancelled under redemption proceedings. In January 2000, the new holding company Nordbanken Holding AB changed its name to Nordic Baltic Holding (NBH) ABC.

A similar method was adopted for the unification of the ABB structure. However, in this example, a new Swiss holding company known as ABB Limited launched separate exchange offers for all the shares in the Swedish company, ABB AB and the Swiss company, ABB AG, such that the former shareholders of these companies received 50% respectively of the shares in ABB Limited. 95.2% of ABB AB shares were tendered. The remaining ABB AG shares were cancelled and the remaining ABB AB shares were compulsorily acquired by ABB Limited through a subsidiary. Holders of ABB AG American Depositary Receipts were given the opportunity to either receive shares in ABB Limited or cash consideration.

The unification of the Zurich Financial Services group involved the merger of the Swiss top-tier company, Zurich Allied AG, with a new Swiss intermediate holding company, Zurich Financial Services, under which Zurich Allied was dissolved and all of its assets were transferred to Zurich Financial Services. Zurich Allied shareholders received one Zurich Financial Services share for each Zurich Allied share. Zurich Allied also implemented an on-market repurchase of its shares up to CHF1 billion (about US$670 million) in order to manage any "flow-back" of shares resulting from the unification (shareholders selling unwanted shares in a foreign company). These repurchased shares were held as treasury shares and were not cancelled. The English top-tier company, Allied Zurich plc, implemented a scheme of arrangement. Under this scheme, all of its shares were cancelled in exchange for shareholders receiving shares in the new Swiss company Zurich Financial Services. In order to mop-up flow-back (some investors did not wish, or were unable, to hold shares in a Swiss company) Allied Zurich also launched a tender offer to repurchase shares up to a value of US$650 million.

Twinned-share structure. Another method by which dual-headed structures may be modified can be seen in the Fortis example. While this did not involve a complete unification of the dual-headed structure, it replaced the "separate entities" structure with the more unified "twinned-share structure". Fortis wanted to avoid adverse tax consequences and to avoid paying any premium. Fortis also wanted to maintain the two top-tier companies' registered offices (so as to maintain the bi-national character of the group). Each ordinary share of the two top-tier companies was replaced with one new single Fortis share, which represented one twinned share in the Dutch company, Fortis SA/NV, and one in the Belgian company, Fortis NV.

As a consequence of the twinned-share structure, and in order to ensure strict equality between the top-tier companies, the number of shares in these companies must remain identical. Any issue of a Fortis share requires the issue of one ordinary share in each of the top-tier companies, and they may not be transferred separately. This is similar to the Eurotunnel twinned structure implemented in 1989.

The unification of a dual-headed structure will face many obstacles and issues. From the examples given, the most common issues stem from the fact that there is an enforced change of domicile for one or both sets of shareholders of the top-tier companies. For example, the top-tier company in one jurisdiction may be dissolved and the top-tier company in the other jurisdiction becomes the new holding company of the group. This results in the shareholders of the disclosed company receiving shares in a company in which they did not initially choose to invest. That new company will have a different governing law constitution and language. Their new shares will be in a different currency and it may be a lot less convenient for them to invest in such a company. The new company will also be listed on a different stock market to that in which they initially chose to invest.

For this reason, a premium may need to be paid to the shareholders of the company to be disclosed in order to gain their approval of the unification and to avoid "flow back" of shares. The same issues may be faced with a merger by way of a takeover where target shareholders may need to be paid a premium as an incentive to agree to the merger.

In the ABB example, the net excess cash in ABB AG (CHF278 million) (about US$186.3 million) was paid out as a special dividend to ABB AG shareholders on 25th June, 1999. This represented a dividend of CHF30 (about US$20.1) gross per bearer ABB AG share.

In the Dexia example, a premium was paid to Dexia France shareholders via the ratio basis of the public exchange offer. The initial ratio of one Dexia Belgium share for one Dexia France share represented a 10% premium for the French shareholders. However, as an incentive, an additional premium of 2.5% was paid to Dexia France shareholders as they tendered more than 90% of the required shares.

In the Zurich Financial Services unification, Allied Zurich shareholders received a special dividend of GBP0.4 per Allied Zurich share tendered, which was paid after completion of the unification in addition to the annual dividend.

On a unification, it will also be important to reconsider all those issues faced on the creation of a dual-headed structure. For example, it will be important to consider the dividend flows up to shareholders within the structure and whether they are tax efficient. If a top-tier company in one of the jurisdictions is merged into the other, it may mean that the shareholders in that former top-tier company can no longer receive dividends in the currency of their choice and dividends may not be as tax efficient for them. In unifying these structures, efforts have been made to account for this issue.

In the ABB structure, the Swedish top-tier company was taken over by a new Swiss company and a separate dividend mechanism was created to provide an opportunity for Swedish shareholders to receive their future dividends in Swedish Kroner without paying Swiss withholding tax. This dividend plan, called the "dividend access facility", ensures that dividend tax levels for Swedish shareholders in the new Swiss company remain as they were before unification.

In the Fortis twinned-share structure, Fortis shareholders can elect to receive either a wholly Belgian or wholly Dutch sourced dividend and the dividend policies of both top-tier companies are the same. This allows shareholders to continue to receive dividends from a company in a jurisdiction of their choice.

In addition, tax aspects of the unification must be carefully examined as the tax consequences may impact on the transaction at a corporate level as well as at shareholder level.

For example, when implementing an exchange offer, the exchange of shares may be subject to tax. In Switzerland, the exchange of registered or bearer shares is tax free for Swiss federal income tax purposes for individual shareholders domiciled in Switzerland holding their shares as private property or as business assets (as seen in the ABB example). In the Zurich Financial Services unification, the merger constituted a tax free reorganisation for the purposes of corporate income tax. However, in other jurisdictions the exchange is taxable.

Under French law, the exchange of shares by means of tender offer is treated as a sale of shares and consequently is subject to taxation (26% if the total annual amount of sales of securities exceeds FF50,000 (US$33,500) in the case of an individual shareholder and 33 1/3% plus an additional tax of 10% for corporate shareholders) (as seen in the Dexia example).

Other tax consequences may arise. For example, in the unification of Merita Nordbanken, the taxation of the Finnish Merita shareholders changed as a result of the exchange offer. Dividend income received from the new Swedish holding company, Nordbanken Holding AB, no longer qualifies for a tax credit under the Finnish imputation system, resulting in the tax credit for a Finnish resident shareholder being lost.

Given that six of the dual-headed structures reviewed three years ago have now been unified, it may appear that these structures have been attempted, have not been successful and are in decline. However, this is not the case, and for many merging companies it may be the only viable way to merge. The structures will still be attractive to well established large groups of companies with strong national links and sensitivities (such as banks or other financial services groups). Such companies may be seeking to merge but have found that the conventional takeover merger route is not suitable (see above "Transient step in evolution"). As groups of companies become more complex and international in nature, it may become more difficult for them to merge in conventional ways. Dual-headed structures are also popular in certain industries such as mining, where there are many joint venture arrangements, as they avoid triggering change of control provisions.

In addition, and as the Dexia, Merita Nordbanken and Aventis/Rhone Poulenc dual-headed structures have shown, these structures may provide a useful transient step in the evolution of a group. They may allow companies to merge when they would not otherwise be able to and they allow employees and investors alike to become accustomed to the newly merged entities.

On the whole, these structures have been seen most often in Anglo-Saxon cultures, but it may be that as cross-border mergers become more difficult, they may be seen more frequently elsewhere, and in particular, in continental Europe. Dual-headed structures will also remain viable options while they continue to provide the advantages for which they are renowned, such as continuity of domicile and corporate identity, capital gains tax advantages and efficient flow of income cross-border (see ). There may also be a renewed interest in dual-headed structures in light of three recent much publicised examples:

On 29th June, 2001, BHP, a leading Australian mining company, and Billiton, a leading UK mining company, merged by way of a dual-headed structure to create the world's second largest mining company (see also "BHP Billiton", ). It was a merger of equals bringing together two groups with very little overlap in their business portfolios and existing projects, thereby enabling many synergies and growth opportunities.

www.practicallaw. com/A20927The structure is based upon the RTZ/CRA example (see "RTZ/CRA: the mining merger", ). Its key features are as follows:

The dual-headed structure was chosen for this merger because:

On 20th November, 2001, P&O Princess Cruises plc (in the UK) and Royal Caribbean Cruises Limited (in the US) announced that they had reached agreement on a proposed combination as a merger of equals under a dual-headed structure. However, due to the intervention of a rival bidder, Carnival Corporation, P&O shareholders voted to adjourn the Extraordinary General Meeting (EGM) to approve the proposed structure. At the time of writing, the matter is still unresolved and the structure has not been implemented. It has also attracted the attention of the Takeover Panel (see box "Takeover Panel control").

The key features of the proposed structure are:

In 2001, the Australian company Brambles Industries Limited, merged with the UK company GKN plc to create a global support services group under a dual-headed structure. The new structure was expected to enhance global growth opportunities, improve access to capital markets, while allowing both companies to maintain separate domiciles and stock exchange listings. The key features of this dual-headed structure are as follows: