Dual-listed Companies - Motivations For Adopting A DLC Structure

Motivations For Adopting A DLC Structure

A dual-listed company structure is effectively a merger between two companies, in which they agree to combine their operations and cash flows, and make similar dividend payments to shareholders in both companies, while retaining separate shareholder registries and identities. In virtually all cases, the two companies are listed in different countries. There are often tax reasons for companies from different jurisdictions to adopt a DLC structure instead of a regular merger where a single share is created. A capital gains tax could be owed if an outright merger took place, but no such tax consequence would arise with a DLC deal. Differences in tax regimes may also favour a DLC structure, because cross-border dividend payments are minimized. In addition, there may be favourable tax consequences for the companies themselves. Once companies have chosen a DLC structure, there can be major tax obstacles to cancelling the arrangement. Issues of national pride may sometimes also be involved; where both parties to a proposed merger or takeover are in a strong position and do not need to merge or accept a takeover, it can be easier to push it through if the country with the smaller business is not "losing" its corporation. A third motive is the reduction of investor flow-back, which would depress the price of the stock of one of the firms in their own market if the merger route were used instead. That is, some institutional investors cannot own the shares of firms domiciled outside the home country or can only own such shares in limited quantity. In addition, in a merger, the non-surviving firm would be removed from all the indices. Index tracking funds would then have to sell the shares of the surviving company. With the DLC structure, all of this would be avoided. A fourth motive is that DLCs do not necessarily require regulatory (anti-trust) consent and may not be constrained by the requirement of foreign investment approval. Finally, the access to local capital markets may be reduced when a quotation disappears in a regular merger. This is based on the idea that local investors are already familiar with the company from the pre-DLC period. However, the DLC structure also has disadvantages. The structure may hamper transparency for investors and reduce managerial efficiency. In addition, issuing shares in a merger and capital market transactions (such as SEOs, share repurchases, and stock splits) are more complex under the DLC structure.