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A dual-listed company or DLC is a corporate structure in which two
corporations A corporation is an organization—usually a group of people or a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal ...
function as a single operating business through a legal equalization agreement, but retain separate legal identities and stock exchange listings. Virtually all DLCs are cross-border, and have tax and other advantages for the corporations and their stockholders. In a conventional merger or acquisition, the merging companies become a single legal entity, with one business buying the outstanding shares of the other. However, when a DLC is created, the two companies continue to exist, and to have separate bodies of shareholders, but they agree to share all the risks and rewards of the ownership of all their operating businesses in a fixed proportion, laid out in a
contract A contract is a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable because it meets the requirements and approval of the law. A ...
called an "equalization agreement". The equalization agreements are set up to ensure equal treatment of both companies’ shareholders in voting and cash flow rights. The contracts cover issues that determine the distribution of these legal and economic rights between the twin parents, including issues related to dividends, liquidation, and corporate governance. Usually, the two companies will share a single
board of directors A board of directors is a group of people who jointly supervise the activities of an organization An organization, or organisation ( Commonwealth English; see spelling differences), is an entity – such as a company, an institution, ...
and have an integrated management structure. A DLC is somewhat like a
joint venture A joint venture is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and economic risk, risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: t ...
, but the two parties share everything they own, not just a single project; in that sense, a DLC is similar to a
general partnership A general partnership, the basic form of partnership under common law, is in most countries an association of persons or an unincorporated company with the following major features: *Must be created by agreement, proof of existence and estoppel. ...
between publicly held corporations. This differs to a cross listed Company, which is (the same company) listed on multiple share markets. Samsung is an example of a cross listed Company (listed both on the Korean and the US stock market).


Examples

Some major dual-listed companies include: * BHP (Australia/UK 2001- ) — BHP Group Limited ( Australian Securities Exchange, ASX), BHP Group plc (
London Stock Exchange London Stock Exchange is a stock exchange in the City of London The City of London is a City status in the United Kingdom, city, Ceremonial counties of England, ceremonial county and local government district that contains the historic cent ...
, LSE) *
Carnival Corporation & plc Carnival Corporation & plc is a British-American cruise operator, currently the world's largest travel leisure company, with a combined fleet of over 100 vessels across 10 cruise line brands. A dual-listed company, Carnival is composed of two comp ...
(Panama/UK 2003- ) — Carnival Corporation (
NYSE The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It is by far the List of stock exchanges, world's largest st ...
), Carnival plc (LSE) * Investec (South Africa/UK 2002- ) — Investec plc (LSE), Investec Limited (JSE) * Ninety One (South Africa/UK 2020- ) — Ninety One plc (LSE), Ninety One Limited (JSE) *
Rio Tinto Group Rio Tinto Group is an Anglo-Australian multinational and the world's second largest metals and mining corporation, behind BHP, producing iron ore, copper, diamonds, gold and uranium. The company was founded in 1873, when a multinational consor ...
(Australia/UK 1995- ) — Rio Tinto Limited (ASX), Rio Tinto plc (LSE) Other companies that were previously dual-listed include: *
ABB Group ABB Ltd (german: ABB AG, French language, French, Italian language, Italian, rm, ABB SA), formerly ASEA Brown Boveri, is a Sweden, Swedish–Switzerland, Swiss multinational corporation headquartered in Zürich, Switzerland, operating mainly in ...
(Sweden/Switzerland 1988-1999) * Allied Zurich (now Zurich Financial Services) (UK/Switzerland 1998-2000) *Brambles Industries (Australia/UK 2001-2006) *Dexia (Belgium/France 1996-2000) *Getlink, Eurotunnel (France/UK 1986-2005) *Fortis (finance), Fortis (Belgium/Netherlands 1990-2001) *Mondi Group (South Africa/UK 2007-2019 Mondi Limited (JSE), Mondi plc (LSE) *Nordea, Nordbanken/Merita (Sweden/Finland 1997-2000) *Royal Dutch Shell (UK/Netherlands 1907-2004) *SmithKline Beecham (UK/US 1989-1996) *Thomson Reuters (UK/Canada 2008-2009) *RELX Group (UK/Netherlands 1993-2018) *Unilever (UK/Netherlands 1930-2020) — Unilever plc (LSE), Unilever N.V. (Amsterdam Stock Exchange, Euronext Amsterdam)


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.


Mispricing in DLCs

The shares of the DLC parents represent claims on exactly the same underlying cash flows. In integrated and efficient financial markets, stock prices of the DLC parents should therefore move in lockstep. In practice, however, large differences from theoretical price parity can arise. For example, in the early 1980s Royal Dutch NV was trading at a discount of approximately 30% relative to Shell Transport and Trading PLC. In the academic finance literature, Rosenthal and Young (1990) and Froot and Dabora (1999)Froot, K.A., and E.M. Dabora, 1999, How are stock prices affected by the location of trade?, Journal of Financial Economics 53, 189-216. show that significant mispricing in three DLCs (Royal Dutch Shell, Unilever, and Smithkline Beecham) has existed over a long period of time. Both studies conclude that fundamental factors (such as currency risk, governance structures, legal contracts, liquidity, and taxation) are not sufficient to explain the magnitude of the price deviations. Froot and Dabora (1999) show that the relative prices of the twin stocks are correlated with the stock indices of the markets on which each of the twins has its main listing. For example, if the FTSE 100 rises relative to the AEX index (the Dutch stock market index) the stock price of Reed International PLC generally tends to rise relative to the stock price of Elsevier NV. De Jong, Rosenthal, and van Dijk (2008)de Jong, A., L. Rosenthal and M.A. van Dijk, 2008, The Risk and Return of Arbitrage in Dual-Listed Companies, June 200

/ref> report similar effects for nine other DLCs. A potential explanation is that local market sentiment affects the relative prices of the shares of the DLC parent companies. Because of the absence of "fundamental reasons" for the mispricing, DLCs have become known as a textbook example of arbitrage opportunities, see for example Brealey, Myers, and Allen (2006, chapter 13).


Arbitrage in DLCs

Price differences between the two markets in which dual-listed companies are listed (also called mispricing) has led to a number of financial institutions trying to exploit the mispricing by setting up arbitrage positions in such circumstances. These arbitrage strategies involve a Long (finance), long position in the relatively underpriced part of the DLC and a Short (finance), short position in the relatively overpriced part. For example, in the early 1980s an arbitrageur might have built up a long position in Royal Dutch NV and a short position in Shell Transport and Trading plc. This position would have yielded profits when the relative prices of Royal Dutch and Shell converged to theoretical parity. An internal document of Merrill Lynch investigates arbitrage opportunities in six DLCs. Lowenstein (2000)Lowenstein, R., 2000, When genius failed: The rise and fall of Long-Term Capital Management, Random House. describes arbitrage positions of the hedge-fund Long-Term Capital Management (LTCM) in Royal Dutch/Shell. LTCM established an arbitrage position in this DLC in the summer of 1997, when Royal Dutch traded at an eight to ten percent premium. In total $2.3 billion was invested, half long in Shell and the other half short in Royal Dutch (Lowenstein, p. 99). In the autumn of 1998 large defaults on Russian debt created significant losses for the hedge fund and LTCM had to unwind several positions. Lowenstein reports that the premium of Royal Dutch had increased to about 22 percent and LTCM had to close the position and incur a loss. According to Lowenstein (p. 234), LTCM lost $286 million in equity pairs trading and more than half of this loss is accounted for by the Royal Dutch/Shell trade. The example of LTCM is a good illustration of why arbitrage by financial institutions has not succeeded in eliminating the mispricing in DLCs. An important characteristic of DLC arbitrage is that the underlying shares are not convertible into each other. Hence, risky arbitrage positions must be kept open until prices converge. Since there is no identifiable date at which DLC prices will converge, arbitrageurs with limited horizons who are unable to close the price gap on their own face considerable uncertainty. De Jong, Rosenthal, and van Dijk (2008) simulate arbitrage strategies in twelve DLCs over the period 1980-2002. They show that in some cases, arbitrageurs would have to wait for almost nine years before prices have converged and the position can be closed. In the short run, the mispricing might deepen. In these situations, arbitrageurs receive margin calls, after which they would most likely be forced to liquidate part of the position at a highly unfavorable moment and suffer a loss. As a result, arbitrage strategies in DLCs are very risky, which is likely to impede arbitrage.


Notes


External links


Background information, literature, data, and research on DLCs
on the website of Mathijs A. van Dijk. * Chad A. Pasternack
Dual Listed Company Structures as a Defense Against Liability
51 Gonzaga Law Review 159 (2015). {{Stock market Types of business entity Dual-listed companies,