Financial Times: Lex live: Royal Dutch/Shell: Tuesday 28 June 2005

UK budgets under Gordon Brown's tenure have shown that taxation and simplicity rarely go hand in hand. But the complexities produced by Royal Dutch/Shell's unification give the chancellor a run for his money.

To avoid Shell shareholders having to pay Dutch withholding tax - and no doubt to appease British and Dutch interests - the company will retain two classes of shares. The A shares, representing Royal Dutch stock, currently trade at a 3.5 per cent discount to the B shares, representing Shell Transport & Trading. Is this discount justified?

The B shares will not suffer 15 per cent Dutch withholding tax on dividends and hence offer a better return to UK pension funds. In theory this justifies a premium. But the fair value of the spread is difficult to estimate since it depends on the type and geographical mix of investors. US and Dutch investors, for example, receive the same dividend from either class of share. The spread's fair value is estimated at 2 to 6 per cent.

The merged group's weighting in the FTSE All-Share will more than double to above 7 per cent. Surveys of institutional holdings suggest fund managers remain underweight ahead of the index change, although "closet" tracking makes the required buying difficult to estimate. But it will run to billions of pounds. Owning only B shares runs the risk of index tracking errors and should ensure buying is concentrated in the A shares.

Meanwhile Shell has announced that its $3bn-$5bn share buyback this year will be entirely in A shares. So far only $500m has been completed. These factors should push the spread between A and B shares, which has narrowed recently, closer to parity.

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