Unilever 2005 Annual Report Download - page 45

42 Unilever Annual Report and Accounts 2005
Corporate governance
(continued)
If both companies were to go into liquidation, NV and PLC would
each use any funds available for shareholders to pay the prior
claims of their own preference shareholders. Then they would use
any surplus to pay each other’s preference shareholders, if
necessary. After these claims had been met, they would pay out
any equalisation or dividend reserve to their own shareholders
before pooling the remaining surplus. This would be distributed to
the ordinary shareholders of both companies, once again on the
basis that the owner of €5.445 nominal NV ordinary share capital
would get the same as the owner of £1 nominal PLC ordinary
share capital. If one company were to go into liquidation, we
would apply the same principles as if both had gone into
liquidation simultaneously.
In principle, issues of bonus shares and rights offerings can only
be made in ordinary shares. Again we would ensure that
shareholders of NV and PLC received shares in equal proportions,
using the ratio of €5.445 NV nominal share capital to £1 PLC
nominal share capital. The subscription price for one new NV
share would have to be the same, at the prevailing exchange rate,
as the price for 6.67 new PLC shares.
Neither company can issue or reduce capital without the consent
of the other.
The Articles of Association of NV establish that any payment
under the Equalisation Agreement will be credited or debited to
the income statement for the financial year in question.
Under Article 2 of the Articles of Association of NV and Clause 3
of the Memorandum of Association of PLC, each company is
required to carry out the Equalisation Agreement with the other.
Both documents state that the Agreement cannot be changed or
terminated without the approval of shareholders. For NV, the
General Meeting can decide to alter or terminate the Equalisation
Agreement at the proposal of the Board. The necessary approval
of the General Meeting is then that at least one half of the total
issued ordinary capital must be represented at an ordinary
shareholders’ meeting, where the majority must vote in favour;
and (if they would be disadvantaged or the agreement is to be
terminated), at least two-thirds of the total issued preference
share capital must be represented at a preference shareholders’
meeting, where at least three-quarters of them must vote in
favour. For PLC, the necessary approval must be given by the
holders of a majority of all issued shares voting at a General
Meeting and the holders of the ordinary shares, either by three-
quarters in writing, or by three-quarters voting at a General
Meeting where the majority of the ordinary shares in issue are
represented.
In addition, Article 3 of the PLC Articles of Association states that
PLC’s Board must carry out the Equalisation Agreement and that
the other provisions of the Articles of Association are subject to it.
We are advised by counsel that these provisions oblige our Boards
to carry out the Equalisation Agreement, unless it is amended or
terminated with the approval of the shareholders of both
companies. If the Boards fail to enforce the Agreement,
shareholders can compel them to do so under Netherlands and
United Kingdom law.
When we pay ordinary dividends we use this formula. On the
same day, NV and PLC allocate funds for the dividend from their
parts of our current profits and free reserves. We pay the same
amount on each NV share as on 6.67 PLC shares calculated at the
relevant exchange rate. For interim dividends this exchange rate is
the average rate for the quarter before we declare the dividend.
For final dividends it is the average rate for the year. In arriving at
the equalised amount we include any tax payable by the
Company in respect of the dividend, but calculate it before any
tax deductible by the Company from the dividend.
The Equalisation Agreement provides that if one company had
losses, or was unable to pay its preference dividends, the loss or
shortfall would be made up out of:
• the current profits of the other company (after it has paid its
own preference shareholders);
• then its own free reserves; and
• then the free reserves of the other company.
If either company could not pay its ordinary dividends, we would
follow the same procedure, except that the current profits of the
other company would only be used after it had paid its own
ordinary shareholders and if the Directors thought this more
appropriate than, for example, using its own free reserves.
So far, NV and PLC have always been able to pay their own
dividends, so we have never had to follow this procedure. If we
did, the payment from one company to the other would be
subject to any United Kingdom and Netherlands tax and
exchange control laws applicable at that time.
Under the Equalisation Agreement, the two companies are
permitted to pay different dividends in the following exceptional
circumstances:
• If the average annual sterling/euro exchange rate changed so
substantially from one year to the next that to pay equal
dividends at the current exchange rates, either NV or PLC
would have to pay a dividend that was unreasonable (ie.
substantially larger or smaller in its own currency than the
dividend it paid in the previous year); or
• The governments of the Netherlands or the United Kingdom
could in some circumstances place restrictions on the
proportion of a company’s profits which can be paid out as
dividends. This could mean that in order to pay equal dividends
one company would have to pay out an amount which would
breach the limitations in place at the time, or that the other
company would have to pay a smaller dividend.
In either of these rare cases, NV and PLC could pay different
amounts of dividend if the Boards thought it appropriate. The
company paying less than the equalised dividend would put the
difference between the dividends into a reserve: an equalisation
reserve in the case of exchange rate fluctuations, or a dividend
reserve in the case of a government restriction. The reserves
would be paid out to its shareholders when it became possible or
reasonable to do so, which would ensure that the shareholders of
both companies would ultimately be treated the same.