Unilever 2008 Annual Report Download - page 55

Corporate governance continued
52 Unilever Annual Report and Accounts 2008
Report of the Directors
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 (that is to
say, 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.
If both companies were to go into liquidation, NV and PLC would
each use any funds legally available 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 on an equal basis.
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.
The subscription price for one new NV share would have to be
the same, at the prevailing exchange rate, as the price for one
new PLC share. 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, by a simple
majority 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 required approval of the shareholders of both
companies. If the Boards fail to enforce the Agreement,
shareholders can compel them to do so under Dutch and UK law.
As announced on 5 February 2009, at the 2009 AGMs and at
separate Meetings of Ordinary Shareholders we will be proposing
resolutions to authorise the Directors to modify the Equalisation
Agreement to facilitate the payment of quarterly dividends from
2010 onwards. This will allow us to change to a simpler and more
transparent dividend practice for the Unilever group. These
changes will result in more frequent payments to shareholders,
and better align with the cash flow generation of the business.
The Equalisation Agreement can be found on our website at
www.unilever.com/investorrelations/corp_governance
The Deed of Mutual Covenants
The Deed of Mutual Covenants provides that NV and PLC and
their respective subsidiary companies shall co-operate in every
way for the purpose of maintaining a common operating policy.
They shall exchange all relevant information about their respective
businesses – the intention being to create and maintain a
common operating platform for the Unilever Group throughout
the world. The Deed illustrates some of the information which
makes up this common platform, such as the mutual exchange
and free use of know-how, patents, trade marks and all other
commercially valuable information.
The Deed contains provisions which allow the Directors of NV and
PLC to take any actions to ensure that the dividend-generating
capacity of each of NV and PLC is aligned with the economic
interests of their respective shareholders. These provisions also
allow assets to be transferred between NV and PLC and their
associated companies (as defined in the Deed) to ensure that
assets are allocated in the most efficient manner. These
arrangements are designed to create a balance between
the two parent companies and the funds generated by them,
for the benefit of their respective sets of shareholders.