While James Hardie's announcement of its intention to domicile in Ireland has been met with some controversy, the legalities of the move raise some unique issues, writes Sarah Sharples
James Hardie Industries made the move to the Netherlands in 2001 amid outcries that it was attempting to shirk its responsibilities to compensate workers who were suffering from asbestos-related diseases. Part of the move, the company said, was for favourable tax concessions.
But changes to Dutch and US tax laws between 2004 and 2006 caused a long-running dispute between James Hardie Industries and the US Internal Revenue Service (IRS) surrounding the issue of whether the company had a "substantial presence" in the Netherlands.
Malleson Stephen Jaques has represented Hardie since 2004 when the company sought advice on directors' duties in relation to the asbestos compensation fund. Partner Tim Blue has spent the last three years helping the company review its corporate domicile and canvas appropriate jurisdictions which, ideally, would have been the US or Australia, he says.
"The major legal impediment to moving to the US or Australia was that Dutch company law is actually very restrictive in terms of corporate reorganisation. So, for example, there is no equivalent in the Netherlands to a scheme of arrangement - which would be the normal way you would do a transaction like this," he says.
"In fact, in the Netherlands they can really only do a reconstruction in one of two ways. One is they have this concept of merger, which we don't have in Australia, where two entities merge together to form one. The other is by way of tender offer, where 95 per cent acceptance is required to move to compulsory acquisition.
"But the problem with a merger from an Australian perspective - and you have to remember virtually all of the shareholders in James Hardie are Australian retail and institutional investors - is that they don't get capital gains tax rollover relief and so merging the company with another foreign company in another appropriate jurisdiction was never really a viable option."
Changing options - the SE regulation
Hardie's tax claims were challenged in 2006 and 2007 by the IRS and, although the company had them subsequently overturned, the issue was going to arise every year, says Hardie chief executive Louis Gries.
company had to make the decision whether to force management to spend more time in the Netherlands to keep the tax bill down. This would have reduced their ability to operate effectively in the US, as well as risking an annual fight with the IRS by keeping the executives Stateside in apparent defiance of the 2006 US-Dutch tax treaty.
So when in 2008 the Netherlands adopted the Societas Europaea (SE) Hardie had found a path to achieve its objective, says Blue.
"The SE regulation, which is a European Union (EU) regulation, provides for a European form of public company which is referred to as a SE. So once you're an SE you can actually move from one member state in the EU to another with just a shareholders' resolution," he says.
The problem faced was finding a way to convert or transform the existing Hardie Dutch parent company into an SE company.
"One of those criteria is where the company is involved in a merger with another company from a different EU member state," says Blue.
"So what triggers the actual conversion process here is that James Hardie has formed a new wholly owned subsidiary in Ireland and will then enter into a merger with that company under Dutch law ... and once that subsidiary has been merged into James Hardie then James Hardie Industries NV has the right to elect to become an SE."
If the proposal is approved by shareholders, the company will be the only SE that is listed on the ASX.
The dollars involved
James Hardie has put the estimated costs for the move at between $US51 million ($64 million) and $US71 million, of which $US14 million has already been spent. About $US30 million to $US50 million related to Dutch taxes, as a result of a capital gain on the transfer of intellectual property from the Netherlands.
Professor Michael Adams, head of the school of law at the University of Western Sydney, says there is not necessarily anything sinister about the decision to move. But he adds that the public and investors should maintain a healthy cynicism, considering previous statements made by James Hardie about reasons for change.
"My concern is that all the costs and benefits which were outlined when they relocated from Australia to the Netherlands appear to have never eventuated ... and it would have to make one sceptical about any cost savings, even with the corporate tax rates and moving to Ireland," he says.
"So you do wonder if there are other reasons or rationales, although, from public press reports, the CEO did outline some of these particular issues. But it does, from a business model point of view, seem strange that the majority of their business is based in America and the majority of their shareholders are based in Australia but [they] have a headquarters based in Europe.
"There doesn't appear to be a very clear business strategy, or certainly [one] that has been disclosed to the public or the shareholders."
Asbestos compensation fund
The move has negative short-term implications for the company's ability to add money to the Asbestos Injuries Compensation Fund, set up in 2006 by the NSW Government for victims of asbestosis and mesothelimo after Hardie's move to the Netherlands. Chief financial officer Russell Chenu says the worst-case scenario will be a reduction by $US20 million of payment in the 2009-10 year.
Blue says the asbestos compensation arrangement was another feature that made the deal fairly interesting.
"One of the key priorities was to leave those arrangements as undisturbed as possible because, obviously, they took a number of years to negotiate with the Government and with the other stakeholders and so disturbing those - not at all or as little as possible - was a major consideration," he says.
"One of the benefits of this SE proposal was that, under European law, the company remains the same company, the same legal entity, throughout this process. In that sense, it is similar to converting from a private company to a public company.
"So contracts that it entered into in the past - including the asbestos compensation agreement - continued to bind it. So James Hardie was able to present that proposal to the NSW Government and to the compensation fund trustee, on the basis that, from a legal perspective, virtually nothing will change - except that ultimately the company will become an Irish company."
James Hardie will seek shareholder approval for its move to Ireland and the change to an SE corporate at an extraordinary general meeting on 21 August. Management hopes to complete the move by March next year.