Interactive Investor

Don’t be shy, ask ii…what’s the difference between Shell A and B shares?

Whether you want to find out how to start investing or how the stock market works, don’t be shy, ask ii.

22nd July 2021 11:21

Keith Bowman from interactive investor

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Torsten Wildschek asks: Shell's A shares (RDSA) are more expensive than Shell’s B shares (RDSB). Shell state that the only difference is the dividend access mechanism. So, for a UK resident, B shares seem more valuable than A shares since the dividend will be received without any tax being withheld by the Dutch authorities. Why then are A shares more expensive?

Also, are there any documents other than the articles of association one would need to check to be sure about rank/special rights of share classes?

Keith Bowman (pictured), equity analyst, interactive investor, says: thanks for your question. First a bit of background for those who don’t know.

Royal Dutch Shell was formed following the merger between Royal Dutch Petroleum and Shell Transport and Trading in 2005. The company is UK incorporated, but headquartered and tax-resident in the Netherlands.

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There are two types of ordinary shares investors can buy - Royal Dutch Shell A (LSE:RDSA) shares and Royal Dutch Shell B (LSE:RDSB) shares. The A shares (formerly Royal Dutch) are primarily listed in Amsterdam, with a secondary listing in London. The B shares (formerly Shell Transport and Trading) are primarily listed in London. Class A ordinary shares and Class B ordinary shares do have identical rights.

However, the UK and the Netherlands have different tax systems, so the tax treatment of dividends for the two lines of stock differs. Dividends paid on the A shares have a Dutch source for tax purposes and are subject to a Dutch withholding tax. Dividends paid on the B shares have a UK source for tax purposes and are not subject to any UK or Dutch withholding tax.

Therefore, and in general, UK investors normally buy the Class B ordinary shares. Dutch investors typically buy the Class A ordinary shares.

Investors who are resident in other countries will normally decide between the two classes, depending on what tax arrangements exist between their country and either the UK or the Netherlands.

So, the difference in share price reflects the different dividend arrangement between Shell’s Class A and Class B shares. If the view of tax implications alters, the supply/demand situation may shift should investor preferences for euro or sterling dividends change.

But there are also a few other considerations. The A shares have a larger share of the corporation’s assets and are treated as a priority if Shell went into liquidation (however unlikely). So, in theory, the A’s should carry a premium. There is also a theory, more difficult to prove, that Brexit may have made the B’s less attractive in Europe, especially with the currency on dividends.

Put simply, the supply/demand balance has moved in favour of the A shares due to multiple factors influencing the respective share prices.

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