Moving to Holland was going to solve James Hardie’s tax woes. It hasn’t. And those asbestos nasties in Australia keep creating bad news. Someone has mucked things up, as Jimmy Hardy explains.

When James Hardie Industries shareholders voted to move the company to the Netherlands back in late 2001, a major concern was tax. Australian tax. So it comes as something of a surprise that one of the reasons advanced three years later for a capital return was a new Dutch tax. What? What’s going on here?

CEO Peter Macdonald said in a statement that Dutch authorities had recently ruled that a 10% withholding tax was to be paid on future capital reductions. Hardie was planning a return of up to $200 million paid for from the proceeds of the sale of its gypsum business.

There’s a certain grim irony here from comments made at the 2001 shareholders meeting to consider the domicile shift. Part of the argument was that the shift to the Netherlands would bring substantial taxation benefits to shareholders. Hardie’s major business is in the US with more than 85% of earnings coming from overseas.

Hardie’s problem was that future dividend payments to Australian shareholders would have had to be paid through dividends from the US to Australia, incurring withholding tax and the lack of franking credits on dividends.

Moving to the Netherlands would enable its operations to be financed from there, producing significant tax benefits. But as Hardie was planning to move, the Federal Government announced it had signed a deal with the US government to reduce the withholding tax, but the company went ahead with the move anyway.

Chairman Alan McGregor told shareholders at the meeting in October 2001 the restructuring would “still give a more favourable outcome even if withholding tax was reduced to zero”.

He said that if withholding tax was completely removed, Hardie’s worldwide tax rate would fall from 40 to 50 per cent to about 36 to 37 per cent. “This is still well above the estimated 25 to 30 per cent rate we will achieve with our new structure, all other things being equal,” he told shareholders.

Ahh, the irony of it all. Here’s a company fleeing Australia for tax reasons to the Netherlands, now hoist on its own petard, thanks to Dutch tax authorities. It’s all a little unfair. Sort of sounds like Karmic Justice doesn’t it.

Shareholders have received the benefits of being based in Holland for the past two and a bit years , but now the strategem has turned around and bitten them all on their wallets. But important as the withholding tax seems, Crikey thinks a better reason was the second explanation advanced by CEO Peter Macdonald.

He said in a statement “Additionally the company believes it would be inappropriate to proceed with a return of capital to shareholders during the current NSW Special Commission of Inquiry.”

After evidence recently, and especially this week, before the Commission, that’s a wise decision. The Inquiry has yet to conclude and the report from the Commissioner is due at the end of next month, but Hardie shareholders can expect some bad news about the company’s behaviour.

The Inquiry is examining claims of a potential shortfall and James Hardie’s refusal to top it up in the Medical Research and Compensation Foundation. Hardie established this fund to handle all asbestos claims, but there could be a claimed shortfall of $800 million or more.

In a hearing of the Inquiry in Adelaide, chairman Alan McGregor was forced to confirm some unwelcome lack of disclosure this week.
He lives in Adelaide and has been under doctor’s orders not to travel. He was forced to confirm that James Hardie seek any advice about telling the NSW Supreme Court it intended dismantling an arrangement to ensure asbestos claims could be met after the company’s shift to the Netherlands.

The 2001 restructure left the old Australian parent as a non-operating shell with only $20 million in assets. The NSW Supreme Court was told at the time that, in approving the restructure, the new Dutch-based parent would ensure the Australian shell could meet any potential liabailities through the issue of partly paid shares which gave the Australian company the ability to call on funds to the value of its market capitalisation in October, 2001 of $1.85 billion.

Mr McGregor told the Inquiry this week that when the company decided to cancel the partly-paid shares he was aware the Australian company faced the threat of a lawsuit from the Medical Research and Compensation Foundation.

The trust was established in February 2001, and by October of the same year shareholders had voted on the move to the Netherlands. Mr McGregor said the board talked about the cancellation move but had not sought any advice about going back to the court to inform it of the cancellation. He did say however that the board decided against making a public announcement.

“We sought advice about that issue and from my memory the advice and decision was that (an announcement) was not a matter which was required under the disclosure regulations”, according to a report in the Sydney Morning Herald this week.

Counsel for the Inquiry asked, “That’s not a serious answer is it?” Mr McGregor replied, “Yes it is.”

Mr McGregor is one of Australia’s most experienced company directors and corporate lawyers. He has served on the The Companies and Securities Advisory Committee during the 1990s looking at various changes to the takeover’s legislation and investment and companies laws. He is an experienced adviser, as well as being a leading member of the Adelaide establishment.

He also is a director of Burns Philp which dates back to the mid 1990s when that company almost collapsed. Al should have known better. Crikey would have thought that James Hardie deciding it no longer thought it had a contingent liability of $1.85 billion to the old Australian corporate shell was an important enough event to be disclosable under the continuous disclosure regime for all listed companies.

But then being among the doyen’s of corporate legal Australia, Al should know. Does the ASX and ASIC? And, with this disclosure having been made, why hasn’t there been any query so far on this issue?

Hardie’s case before the Commission wasn’t helped on Thursday when Peter Shafron, the company’s senior in-house lawyer and about to become chief financial officer, admitted misleading four directors before they agreed to join the board of the Foundation in February 2001.

He said he did not tell the four directors that Hardie was in possession of a recent detailed report from a firm of actuaries estimating future claims for asbestos diseases. He also said under cross examination by counsel for the Inquiry that he had no basis for implying in an email in 2001 that later material from the actuaries would be protected in any future court case by legal professional privilege.

This report, in the SMH again, is another in a series of reports on the Commision’s hearings that have produced a string of bad news for Hardie that many shareholders are probably not aware of. CEO Peter Macdonald says he and the company cannot say any more as yet, but will do so before the Commission. That evidence will be fascinating and could very well decide the fate of any capital return, and indeed the future direction of the company.

The fact that Hardie is now based in the Netherlands complicates matters in the event of an adverse finding. You’d have to ask how will any NSW Government be able to enforce any legal finding/judgement again Hardie and secure full satisfaction for the Foundation and any asbestos-based litigants with legal actions against Hardie.

So while tax was no doubt the driving force behind this move, there could very well be a big, big bonus. Moving to the Netherlands might prove to put the company beyond the reach of any NSW law.

That’s why the new Dutch withhholding tax is such a delicious irony. But the real reason for no capital return is the sensible decision by the board not to inflame an already delicate situation for the company before the NSW Commission. Hardie is in deep enough trouble there as it is.

The market is starting to get nervous as James Hardie tumbled after the capital return decision.