A proposed de-merger involving the removal of substantial cross-shareholdings between building products maker Brickworks and its largest shareholder looks to have been buried after a meeting to vote on the proposed deal was cancelled following a ruling that effectively means the two companies would incur substantial tax liabilities if the proposal went ahead.
On Monday, Brickworks announced that shareholders M.H. Carnegie & Co Pty Ltd and Perpetual Investment Management Pty Ltd had agreed to cancel a shareholders meeting previously set for September 25 at which a proposal put forward by the two shareholders to effectively end a 45 year old cross-shareholding arrangement which sees Brickworks own 42 percent of ASX listed holding company Washington H. Soul Patterson (WHSP) and WHSP in turn own around 45 percent of Brickworks was set to be voted on.
The cancellation follows a final private ruling from the Australian Tax Office (ATO) which denied capital gains tax roll-over relief on the proposed transaction and would have seen WHSP liable for capital gains tax of around $311 million and Brickworks liable for substantial amounts of income tax liability on its WHSP shares.
In a statement to the Australian Stock Exchange, Brickworks said the granting of roll-over relief had been an effective condition of the proposal going ahead, and that WHSP and Perpetual had agreed to withdraw their request for the meeting – which had originally been slated for last year but delayed on several occasions – in light of the ruling.
“The effect of the ATO ruling is that neither the TPG Demerger nor the Share Cancellation can occur as envisaged by Carnegie and Perpetual’s Proposal,” Brickworks said in a statement to the Australian Stock Exchange.
“In light of the ruling from the ATO, the Company invited Carnegie and Perpetual to withdraw their requisition. Carnegie and Perpetual have accepted the invitation and withdrawn their requisition of meeting.”
Despite having been in place since 1969, the cross-shareholding arrangement between Brickworks and WHSP – effectively a holding company listed on the ASX with assets spread across the agriculture, pharmaceutical, mining, telecommunications and (through its shareholding in Brickworks) construction materials industries – has been the subject of considerable speculation and controversy in recent times.
In their push to undo this arrangement, Carnegie and Perpetual had argued the cross-shareholding represents poor corporate governance and that its unravelling via the proposed arrangement would unleash shareholder value in both companies in a tax effective manner.
Brickworks’ board, however, retorted that the arrangement provided a more diverse source of revenue as well as greater levels of scale, financial capacity and investor appeal that would otherwise be the case were the cross-shareholding not in place.
Furthermore, Brickworks and WHSP had said they had independent advice which contradicted critical assumptions about the tax implications of the proposal, and raised concerns (now appearing to be validated) that the proposal would result in significant tax liabilities for both companies.
WHSP Chairman Robert Millner expressed his frustration at the distraction bought about by the merger proposal over the past nine months, and said early engagement with the ATO surrounding concerns about the de-merger had avoided a situation whereby shareholders were forced to vote without understanding the potential consequences.
“The Board was advised of a number of issues with the Proposal and we diligently worked through these in order to properly inform shareholders,” Millner said. “Had we not engaged early with the ATO, shareholders may have voted on a transaction without fully understanding the potential consequences of the Proposal.”
"Significant time and money has been spent analysing this Proposal which is incapable of implementation as envisaged by Carnegie and Perpetual.”