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 no 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.

Peter Fray

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