16, February 2015
Background. Royal Dutch Shell Group is one of the world’s largest oil corporations and one of the largest companies in Europe. The company was created as a result of a merge between Netherlands’ Royal Dutch and UK’s Shell Corporation. The case looks at the issue of price differentials between several equity listings in different markets from the perspective of investors seeking an arbitrage opportunity. Royal Dutch trades more actively in the Netherlands and U.S. markets, whereas Shell trades more actively in the United States. The result is that the Royal Dutch/Shell relative price moves positively with the Netherlands and U.S. markets and negatively with the U.K. market.
Structure. The Royal Dutch and Shell Group’s structure has all of its subsidiary companies controlled by the holding group of the company. These companies include Shell Petroleum NV located in Netherland, The Shell Petroleum Company Ltd based in UK, and Shell Petroleum Inc. based in the United States. These companies are controlled by the two parent companies, which are Royal Dutch Petroleum and Shell Transport & Trading. The ownership is divided in terms of 60/40 ratios. The relationship between these groups of holdings are meant to be 60/40, which means that all the inflows coming and all the outflows made to shareholders are divided between the two holdings. This represents that one share of Royal Dutch and one share of Shell is entitled to the same cash flows. The structure of the company is different from the equity firms. The main difference is that the returns of fund management are based on the performance and then further divided into the fund managers. The manager gets the rewards in terms of compensation while maximizing the investors’ investment return. In this case the Dutch is receiving more than the Shell which means that whatever the earning would be, Royal Dutch gets the maximum out of that inflow...
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