Making sense of Vodafone share options

Q&A: Dominic Coyle continues to tackle the Vodafone issue

Tue, Jan 28, 2014, 17:38

Thanks for the advice re the Vodafone shares. However, there are a couple of issues I am not clear on. The first is, does one have to vote on the proposal? Secondly, rather than end up with a mixture of Verizon shares, cash and Vodafone shares, could I not just sell the Vodafone shares now through Computershare and be done with it?

Also, I can’t understand why they would set up the “income” option rather than the “capital” as the default option when the vast majority of Irish investors would choose the capital option.

Mr JG, Galway

As Vodafone holds its shareholder meetings today to vote on the Verizon deal and the “return of value” to shareholders, your first question reflects the concern of a large number of people who have been in touch with me in the past fortnight – especially those who, for one reason or another, never got the information pack and voting forms.

The good news is that you don’t have to vote to be able to participate in the windfall, or “return of value” as Vodafone terms it. However, if you want to have a say in how you receive your cash and shares, you will need to make make sure that all shareholders sign and return that white “form of election return of value” form before February 20th.

Otherwise, Vodafone will decide how you get your windfall – a not insignificant issue as the default option is that you receive both the cash and the shares as “income”, meaning you will be liable for income tax, universal social charge and PRSI on the full value of both (c€1.25 per Vodafone shares). For a higher rate taxpayer, this would mean well over half your windfall going to the taxman.

As the capital option will mean no tax bill at all for almost all Irish shareholders, is the income option, the possible cost of inaction is high indeed.

As the deadline is almost a month away, there is plenty of time to contact Vodafone on the helpline (01-6968421) and get them to send out the relevant white forms. Given the number of shareholders involved, I’d do that sooner rather than later. You’d hate to get caught by tax for the sake of a quick phone call.

On your second point, you can sell your Verizon shares cheaply as part of this process – and as you get only one Verizon share for every 35/40 Vodafone shares that might make a lot of sense. However, there is nothing in the current deal to facilitate a low cost dealing option for shareholders on their Vodafone stake itself.

I have raised the issue with the company – with shareholders holding as few as 50 Vodafone shares, or even less – the standard costs in selling shares effectively force them to hold on to their stock, especially as it is still trading at a loss. If anything emerges, I’ll certainly let you know.

On the final point, it is worth remembering that Irish shareholders form a tiny fraction of the overall value of Vodafone shares. And, in many countries, the capital option is not possible. On that basis, it made more sense for the company to make the income option which can apply in all jurisdictions the default.

As you note, at least for those Irish shareholders who first bought shares in Telecom Éireann and then received their Vodafone stock in the sale of the Eircell mobile division, the only sensible choice is the capital option, under which they will face no liability for tax at all even if selling the Verizon stock immediately.

Of course, before anyone gets too carried away with their tax free “windfall”, it’s worth remembering that the reason you will have no capital gains tax liability is that, even with this payback of cash and Verizon shares, Vodafone shareholders are still losing money on their original investment.

Signature issue on Vodafone forms
In your Irish Times Q&A last week, you say that in the case of shares held for a child that both the signature of the child and the parent are required for section 4A. I called the help line on 01-6968421 (twice) and they definitely state that only the parents’ signature is required. Please clarify

Mr JR, email

Your question is very relevant because, as the form makes clear, any form not correctly completed and signed by “all named shareholders” will not be deemed valid. That means you’ll get the default option which could prove a very expensive error as outlined above.

The information provided to me was that all those named on the share certificate were required to sign the white Form of Election to indicate how they wish to receive their “return of value” – ie the cash and Verizon shares.

I have now gone back on foot of your query to check again.

I’m told it is a matter of interpretation but, in the view of the people to whom I was speaking, if the shares are in the names, say of John and Mary Jones, there are two registered accountholders. If they are in the names of John, Mary and Jim Jones, then it is three shareholders, etc.

However, if there is something like John A/C Jim Jones (as would have been the case I am told for many of those who applied on behalf of their children) then it is deemed to be a “designation” and John Jones would be considered as the only registered owner of the shares.

Vodafone has unnecessarily muddied the water on this one because on the white “form of election: return of value” form itself, in defining “all named shareholders” the form states immediately thereafter “as printed at the top of this form”.

In several instances among shareholders to whom I have been speaking have noted that both they and their child are named at the top of the white form of election.

If this does lead to people losing out on the capital option, I would not be surprised to see Vodafone facing a threat of legal action. Former Eircom shareholders are already ticked off enough about the loss incurred over the past 15 years without facing an avoidable tax bill because of confusion over something as simple as who should sign the form.

Separately, but related, I have also been informed that, when the children turn 18, the shares intended for them should have been transferred to their names. It makes sense but I wasn’t aware of the obligation which I will have to return to at some point. I certainly would not encourage anyone to go transferring shares in the middle of the current process. Better to sort such matters out after this “return of value” is complete.

Capital option makes sense
I am considering opting for the capital gains option rather than income tax option because of the accumulated loss on Eircom shares bought in the original offer and not subsequently sold, do you concur? I am unsure if I should hold onto the Verizon shares I will receive or if I should sell them through the “dealing facility”, any comments?

Mr SW, Wicklow

In your case, the capital option is the only one that makes sense. As explained above, it means no tax bill for you.

So what then? In part, that depends on your assessment of the worth of Verizon shares but there also more practical issues to consider.

While it is not yet certain what the precise proportion of the windfall will be in cash and how much in Verizon stock, it is likely to result in Vodafone shareholders in Vodafone holding one Verizon share for somewhere between every 35 and 40 Vodafone shares you hold now before the whole exercise begins.

If you are one of the many Irish shareholders with between 40 and 50 Vodafone shares, you’re going to receive just one Verizon share (with the fractional balance paid over to you in additional cash). Even if you look at the average holding in Ireland, you will receive somewhere between 30 and 35 Verizon shares.

Trying to sell a single share is simply not worth the hassle and you’d certainly be advised to get rid of it through the commission free dealing service on offer as part of this transaction.

Even if you have 30+ shares, it’s questionable if you want to hold them. If you are trading through an Irish broker, it will be costly to sell these subsequently, You could use a US or online broker but none of the, much like one off traders, and charge accordingly.

A separate but equally relevant issue is your exposure to equities. If like many Irish Vodafone shareholders, this is the only stock you own, you are now going to receive shares in a second company but one that operates in the same sector. That is not doing much for the notion of diversification which helps you spread your risk.

Ultimately, this is a choice you have to make. If you are looking at holding on to a small number of Verizon shares, you should do your homework first on the company’s prospects and those for the markets in which it operates.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email to This column is a reader service and is not intended to replace professional advice 

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