Time & Attendance
By Steve Daniels
Jan. 20, 2012
Aon Corp.’s headquarters move to London from Chicago is supposed to benefit shareholders by lightening the company’s tax burden and raising its earnings.
But the maneuver appears as if it will have precisely the opposite effect on one of Aon’s largest shareholders, company founder and retired Chairman Patrick Ryan. If shareholders approve the move, Ryan is expected to get a tax bill in the tens of millions, based on a reading of the company’s registration statement, filed Jan. 13 with the Securities and Exchange Commission.
Ryan and his spokeswoman didn’t respond to repeated requests for comment.
The unexpected tax liability adds a tangible dollars-and-cents hit to the symbolic blow to Ryan resulting from Aon CEO Greg Case’s decision to move the company’s corporate headquarters and domicile to London. Ryan for decades has been one of Chicago’s most prominent businessmen and a loyalist to the city and its political leaders. Then-Mayor Richard M. Daley tapped Ryan just a few years ago to lead the city’s unsuccessful bid for the 2016 summer Olympics.
Ryan founded his namesake commercial insurance brokerage in the 1960s and merged it with another well-known Chicago company, W. Clement Stone’s Combined Insurance Co., to form Aon in the 1980s. Ryan grew the firm to become the world’s second-largest insurance broker and remained its CEO until 2005, when former McKinsey & Co. executive Case succeeded him.
For long-term shareholders like Ryan — who was Aon’s fourth-largest owner, with 12.8 million shares, or 4 percent of the company, as of March 2011, his most recent filing — the creation of the new Aon U.K. company will be treated as an “exchange” of shares that’s taxable for U.S. stockholders, according to Aon’s filing. Shareholders then will pay capital gains taxes on the difference between the value of the new shares and their basis in the old stock.
For Ryan, whose basis in the stock is believed to be low given his status as company founder, the difference is likely to be significant.
Here’s how the Aon filing puts it: “In general, for U.S. federal income tax purposes, a U.S. holder should recognize gain equal to the excess of the fair market value of the Aon UK shares received by the U.S. holder pursuant to the merger over such holder’s adjusted basis in the Aon Delaware shares exchanged therefor.”
Ryan hasn’t disclosed what the basis in his Aon shares is. But a conservative estimate is $30 per share. At Aon’s current price of about $47 per share, that would create a $17 capital gain. With 12.8 million shares and a $17 gain, Ryan’s tax would be nearly $33 million at the 15 percent long-term capital gains tax rate. At a $20 basis in the stock, his tax bill could be as much as $52 million. And if his basis is really low — say, $5 — the tax jumps to about $80 million.
Ryan was said to be upset about the tax situation by people familiar with his thinking. These sources didn’t know, however, what his estimated tax bill was going to be, other than that it was significant.
Case and Aon Chairman Lester Knight, a longtime family friend of Ryan’s, informed him of the plan to move the headquarters on Jan. 12, the day before the announcement, according to people familiar with the matter.
The company justified the move, which will send less than 20 executives to London even as the company shifts 750 more jobs into Aon Center downtown, as a way to be closer to emerging markets, where it sees much of its future growth and as a way to cut its corporate taxes. Analysts roughly pegged the potential value of the corporate tax maneuver at 40 cents per share — about 12 percent of Aon’s projected 2011 earnings — over the next several years.
Three Chicago businessmen whose tenure on Aon’s board dates to when Ryan ran the firm abstained on the board vote to move the headquarters. They were McDonald’s Corp. Chairman Andrew McKenna, who became a director of Ryan’s firm 42 years ago; William Blair & Co. Chairman Edgar Jannotta, and Ariel Investments LLC CEO John Rogers.
An Aon spokesman acknowledged in an email that shareholders would be subject to capital gains taxes depending “on when you bought stock.” He also said that applies to employees who hold stock depending on their circumstances. He declined to comment further.
The tax issue raises questions about whether shareholders, who must approve the headquarters move, will balk.
“Leaving Mr. Ryan aside, the fact they’re going to create a taxable event is an important consideration for every individual investor,” said J. Paul Newsome, an analyst at Sandler O’Neill & Partners in Chicago. “If I were the company, I would think about the impact on employees.”
But analysts, including Newsome, doubt shareholders will reject the proposal. Like most big corporations, Aon’s shareholders are mainly institutional investors. They manage money in large part for retirement plans, which aren’t subject to taxes. Likewise, individual investors who hold Aon stock in retirement plans don’t have to pay capital gains taxes, either.
The same goes, of course, for Ryan and Aon’s employees. To the extent their Aon stock is in retirement plans, they won’t be subject to the capital gains tax.
Ryan’s filing says he and his wife, Shirley, together hold 12.8 million shares, some of which are held in trust for beneficiaries.
Of course, Case, too, is a significant shareholder and presumably will have to pay capital gains taxes on his holdings. He held more than 447,000 shares as of last March, the most recent filing available. But, in return for agreeing to move to London, Case is in line to receive various move-related benefits of $561,000 annually in cash on top of his $1.5 million salary, according to an analysis of company filings by Chicago-based Morningstar Inc. analyst Theo Francis.
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