Litigation & dispute resolution articles

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Budget Summary 2010 | For business clients
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19 January 2010

Shareholder Battles - the Court of Appeal beckons the Rock

18 February 2009



Friday 13 February 2009 was definitely unlucky for the shareholders in Northern Rock who challenged the Government's entitlement to nationalise the Rock without providing compensation to them as a going concern says Sarah Jackson, senior associate in the litigation and dispute resolution team.

Lord Justice Stanley Burnton and Mr Justice Silber expressed sympathy with the former long-term shareholders who thought their investment was safe. The last turbulent 18 months has shown that no blue chip investment could ever be classed as "safe" and that shareholders, particularly those of nationalised or part nationalised banks, could be in for a raw deal.

The Judges in the Northern Rock case ruled that the Government's compensation scheme, based on a valuation made on the assumption that the bank was in administration and no longer a going concern, was not unfair: "We have come to the conclusion that the provisions made for the compensation of the shareholders of Northern Rock do not infringe their rights."

The result of this ruling is that the shareholders stand to receive as little as 5p per share compared with what they say a fair value is of £3 - £4 per share. In contrast, the Government stands to make a tidy profit when the bank is eventually sold off. This is perhaps, as others will no doubt argue, good news for the long suffering tax payer who has been bailing out these banks.

The private shareholders, which included former and existing Northern Rock employees, backed by the UK Shareholders Association have been given permission to appeal the decision to the Court of Appeal. Their case was that "the basis of valuation was unfair: Northern Rock, was at the date of nationalisation, in fact a going concern, with a strong mortgage book and an excess of assets over its liabilities." They had sought a declaration that the compensation provisions were incompatible with the human rights principle that taking property by the state must be balanced by compensation that reasonably reflects the value of that property.

The Government lawyers relied on the fact the Treasury and the Bank of England had provided substantial financial assistance to Northern Rock by way of loans and guarantees, without which it would have gone into liquidation. They argued the shares should be valued on what they would have been worth without that assistance, which is what the legislation provided.

The Court found that "Ultimately… they entrusted their investment to the hands of the management of the company. As it turned out, their business plan was flawed and could not survive the unprecedented circumstances of the latter part of 2007."

The next instalment will be battled out in the Court of Appeal but the result does not bode well for the shareholders of RBS and Lloyds Banking Group who still face the possibility of nationalisation with little, if any, compensation. A final note: the two hedge fund claimants in this case must rue the day they bought more shares in the Rock after the nationalisation announcements. Those 'cheap deals' do not look like such a good bargain now…

If you require legal advice, for either your private affairs or organisation, please call Thames Valley based B P Collins Solicitors on 01753 889995, complete the online enquiry form or email enquiries@bpcollins.co.uk.