THE shareholder legal actions against Royal Bank of Scotland and Lloyds Banking Group stemming from equity value destruction during the financial crash continue to cast a long shadow over the banks. writes Martin Flanagan
The Lloyds Shareholder Action Group was the latest in court last week, winning at a pre-trial hearing the right to see the legal advice Lloyds directors had received when recommending to investors the takeover of the terminally listing Halifax Bank of Scotland (HBOS) in late 2008/09.
At the core of both lawsuits is the allegation that the RBS and Lloyds’ boards failed to disclose the truth about the financial position surrounding major decisions affecting shareholders they made at the height of the banking crisis.
RBS is alleged to have misled shareholders on its financial strength in the prospectus for its £12 billion rights issue in 2008, the cash call coming just months after then-chief executive Fred Goodwin denied the bank needed fresh capital following what proved to be its disastrous acquisition of ABN Amro the previous autumn.
Meanwhile, equally angry, out-of-pocket Lloyds investors claim that bank’s board breached its duty to them by not disclosing major financial lifelines HBOS was getting from the Bank of England, US Federal Reserve and Lloyds itself in the shareholders’ circular asking for their support for the HBOS acquisition. The latter proved every bit as disastrous for the group as ABN Amro was for RBS.
Even though between hundreds of millions and billions of pounds are being sought in the legal actions, which both banks have said they will contest vigorously, I think the cases are more damaging in public relations terms than in their financial implications.
Given the immense profitability of the top-echelon banking industry in anything approaching good times, the damages being sought are not significant for RBS and Lloyds in the broader shape of things.
And the banks might not lose. Showing the challenges the shareholders face, in 2012 US courts found in RBS’s favour regarding two similar lawsuits by holders of the bank’s preference shares and American depository receipts.
And a report in 2011 into RBS’s near-collapse into majority taxpayer ownership by the defunct financial regulator, the Financial Services Authority, found evidence of poor management decision-making but not dishonesty or lack of integrity.The latter are criminal, but incompetence and flawed management cultures are not. Meanwhile, although current managements at the two banks are not implicated in the legal actions they continue to hang round the banks’ reputational necks.
And it is not going to go away soon. The date for the RBS hearing is December 2016, and the Lloyds trial is virtually certain not to start before then, at the earliest.
The lawsuits are like Banquo’s ghost at the banks’ attempts to reinvent themselves in the public eye.