Covert financial lifelines HBOS received in the 2008 crash from central banks and eventual buyer Lloyds would have scuppered the takeover if they had been publicly known, lawyers for a shareholder action group claimed yesterday.
About 6,000 claimants, including 300 institutional investors in Lloyds, say they lost about £350 million in total as the share price of the merged banking giant plummeted when the full scale of the problems at HBOS later came to light.
Lloyds Action Group (LAG) alleges Lloyds breached its duty to shareholders by failing to reveal in a shareholder circular seeking approval for the acquisition funds worth £25.7 billion and $18bn from the Bank of England and the US Federal Reserve.
At a pre-trial legal hearing in London, Stuart Adair, counsel for LAG, said if the information had been divulged to the market, the HBOS share price would have “dropped like a stone”, making clear that the 0.605 Lloyds shares being offered for every HBOS share was a “gross overvaluation”.
Adair said: “If that information had been released to the market there would have been no bottom to the level HBOS shares would have sunk.”
He said the lifelines, including a £10bn loan facility Lloyds had given to Bank of Scotland-owning HBOS, were “highly material information. The fact that it was not disclosed was distorting the market.”
Lawyers for Lloyds Banking Group and five former directors, including chief executive Eric Daniels, are seeking a pre-trial ruling from Mr Justice Nugee seeking a “strike-out” of shareholder allegations that HBOS was valueless.
Helen Davies QC, for the defendants, said HBOS had “liquidity issues” at the time, but added “you cannot leap from that to say it has no value at all at the time of acquisition”. She said three sets of independently audited Lloyds accounts between 2009 and 2011 had given a £18.96bn figure of a fair value of HBOS’s net assets, and a “net gain” to Lloyds of £11.173bn on the acquisition.
However, Adair countered that the “so-called profit” on the transaction was only derived from a technical “own credit” accounting adjustment by Lloyds arising from a downward revaluation of HBOS’s external debt.
The hearing is due to continue today and tomorrow.