Lloyds ordered to reveal legal advice

Sir Victor Blank chaired the Lloyds board at time of HBOS takeover. Picture: Getty

The ruling, by Mr Justice Nugee in a pre-case hearing in London, was hailed as a victory by the Lloyds Shareholder Action Group, which is suing the bank and five of its former executives. They allege investors were misled over the financial weakness of HBOS.

About 6,000 claimants, including 300 institutional investors in Lloyds, claim they lost about £350 million as the share price of the merged group plummeted when the full scale of the problems at the acquired business later came to light.

They say Lloyds breached its duties to shareholders by failing to reveal in a shareholder circular seeking approval for the acquisition financial lifelines worth some £25.7 billion and $18bn provided by the Bank of England and the US Federal Reserve to HBOS during the crash.

The circular, ahead of an extraordinary general meeting (EGM) of shareholders to approve the deal, also did not mention a £10bn loan facility Lloyds had given HBOS.

Lloyds repeated after yesterday’s hearing that it would “robustly contest” the action, saying it has no legal basis, while the judge granted the bank’s lawyers permission to appeal against the ruling.

Alan Steinfeld QC, representing the shareholders, told the first High Court case management conference related to the action that the bank’s decision not to disclose the “covert support” HBOS was receiving “distorted the market and artificially inflated its [HBOS’s] price”.

He said: “Nobody but a mad man would have agreed to exchange their shares [for HBOS stock], thereby diluting their Lloyds shares, if those [HBOS] shares were worthless.”

Steinfeld said the Lloyds board, led at the time by chairman Victor Blank and chief executive Eric Daniels, was entitled to its opinion that the acquisition was a good one for shareholders.

But he said the secret financial lifelines from the authorities and Lloyds itself should have been disclosed. “They knew about the covert support.

“That’s admitted. They deliberately chose not to disclose it.” Steinfeld said this was particularly important as “HBOS was teetering on the brink of total collapse”.

Helen Davies QC, representing Lloyds, argued at the hearing that by precedent shareholders’ rights to know the privileged professional legal advice to their company was “subject to a cutoff” by litigation, the threat of litigation or the “reasonable contemplation” of a legal action.

She said that just because shareholders at the time of the takeover had refrained from forming themselves into a group to launch an action it did not mean litigation was not being contemplated.

However, Steinfeld, for the shareholders, countered that statements by Blank soon after the announcement of the HBOS takeover offer showed the bank’s directors “clearly did not expect litigation” after they had given “incomplete and potentially misleading” information in the shareholders circular.

Blank had said publicly that the deal was “overwhelmingly in the interests of our shareholders”, Steinfeld said.

He added that many shareholders, far from contemplating a lawsuit at the time, had voted in favour of the deal based on the incomplete information.

• The Financial Conduct Authority yesterday said it could not give a date for the long-delayed report into the failure of HBOS, adding only that it would come out “as soon as practicable”. It was originally due to be published at the end of 2014.