FT: Suing over Northern Rock
Papadillos
Financial Times
Published: February 18 2008 13:08
Northern Rock investors may be talking tough, but they face a hard battle
for compensation for the companyąs nationalisation. Claims in either UK or
EU courts for unfair taking of private property would rest on what the
shares were actually worth. The small shareholder coalitions and the hedge
fund SRM contend their holdings have a book value of about 450p a share, but
that claim is on thin legal ice, given the high risk nature of many Northern
Rock mortgages.
Other methods of valuing the bank yield far lower numbers. Northern Rock
shares closed at 90p Friday, and the Virgin bid rejected by the government
amounted to about 50p per share, if a pessimistic view on writedowns are
included. The government can also argue that the shares are worthless
because Northern Rock would have gone into administration last autumn
without government help. In the last big UK nationalisation, Railtrackąs big
shareholders settled for 250p per share, not far off the 280p final closing
price, but well below early claims of about 400p.
If Rock shareholders can dig up evidence of ministerial lies, regulatory
failures or unnecessary dithering, they could claim government negligence or
misfeasance. Key episodes could include Lloydsą interest in Northern Rock
before the collapse and Sundayąs decision to reject the private sector bids.
But misfeasance claims are hard to win, as BCCI and Railtrack shareholders
found out. In the Railtrack case, the judge was not swayed by evidence that
the transport secretary had misled parliament about his plans to push the
company into administration.
Costs serve as another barrier. The Rockąs hedge fund investors could
finance a legal challenge, but the UKąs loser-pays system puts them at risk
of huge charges in the event of an unsuccessful claim. Investors may hope to
stir up enough political pressure to embarrass the government into upping
the pay-out. In practice, pacifying shareholders is likely to be low on the
governmentąs list of priorities.
http://www.ft.com/cms/s/1/ecb39ca8-de21-11dc-9de3-0000779fd2ac.html