Royal Bank of Scotland spends £1bn in bid to avoid High Court trial over 2008 rights issue

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Investors Launch £4bn Compensation Claim Against The Royal Bank Of Scotland
The Royal Bank of Scotland trial was due to last for 14 weeks (Source: Getty)

Royal Bank of Scotland has spent more than £1bn fending off a high profile court case over its disastrous rights issue in 2008.

The majority state-owned bank's mammoth bill consists of legal fees and out-of-court settlements with shareholders.

The RBS shareholder action group yesterday informed the High Court judge that it was accepting a £200m, 82p-per-share compensation offer on behalf of the 9,000 investors it represents.

This means the bank and disgraced former chief executive Fred Goodwin are almost certain to have avoided an embarrassing 14-week trial.

Labour’s Rachel Reeves, who served on the Treasury Select Committee until parliament was dissolved last month, said MPs may consider calling Goodwin to face more questions.

"After everything Fred Goodwin did, destroying jobs and pensions, I think it’s very disappointing he won't appear in court." Reeves told City A.M.

"A lot of questions remain that he should be held accountable for. When parliament returns, this might be something for the Treasury Select Committee to look into."

The latest £200m settlement marks the final RBS payout to investors who were suing the bank over a 2008 cash call of £12bn, which was made shortly before the bank had to be rescued by the taxpayer.

The 9,000 investors to benefit accounted for 13 per cent of the original claim, and were suing for £520m. RBS has previously paid out around £700m to the first 87 per cent of claimants, the majority of whom accepted half of the final settlement offer, 41p per share.

In addition to the £900m of settlement costs, RBS also ran up a legal bill of at least £100m. These legal expenses were expected to balloon by a further £25m in court.

RBS shares fell three per cent yesterday.

Read more: RBS “diehard” investors in race to cover legal costs

The final decision to accept the 82p settlement offer, which is due to be confirmed in a short High Court hearing today, was voted on by directors of the shareholder action group on Monday evening. The High Court was informed of the decision for an 11am deadline.

The decision came despite thousands of retail investors apparently being determined to hold out for the trial, or push for a higher compensation offer. Shareholders had been hoping for at least 92p per share.

However, bigger claimants, including the 20 remaining institutional investors, had accepted the offer. Crucially, Preston North End Football Club owner Trevor Hemmings, who as well as being a claimant was providing funding for the group, had accepted the offer, as had litigation funders Hunnewell Partners and London & Northern Capital Partners.

Despite strong advice from the shareholder action group’s lawyers to accept the 82p offer, a so-called “diehard” group of retail shareholders, numbering in their thousands, appeared determined to plough on with the action.

The group believed they needed to raise £7m to cover the legal costs. Neil Mitchell, the former chief executive of software company Torex Retail and an ex-customer and investor in RBS, was one of those fighting to keep the case alive.

On Monday night, as the directors of the action group were voting to accept the 82p offer, Mitchell agreed a £2m deal which he said meant the £7m of fees could be covered in full.

Many of the remaining 9,000 investors will be disappointed with the 82p-per-share offer, which is below the previous target of 92p to 234p. However, lawyers and those at the top of the group feared a trial could lead to a smaller payout.

In a heated meeting last Friday, RBS chief executive Ross McEwan is said to have made clear that the lender would be offering nothing more as a settlement.

The final, seemingly binding, decision to accept the 82p-per-share offer was voted for on Monday evening – after the group had received backing from more than 70 per cent of remaining claimants by value.

But the shareholder action group had already written to the claimants it represented on 27 May to lay out its reasons for recommending the offer. The letter highlighted a series of ways the trial could go wrong and explained that the process could result in “more costs being incurred and more delay”.

Read more: A settlement would shred Fred's RBS inquisition

In addition to shareholders being disappointed not to land a greater payout, there will be wider disappointment that former RBS boss Goodwin will not appear in the dock.

During seven years heading up RBS, he made more than 20 acquisitions as he sought to build up a banking empire. He hoped a 2007 takeover of ABN Amro would be his crowning glory. But this deal ultimately led to the bank’s taxpayer bailout and his own downfall.

Former Liberal Democrat business secretary Vince Cable, who has been following the case closely over a number of years, told City A.M.: “Obviously, I think it’s something of a disappointment that the people who were the source of the RBS crash are not having to defend themselves in court.

“But it’s right that the shareholders should make the decision in their own interests, and it will also save the bank shareholders – i.e. you and me and the taxpaying public – a great deal of money in legal expenses.”

Goodbody banking analyst John Cronin said: “While some of the general public would, no doubt, like to have seen former chief Fred Goodwin have his day in court, the existing RBS shareholder base will be largely pleased with the news that this distraction is finally behind the management team, allowing them focus more intensively on getting on with the important task of restructuring the bank – with substantive progress already made on this front.”

As RBS, which is still 71 per cent owned by the taxpayer, moves on from its rights issue legal action, attention will soon turn to Lloyds Banking Group, which is facing a similar case later this year.

Lloyds, which the government sold its final stake in last month, and its former executives are due to appear in court in October.

The Lloyds/HBOS Shareholder Action Group, comprising 6,000 former Lloyds TSB investors, is suing the group for between £300m and £350m.

They claim that Lloyds failed to make shareholders aware of the “parlous state” of HBOS before it was acquired by the firm in 2008.

Five former directors, Sir Victor Blank, Eric Daniels, Timothy Tookey, Helen Weir and George Truett Tate, are named as defendants in the case.

The shareholder group, represented by law firm Harcus Sinclair and made up of around 5,700 private shareholders and 300 institutional investors, confirmed the case is due to begin on 2 October and is listed to run for 12 weeks.

Lloyds has said its position is that “we do not consider there to be any merit to these claims and we will robustly contest this legal action”.

RBS trial timeline

22 May: Trial adjourned for 24 hours at last minute as RBS makes last-ditch, 82p-per-share settlement offer

23 May: Trial adjourned for another 24 hours; court is told "the majority of claimants have indicated their willingness to accept the latest offer from the defendant"

24 May: Judge adjourns trial for third time, this time until 7 June, for settlement to be reached

27 May: Shareholder action group writes to claimants saying it will be accepting 82p-per-share offer, warning of risks it will not achieve a better outcome

Big shareholders, including institutional investors and Trevor Hemmings, who was funding a large part of the action, have accepted the offer, leading to a lack of funding for the legal fees

1 June: Thousands of retail shareholders scramble to fundraise £7m in legal fees, which some believe will be enough to force through the trial or gain an improved settlement offer

2 June: Shareholder action group meets RBS chief executive Ross McEwan, who refuses to raise the offer further

5 June: Directors of action group vote to accept 82p-per-share offer, sources tell City A.M.

6 June: Shareholder action group informs judge of acceptance, according to sources

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