RBS £200m payout could lead to similar group litigation brought by small investors in other companies.
You may recall that investors alleged that RBS had misled them over the state of its health before a £12bn rights issue in spring 2008. Most of that investment was wiped out soon after, when RBS required a £45.5bn taxpayer-backed bailout.
Thousands of retail investors and institutions worked together to bring a court case that was due to start in May. But over the previous few months, a number of institutions and other investors — representing nearly 90 percent of claims by value — agreed to a settlement worth between 41p and 43.2p per share.
The deal struck in early June with thousands of retail investors at double that price is a sign that individuals can successfully pursue a group litigation case. So expect similar action in the future.
Other group litigation cases with similarities to RBS are already in the pipeline. A case against Lloyds Banking Group, which was only freed from the shackles of government ownership last month, is due to commence in October. Again, it is being brought by thousands of investors who complain about the bank’s rescue of the beleaguered HBOS in 2008. Annoyingly the action group is no longer open to new members so I cannot join it! I found out too late.
Investors allege they lost about £400m as a result of the deal and that HBOS shares were “valueless” at the time. They claim they were misled into approving the HBOS merger as key information over the true financial health of the bank was withheld.
Stephen Rosen, a partner at law firm Collyer Bristow was quoted as saying “there are litigation funders who are actively looking to fund shareholders’ actions.”
With more litigation funding readily available, the success of the RBS investors could inspire more small shareholders to take action.
Letter in the FT from ShareSoc Director Cliff Weight on why the SFO, CPS and/or BEIS should be given more resources and told to pursue problem cases much more speedily. Companies should not be allowed to hide behind expensive lawyers.
RBS case shows why trust must be rebuilt in business.
In recent months your chairman has found it increasingly difficult to reconcile the views of the ShareSoc board in certain areas of style and presentation, and this has started to impact the effective functioning of the society.
Following a lengthy discussion at the May board meeting, it was agreed that Roger Lawson will cease to be a director of ShareSoc.
ShareSoc owes a huge debt of gratitude to Roger. As founding chairman, he set the strategic direction for the Society and presided over its development into a multi-faceted organisation providing its members with information, education and networking facilities while campaigning on your behalf at both policy and company level. Roger is extremely knowledgeable and diligent, and has put an immense amount of work into the society. He has done all of this without receiving any form of remuneration.
Roger will be a lifetime honorary member of ShareSoc, and we hope that he will continue to be involved in specific campaigns and to provide input into the society’s blog and newsletters.
The board has recently undertaken a skills audit, and we are looking to attract new directors in the coming weeks. Our intention is to further deepen the knowledge and resources available to your society, thereby increasing its appeal to a broader membership base.
We recommend (with reservations) that shareholders vote in favour of the resolutions to merge Foresight 3 & 4 and to raise additional funds of £50 million, and possibly up to £100 million, (including a possible over-allotment facility for an additional £50 million).
In summary, we acknowledge the recent communication and documents outlining the terms of the merger, but we are disappointed that the directors were unable to negotiate better terms for shareholders. There are positives but also negatives: on balance we think shareholders should not oppose the merger, but going forward there need to be changes to the Board of Directors and/or improved corporate governance. ShareSoc may put forward proposals via resolutions at the next AGM to address these outstanding issues.
Considering these points, we think it is better to support the directors at this time. There are a number of good points, highlighted in the Companies’ shareholder letter. The good points include:
- Regular buy-back programme
- Commitment to narrow the share price discount to below 10%
- New monies remove lack of liquidity concern.
However, we have a number of remaining concerns, which we think should have been addressed:
- Directors should have negotiated better terms, i.e. high ongoing management fees and incentives. The fees for the fund manager are still high by industry standards (n.b. the AIC publish fees data).
- Historically the directors have made some mistakes, such as paying dividends which may have been in contravention of CA 2006 S847 which requires companies to have distributable reserves in filed accounts. Foresight dispute this claim, but they may have mistakenly stated the distributable reserves on the balance sheet which, in turn, may have impacted the directors’ explanations of why they were not willing to pay higher dividends. Those responsible have avoided the blame and this merger will provide the opportunity to sweep these issues under the carpet.
- The manager seems to be benefiting more than the shareholders. The benefits for the shareholders should be more. The contribution to costs by Foresight is very small compared to the fees they will earn from the fundraising both as promoters and on higher net assets.
- Merger costs are too high and higher than elsewhere.
- Cash drag (assuming significant levels of cash will be raised) as a result of having lots of cash for some time, by raising so much new money at an opportune moment. This may create an incentive and temptation to make risky investments.
- New chairman was previously a board member of Foresight 4, so has been involved with two badly-performing VCTs. We question his value and hope that he will step down after, say, 12 months.
- New director (Mr Gray) has no relevant experience and appears to have been hired by the two exiting directors – both of whom stepped down after ShareSoc’s campaign. (Note: Michael Gray qualifies as independent by all parameters used to determine independence, under corporate governance and listing rules.)
- Tender offer is too low in size and no reasons given for why so. No detail has been given as to which assets are being realised/sold to raise the funds for the dividend/tender, but the most obvious and simplest would be Datapath, in total or in part, an investment which is by far the largest holding in both funds.
- No information was provided in the shareholders’ letter on the NAVs of the two VCTs on which to judge recent performance (last is Dec 2016).
We had hoped that the above issues would be addressed but they have not been.
However, we think it best to support now and to reserve our position to oppose the re-election of the new director Mr Gray and possibly others at the next AGM; and possibly to propose alternative directors or a shareholders’ committee.
A number of shareholders have worked hard on this campaign and their efforts are much appreciated. There are complex issues involved and we do not all agree on everything. One important view (but a minority view of those shareholders involved) was that the ShareSoc Campaign should not be happy to endorse this untimely merger.
Individual shareholders will make their own decisions but we hope the above guidance is helpful and lays out the main arguments we have considered.
Cliff Weight, ShareSoc Director