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Lloyds Shareholders Lose Case

After many months of deliberation, a judge in the High Court has rejected the claims by former Lloyds TSB shareholders over the takeover of HBOS and recapitalisation of the company by the Government. That resulted in major capital losses to Lloyds Banking Group (LLOY) shareholders and suspension of the dividends which many private shareholders relied on for income.

For those not familiar with the case, this stems from the events in 2008/9 when all banks came under severe financial pressure. HBOS was clearly in major difficulties due to imprudent commercial lending although how bad its position really was only became public much later. But there seemed to be only two credible options as nobody was willing to refinance it – nationalisation by the Government or a takeover by another large bank. Lloyds TSB agreed to do the latter with Government financial support. A prospectus was issued and voted upon. The shareholders supported it based on what they were told, but many institutional shareholders held both Lloyds TSB and HBOS so had a vested interest in the deal going through.

Note that this writer had an interest in the case because I held some shares in Lloyds TSB but I was not a claimant in the litigation because I sold most of my shares as soon as I knew the deal was going through thus minimising my losses. However I did provide a witness statement to the court via solicitors Harcus Sinclair who represented the shareholders. I did write some articles at the time complaining about the deal and its likely effect on shareholders and met with Sir Victor Blank, then Chairman of Lloyds TSB who defended the actions of the company.

The claim which was against the company and the directors was based on two specific issues: 1) that the directors had recommended the deal when it was not in the interests of Lloyds TSB shareholders which is all they should have considered; and 2) the prospectus did not disclose the financial support in loans received by HBOS from Lloyds, the Bank of England and the US Federal Reserve. Prospectuses should disclose all relevant information under the relevant legislation.

It seems the court judgement was that the directors were not negligent in recommending the acquisition of HBOS and that the failure to disclose the HBOS funding would not have affected the outcome of the vote on the deal. But the judge acknowledged that the failure to disclose the funding was wrong.

Last week I gave a talk on Business Perspective Investing in which I argued that company accounts are not be relied upon. This latest judgement implies that a prospectus is now not be relied upon either. It can be grossly misleading but nobody will be held to account for that.

This is a most disgraceful outcome and I hope that an appeal is made.

The costs of pursuing this legal case are also a disgrace. Lloyds solicitors expected to run up costs of more than £25 million and there were probably similar costs incurred by the other party. There were weeks in court and it was a pretty impressive scene when I attended with at least 6 barristers in wigs and gowns plus about another 10 supporting legal staff. In essence what were in essence quite simple issues became a beanfeast for lawyers and demonstrates much of what is wrong with the English legal system. It’s now ten years since the events on which the litigation was based took place and many claimants have since died. And at the end for all that time and expense, justice was not well served.

If shareholders in such a major and simple case supported by litigation funding cannot obtain justice, what chance do they have in the case of misdeeds by directors in smaller companies? None at all in summary.

Go here if you wish to read the full judgement of the case: https://www.judiciary.uk/judgments/sharp-others-v-blank-others-hbos-judgment/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

2 Comments
  1. marben100 17th November 2019 at 1:28 pm

    Thanks Roger,

    Whilst I wholeheartedly support your views about the difficulty of shareholders obtaining justice and redress when directors act against their interests, you say: “This latest judgement implies that a prospectus is now not be relied upon either. It can be grossly misleading but nobody will be held to account for that.”

    However, surely the judge’s view (according to your summary) was that whilst the prospectus contained flaws/omissions, it was NOT grossly misleading. Counsel for the claimants failed to prove that to the judge’s satisfaction.

    Best,
    Mark Bentley

  2. rogerwlawson 17th November 2019 at 2:43 pm

    It does not have to be grossly misleading. There were significant omissions in the disclosure, and the judge agreed they should have been included, i..e they were not trivial. Omissions from a prospectus are surely a breach of the FSMA Act and hence the FSA/FCA should be taking steps to pursue those at fault. But will they? The judge’s view was that the omissions made no difference to the outcome but that is an opinion and my view is that the outcome would have been very different if the disclosures had been made. But these are both suppositions when judges should stick to the facts which are beyond dispute. But any fool could see that the outcome for Lloyds TSB shareholders would be very poor so why did the directors recommend it?

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