Northern Rock shareholders fight on

29 July 2009

Sarah Wilson

EU regulation

Northern Rock's former shareholders have lost their bid for a judicial review of the nationalisation compensation scheme but have vowed to press their claims in the the House of Lords and, potentially, the European Court of Human Rights.  The House of Lords appeal could be heard in summer 2010 but  an appeal to the European Court could take between one and three years.

This is the second stage of the legal battle by the former Northern Rock shareholders who are seeking up to £1.8 billion compensation. The investors, a mixture of hedge funds, former employees and over 100,000 private individuals claim they should be paid up to £4 a share and that the compensation scheme was in the words of SRM Global, the lead plaintiff, 'unlawful and unfair'.

The crux of the shareholders argument is that the compensation scheme is based on "false criteria" and is designed to deliver the UK government a profit when the bank is sold.  The shareholders' complaint is based on the article 1 Protocol 1 of the Human Rights Act 1998, the right to protection of property. According to the arguments, the system for calculating compensation was set up under section 5(4) of the Banking (Special Provisions) Act 2008 in such a way that shareholders were bound to receive nothing or virtually nothing from the government - even though Northern Rock still had considerable assets. Consequently the scheme fails to strike the "fair balance" required by article 1 of Protocol 1 between the private rights of the shareholders, and the public interest.

Lord Justice Laws, sitting with Master of the Rolls Lord Clarke and Lord Justice Waller, accepted that "Northern Rock's substantial assets ... will be as much a contributor to the sale price as will the support put in by the Government".  However they concluded that without the government funding, the bank would have had to have ceased trading leaving shareholders with nothing.

Northern Rock was the first government-backed UK bank bail-out and market commentators have argued that the terms of the deal were ill-thought out and hurried through as a matter of political expediency. Subsequent bail-outs have been structurally significantly differently with shareholders typically retaining a proportion of the equity, albeit significantly diluted.

SRM and RAB Capital are bearing the costs of the case with support from Legal & General.

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