Day Two of the HBOS competition appeal - What happened? Merger Action Group (MAG) are seeking to interrupt/ disrupt/ stop the takeover of HBOS by Lloyds TSB (in which Government as underwriter will own 43% or more depending on how many HBOS shareholders do not take up Lloyd's offer, in which case those shares remaining are bought by HM Government, current offer is £1.13per HBOS share, paid in Lloyd's shares). This is a derisory price in terms of the bank's actual size, market share and actual net asset book value. All may change if MAG wins its case. This result should force Lloyd's to have to rethink the purchase price agreement and may potentially cancel the agreement between the two banks?
The MAG legal team say they are at least getting a serious, substantive hearing (under Scottish Law in London) from the Tribunal judges. The HBOS observers say they remain confident the appeal will be dismissed, because the legal move is "an unhelpful and unnecessary distraction", which cannot be described as a serious and thoughtful take on the matter, some might say, as I do, somewhat on a par with the bank's blinkered submissivesness towards Lloyds. Managers' jobs are at stake, but not so assuredly 'at the stake' as 20,000 employees firmly expected to be 'let go' after Christmas. This Friday, we will learn whether HBOS shareholders back the merger with Lloyds TSB and will vote in effect for the job cuts and for selling HBOS for a fraction of its book value? We can expect institutional shareholders, whose hard choices are taken on behalf of numerous pensioners etc., to vote for the jobs cutting takeover as it makes little difference to them as they have more than 80% of the depreciated shares in both banks. Not so - under the takeover, called a “scheme of arrangement”, the board has to win the backing of people holding 75% of all the banks' shares (with institutions, holding more than that and expected to support the deal) - there is a rule to protect small shareholders giving holders of 100 shares the same voting weight as holders of 10 million shares! The rule says that the deal must be supported by 50% of all shareholders. This remarkably makes the institutions a minority. The decision therefore lies in the hands of small shareholders, two million of them. HBOS has merely been able to repeat parrot-fashion that "the legal action is meritless." “There is only one transaction on the table which provides certainty and benefits for our shareholders, including the 200,000 small shareholders in Scotland.” So they believe there are only one tenth the number of small shareholders left compared to what had been? Will they (2 million or 200,000) be swayed by the earlier campaign of the two knights, Burt and Matthewson, by MAG, the SNP government, the unions, or now by 'the king of Scotland' Sir Sean Connery who also supports MAG? Small shareholders (however many have held on to their shares this long) may oppose entirely the view of the banks's boards and HM Government, even though they would be expected to be most directly selfish in the matter. They are angry that so little or nothing has been done for shareholder value, which should at the very least amount to book value (net assets). They are being offered 0.6 of a Lloyds TSB share for each HBOS share, valuing the bank at under £5bn when mid-year book value was still nudging £19bn! On BBC Scotland's Politics Show, Sir Peter Burt said that Alistair Darling, the Chancellor, had been in an extremely difficult position: “In fairness has been the only solution put forward on the table. I blame the HBOS board myself, rather than the Government. If they had displayed a bit more spine than a jellyfish, they could have done a very much better deal for the shareholders, the customers and the employees.” Talking of fairness, The Times reports an attempted judo-throw. MAG was offered a deal by Lord Mandelson's lawyers that they would not seek to recover legal costs, somewhere north of £50,000 at that time, if MAG dropped the case. Other reports say the offer was in a letter from Lord Mandelson. But, legal precedent set in 1953 means that under Scots law, applicants are not liable for costs under public interest legal challenges. Mandelson's lawyers are arguing however that this is not a public interest case? There are now political calls by SNP and Lib-Dems for the minister to be hauled before MPs to answer for his actions, although as a member of the Lords he cannot appear in the Commons. About 40 lawyers are taking part in the case, 35 of them representing Lord Mandelson,HBOS and Lloyds TSB. £50 grand barely covers time-cost for a teabreak in their costs. This offer morally weakens any attempt by Government to recover costs should they win. MAG was anyway able to finesse the move by announcing Sir Sean's support and his letter that argues against the creation of a “super bank”. Sir Sean sagely observes “I never saw anything that got bigger, get better” and that from someone famous for blockbuster movies! If, however, the appeal is granted by the three judges, it means that the Tribunal is saying Lord Mandelson was wrong to set aside competition concerns raised by the Office of Fair Trading with regard to the potential merger. UK Government would appeal, to be heard by the Court of Session in Edinburgh. Could that be expedited before Friday - maybe? If not, does it mean Friday's HBOS shareholders' vote becomes "meaningless"? Er, not exactly. Shareholders could still vote a majority for yes. Institutional investors might, however, think again, factoring in what potential value might be gained or lost by delays to the takeover timetable, and the prospect of the takeover not proceeding at all? If referral proceed to the Competition Commission, the CC report would probably allow the takeover to proceed on condition that certain businesses are sold and some assets are sold or reduced as a share of the UK market, or as a share of geographical/ regional markets (Scotland and North of England). Lloyds intends to writedown HBOS assets anyway and sell parts of its business empire. What MAG might achieve is simply to get this process working the right way round i.e. Competition Commission report first, before a takeover, and not leaving competition issues to be satisfied wholly or partially or not at all afterwards - leaving this merely to the self-sering discretion of the new Lloyd's Banking Group management. The Government's and two banks' logic was that an uncontested merger to be urgently implemented for the sake of UK financial sector stability needed the UK Government to ignore competition concerns. Mr Forrester had some sympathy for Lord Mandelson. For MAG he argued that, while Lord Mandelson is entitled to take a decision to waive competition law, he had to do so based on sound advice that the public interest in the merger going ahead outweighed competition concerns. He said the Business Secretary relied on a statement from the FSA, which wrongly claimed that, under European law, a government-owned HBOS could not "compete aggressively" with private banks? Forrester said Mandelson was legally bound to take advice from the OFT, but not from the FSA, which is "not competent" to advise on competition issues. In his summing up of the case for MAG, he said "There is an elephant in the corner of the room today – and that is the Government’s policy." He said there was clear evidence from the public statements Gordon Brown and Alistair Darling made in mid-September – that were prepared to ‘rip up’ competition law - and thereby already decided the fate of HBOS. "They [the Government] had decided at the highest level that the merger would go through and that competition rules would be waived." He said "it was MAG’s contention that this had been a ‘unique’ decision and the Government’s promotion of new legislation to accommodate the move had been done entirely with the Lloyds TSB HBOS merger in mind... MAG’s challenge was based on the legality or otherwise of the Minister’s decision – a decision that should be annulled".Mr Forrester urged the judge, tribunal chairman Sir Gerald Barling QC, sitting with Michael Blair QC and Professor Peter Grinyer, to order Lord Mandelson to take into account Office of Fair Trading [OFT] concerns about the anti-competitive impact of the proposed takeover and refer it to the CC for further consideration. Mr Forrester added he made no apology for "taking instruction in the case from six sober and responsible citizens ‘who are troubled, worried and aggrieved’ that the merger would lead to a significant restriction of competition within the banking sector, particularly in Scotland."... "It is not fanciful as has been suggested for this group and their 600 or so supporters to be concerned about the impact of this merger on their personal lives, on their businesses and therefore the lives of their employees. Many of them have debts, loans, mortgages with HBOS. They are not busybodies looking over the fence at something that does not concern them. They are regular users of banking services and they will undoubtedly suffer if competition is severely reduced."
Paul Lasok QC, for Lord Mandelson, who had earlier accused MAG of using ‘spoiling tactics’ and ‘inadequate and spurious grounds’ in a bid to block the merger, claimed that MAG’s argument that there was no need for a merger after the Government had announced its banks recapitalisation measures was ‘a matter of judgement’. Lord Mandelson, he said, had exercised his judgement when he decided to allow the merger to go forward without reference to the Competition Commission.
On the opening day of the appeal on Monday, Mr Forrester had told the tribunal that the takeover was ‘preordained’ by the Chancellor and Prime Minister when in mid-September they revealed publicly that they were prepared to ‘rip up’ the rules to allow the deal through without reference to the CC. Forrester could have added that the Government also took advice on stability from the FSA and some advice (content unknown) from the Bank of England. The FSA is responsible for 'resilience' (my word) and not stability, which is BoE's remit. Paul Lasok, QC, for HM Government, said MAG's arguments could be dismissed by the tribunal for lack of required legal standing to bring a case i.e. a technicality body-swerve. He said, referring to the Enterprise Act 2002 (which builds on the Competition Act 1998) that MAG and the persons (and businesses) it represents do not have sufficient interest in the competition issues, with an additional interpretation (not strictly available in the Act) that these parties needed to have a greater interest in the deal than the public at large. "The complainants have not identified any factor that distinguishes them from customers or the general public," he said. This is a curious but weak gambit since the appeal claims a breach of the law (if Mandelson was not free to take a decision because it was taken for him by The Chancellor Alistair Darling 6 weeks earlier and that Mandelson had not taken full and proper advice before deciding to waive the necessity of referral to the CC!). It is also a weak technical objection given that John Swinney, the Scottish government's finance secretary, has given his Government's tacit support to MAG. Also, First Minister Alex Salmond told MSPs that Mr Swinney had written to Mr Justice Barling, President of the tribunal, expressing the Scottish Government's concerns, albeit that Mr Swinney was careful to state his Government was not becoming a party to the case, but his letter effectively suggests that MAG does have a representatively legitimate basis for its 'Third Party' Appeal. Moreover, the Scottish Government made a formal response to the OFT setting out its concerns (included with Mr Swinney's letter to the Tribunal). One may wonder though why UNITE the Amicus/TGWU trade union has not made itself party to the MAG case since tens of thousands of its members, plus husbands, wives and children and another several thousand retail trade employees etc. are all at risk of severe fall in living standards! Bank of Scotland's motto for years was "A FRIEND FOR LIFE" until it merged with Halifax. But, then unemployment is not a competition law issue, or should it be since the members are also bank customers, or is that just introducing extraneous morality issues that should not be counted as part of the equation between benefits and competition? As a measure of how hard or hard-up HBOS is, the bank has ordered that there are to be absolutely no staff Christmas parties this year, at least none involving any expense by the bank (Scrooge-like fearful of public opprobrium when in receipt of Government subsidy) - rather hard on the thousands about to be cut for whom this is their last opportunity to celebrate with colleagues. If any doubt HBOS's scrooge credential, recall Farepak’s collapse in 2006 when Christmas was ruined for thousands of families. The HBOS bank pulled the plug on the scheme’s parent company – and 120,000 people lost a total of £38 million in savings. Victims were told they could get 5p in the £, but have got any so far? The only other defence of Mandelson's decision is that "...any relevant customer benefits in relation to the creation of the relevant merger situation concerned outweigh the substantial lessening of competition concerned and any adverse effects of the substantial lessening of competition concerned..." Forrester headed this off by claiming that Mandelson did not take sufficient advice from the appropriate bodies on this. Oh yes he did! Oh no he didn't! How to adjudicate that one? The Tribunal has 'economic advisors'. After Mr Lasok concluded his arguments today representatives for HBOS and Lloyds TSB made their submissions to the tribunal. Nicholas Green QC, for HBOS, told the tribunal that Lord Mandelson had ‘discretion in law’ to make the decision he did, having taken into account what was best for the economy as a whole. Helen Davies QC, for Lloyds TSB, claimed there was no proof that Lord Mandelson had been ‘fettered’’ by the statements made by the Prime Minister or the Chancellor. She was implying that MAG's evidence to the contrary is purely circumstantial!
These issues also involve the "SECRET DOSSIER", of which there is now reason to believe there may be two dossiers? Is it the "smoking gun"? To vacate keen interest in this Alistair Darling, the Chancellor, insisted yesterday that preparation of the dossier was a routine legal matter only, prepared from the UK government's side, but confidential and therefore not shared with MAG. This is a remarkable change of story, when we'd learned preiously the dossier was prepared by either or both HBOS and Lloyd's TSB. I suspect there are now two dossiers! The first was made in September or 6 weeks ago and as a file includes (or not) the basis for the £10bn loan from Lloyd's to HBOS. The second (at least the one Darling is referring to), the Government's, was probably made when HBOS got its £11.5bn capital infusion, and this one probably and conveniently (speculative supposition) lacks detail on the Lloyd's loan that could conceivably be deemed to contain anti-competitive 'tying' or even (again speculation only) agreement clauses breaching basic competition law principles? Would it reveal somehow that HBOS can only avoid insolvency by being taken over, or would it reveal an anti-competitive clause attaching to the Lloyds £10bn loan to HBOS, either way lies the possibility of case proven for or against. But, with all my financial & banking experience I cannot imagine how inevitable solvency can be proved. I can, however, precisely imagine how the loan might have breached competition law! The Tribunal's decision is expected tomorrow, Wednesday, two days before HBOS shareholders are due to vote at the bank's general meeting (in Birmingham?). The Government would have succeeded here better by taking a solid view on benefits outweighing competition issues (the latter confirmed by OFT) and then getting the CC to rubber-stamp it quickly, and then be able to claim with some confidence that this was the best course in the wholly exceptional circumstances. But, only if, despite the Government's £11.5bn out of £56bn capitalisation funding and Darling now considering whether to expand a £250bn Treasury programme to support by guarantee interbank funding loans between U.K. banks, and to guarantee cover for much or all of the £1.2tn UK mortgage market (Crosby Review). Some, including those who fear the possibility of outright nationalisation of the banks, may say it is impossible to know yet if those exceptional circumstances endangering HBOS's solvency have changed at all for the better (a conclusion that might serve the case but be totally damning to the Government's policy?!). But, of course, stability in solvency risk terms is certainly (at a basic level) now assured; neither bank is at risk of insolvency failure. The unplain, highly varinished fact of the matter is that there is no one direction in which to determine clearly what makes most (or the only) financial good sense between the takeover and allowing HBOS to keep its independence. My view, for what that is worth, is that HBOS can survive as an independent bank with temporary Government support and dose not need to be taken over by any other bank, or any other rich investors! If, following tribunal proceedings, competition concerns are paramount, then the initial logic behind the speedy-motors merger fades like a Cheshire smile. The BBC's Brian Taylor, one of Scotland's media treasures, on his BBC blog wants to draw the attention of the judges to the case of MacCormick & A.N.Other v The Lord Advocate (1953 SC 396) who contested the right of the Queen to bill herself as Elizabeth II in Scotland. Well in the MAG case the Queen's representatives have tried threatening to bill MAG for costs (intimations?) "Ian Hamilton QC, who was involved in the case, has contacted the Merger Action Group, arguing that there should be no question of facing costs should their case fail. He says that, after the MacCormick case failed, costs were moved for - but were refused...the court is reluctant to award costs in Scotland where people act in the public interest, even if unsuccessfully". This is probably exactly right and is the view of the MAG team. If MAG loses it may try appealing to Brussels or to both Houses of Parliament or simply to the Law Lords, but these may prove unlikely to delay the takeover. I suspect that some compromise decision may be sculpted that satisfies neither side fully. I say this without any clear idea what that could be? Brian notes for us that he has just finished reading QC Hamilton's book on the Stone of Destiny I have recently finished re-reading. This recalls me to Walter Scott's letters in 1926 under the soubriquet of Malachy Malagrowther that most artfully at great length successfully defended the right of Scottish banks to issue their own banknotes against a London Government proposal to make only Bank of England banknotes legitimate or lawful tender. My own inside information on that case was that behind the scenes Scott blackmailed HM Government by threatening to reveal the hiding place of the true Stone of Scone (also called Stone of Destiny and believed to be shiny black basalt Jacob's Pillow from Sinai, not a piece of sandstone) that would have put into question the legality of British Kings and Queens to the Scottish throne, which by time immemorial (since at least The Bruce) requires crowning on the true stone, which brings us back to the MacCormick case, and that of HBOS too!Given that the merger of the two banks is actually a Government measure (subject to Parliamentary oversight too) then it potentially comes under the Treaty of the Union (1707 full political union, merger of Parliaments & abolition of the Scottish one), precisely the ground upon which Walter Scott won his case (conducted in Edinburgh Review newsprint, read in London, and debated in Parliament). As Scott put it, "...virtue of a solemn Treaty of Union. Nay, so distinct an idea had he (referring to his ancestor of the time of the Union) of this supposed Treaty, that he used to recite one of its articles to this effect: -- "That the laws in use within the kingdom of Scotland, do, after the Union, remain in the same force as before, but alterable by the Parliament of Great Britain, with this difference between the laws concerning public right, policy, and civil government, and those which concern private right, that the former may be made the same through the whole United Kingdom; but that no alteration be made on laws which concern private right, excepting for the evident utility of the subjects within Scotland." When the old gentleman came to the passage, which you will mark in italics, he always clenched his fist, and exclaimed, " Nemo me impune lacesset! " This is why Scott (who was, like Sir Sean and any big Scottish sports star, familiarly called "The King of Scotland" - in Scott's case from when he hosted the visit of George IV), why Scott's likeness continues to grace Bank of Scotland notes (not, by the way, ever called HBOS notes). His case was that the UK Government has a constitutional treaty obligation (as much as any UK constitutional nicety can be an obligation in the UK even if it is a formal treaty) to demonstrate to the satisfation of the people of Scotland that any measure affecting a private Scottish interest, or an exclusively Scottish measure applied by the UK Parliament, is demonstratively and agreeably in the Scottish people's interest. This obligation was not appealed to at the time when the Poll Tax was applied uniquely to Scotland, but that does not mean it is not still operating and can be appealed to?
Scott's use in his first letter of Nemo me impune lacesset! had its desired effect too - on English nervous lawmakers. This is the Latin motto of the Order of the Thistle, of three Scottish regiments and the Royal coat of arms of the Kingdom of Scotland and in the version of the Royal coat of arms of the UK when used in Scotland. It is often translated as No-one provokes me with impunity, or rendered in Scots as Wha daur meddle wi' me? ("Cha togar m' fhearg gun dìoladh" in Scottish Gaelic), which rendering may explain why in the USA it is also the motto of the guns lobby, the right-to-bear-arms enthusiasts. It may also mean let any who trend on me should fear injury or will be injured or killed, hence the American versions have a rattlesnake logo. What made it doubly impressing in 1826 was that this was the motto on some of Revolutionary America's flags and banknotes (e.g. Georgia), and that association may have concentrated minds further, as indeed should be so in this case regarding the possible impact on how Scotland will respond to Labour next time round at UK and Scottish elections! I'm fascinated to know what is in the 'secret dossier' or dossiers? I wonder if our investigative journalists will have any more luck than they did with that other secret dossier that eventually led to PM Tony Blair's loss of almost all popular trust?