ShareSoc Chairman's Blog

In reply to marben100, post #264

I've been asked to clarify this comment:

"I know many extremely rich people who have learnt how to game the system in their favour. It's not really that hard if you know how and if can buy the info required."

I'll give one example.  A friend I know buys the flow of funds data before it's really hit the wires.  He uses it to analyse whether the majority has gone into Growth or Value funds and in what regions.  Once he knows that it's not that hard to effectively front run the trades - it's fairly straightforward to know which liquid stocks are going to be bought by which funds if you know the fund flows, and the sheer scale of fund flows means that its only deployed to the market after a delay.  The hedge fund in question returned 38% and 30% in first 2 years of running. 

Easy when you know how eh!

Not only was John Kay more provocative than in his published report, but my headline was also provocative to stimulate debate. But he has a good point in that there are many things wrong in essence in financial markets that could be rectified by a few simple steps and an associated change of culture. His report was not particularly revolutionary, and yes there is surely still a need for a good place to trade shares. Moving to a private equity model would of course sooner or later result in a market being formed where private equity players could exchange stakes or portfolios (as they do at present to some extent). At worst it might solely prevent smaller players such as current individual shareholders from participating which obviously I wouldn't be too keen on.

Posted by ShareSoc at 09:18, March 13 2013.

Government to Review Pre-Packs

The Government has announced an independent review into pre-pack administrations in a debate in the House of Lords on the subject. It is well worth reading the comments (and criticisms) of Lord Mitchell in that debate which you can see here:

http://www.theyworkforyou.com/lords/?id=2013-03-11a.29.7&s=pre-pack+administrations#g84.0

ShareSoc has of course strongly opposed pre-pack administrations, and we reported on two recent ones at publicly listed companies only recently in our blogs and newsletter – those of Cosalt and of United Carpets. Pre-packs are not just the province of small businesses trying to escape their creditors and start again – all manner of companies are using it to evade their responsibilities and preserve the jobs of the directors and managers who got the companies into difficulty in the first place. In summary, pre-packs encourage unethical and disreputable behaviour, and the process is in essence “unprincipled and unfair” as Lord Mitchell said.

But the Insolvency Service does not seem to have changed their mind as yet. So when they announced the news they had this to say: “The Government has listened carefully to the concerns of creditors about pre-packs and that is why we already have measures in place to increase transparency and prevent abuse. Strengthened measures are being introduced to improve the quality of information insolvency practitioners are required to provide on pre-pack deals and we are using targeted monitoring of outcomes to assess whether there is evidence of abuse.

Used appropriately, pre-packs can be a highly effective process to ensure the best deal for creditors by better enabling the rescue of businesses, preserving value and safeguarding jobs. The independent review announced by the Minister will enable further evidence to be assembled on how pre-packs are working in practice and whether further steps are needed”. There is more in the same vein, defending the indefensible.

It does not exactly give the impression they concede that there are major problems, does it! So let us hope the review will be a truly independent review, and not another whitewash by the Insolvency Service.

Posted by ShareSoc at 14:29, March 14 2013.

AIM Companies in ISAs – it’s a done deal.

The Government yesterday announced the expected consultation on “ISA Qualifying Investments” (in essence permitting AIM shares, and others quoted on “recognised exchanges” to be included in ISA accounts). But this is not a consultation on whether it should be permitted or not, just a consultation on the implementation details.

The Government spells it out by saying at the start that “The Government has decided to introduce this policy in order to stimulate investment in smaller companies”. ShareSoc members have generally welcomed this proposed change because the current situation is clearly absurd. Shares quoted on very small foreign exchanges have been eligible, and almost anything can be put into a SIPP.

ShareSoc will be responding to the detail questions in due course, but one possible issue is as follows. Not many people know that the ISA regulations require the beneficial owners of shares in ISA accounts to be enfranchised. In other words, they must be given information and voting rights (Reg 4.6) although many stockbrokers certainly don’t promote this and often like to forget about it.

There are of course clauses in the Companies Act that enable nominee account operators (brokers) to obtain information and voting capabilities on behalf of their clients from issuers and registrars for Listed companies, but the question arises as to how this would be legally and technically supported for AIM stocks.

Of course if ISA accounts could be held in Personal Crest form or in some new “name on register” format, all this complexity, and absurdity, would blow away. This area needs a bit more research and thought therefore before ShareSoc submits its comments.

Posted by ShareSoc at 12:57, March 18 2013.

Why meeting directors is important

The Financial Times published a letter from Dr Simon Taylor last week which effectively said that paying to meet CEOs was a waste of time because FSA rules prevent them saying anything which had not already been disclosed. How far from reality is that, one might ask? Well today they published a letter from this author giving some examples of how useful it can be to talk to the directors and meet them in person. See:

http://www.ft.com/cms/s/0/e989ebb4-8d75-11e2-82d2-00144feabdc0.html#axzz2NtVRxOW1

In reply to ShareSoc, post #269

As was pointed out at the ShareSoc event last month, one needs a certain detachment and sophistication to truly benefit from meeting management. Someone like David Stredder who meets and talks to management every day has a v. good BS barometer, but for novices I think it is best practiced with great caution.

The main issues are entirely due to our cognitive biases - we are easily impressed by authority, confidence and likeability in people, and CEOs of public companies are hired often for those traits. Also our susceptibility to the power of stories over facts is well documented, and we get terribly attached to stocks when they get under our skin.

As long as one is aware of these things and has a good defence system I think it's all good but nothing is better than losing lots of money in a stock having met the management, one learns a certain detachment that way !

Just my tuppence worth - see you at Mello Central on Wednesday ! ;-)

Posted by ShareSoc at 13:30, March 19 2013.

Lamprell fined £2.4m for failures in reporting

Lamprell (LAM) was yesterday fined £2.4m for “systems and controls failing” which resulted in shareholders being seriously misinformed about the financial position of the company. But of course it is shareholders who have suffered twice over from this debacle. When the real state of the business was disclosed in numerous profit warnings, the share price fell abruptly as many shareholders bailed out. But those remaining will have their interest in the company reduced by the size of the fine. Given that they were already forecast to lose US$95m in the current year, you can perhaps see why this fine did not have much impact on the share price, particularly as it was to some extent expected.

Shareholders might welcome this somewhat tougher stance by the FSA than in the past on failures to disclose timely financial information, but they perhaps won’t be pleased that they have effectively to pay the fine when the miscreants who caused these difficulties get off scot-free.

There must surely be a better system than this that could be put in place? Shareholders have no ability to ensure that management have decent and working internal management information systems.

Lamprell was apparently also too slow in preventing its employees from dealing in the shares once the problems had been recognised by senior management. There were a lot of complaints from shareholders after they saw some dealing by management personnel soon before the profit warnings. But the FSA is satisfied that such trading was not based on inside information. 

Posted by ShareSoc at 15:30, March 19 2013.

Corero EGM Report – Poor turnout on a critical vote

Corero Network Security (LON:CNS) held an EGM today to approve a fund raising. This was previously covered in the ShareSoc blogs and would give Jens Montanana, the Non-Executive Chairman, a 39.6% stake in the company after the placing. That effectively would give him control and the ability to pretty much do whatever he wants with the company.

Now normally anyone acquiring more than 30% of a company is required under Takeover Panel rules to make an offer for the company for that very reason. So this required approval by the Takeover Panel and a waiver resolution to be approved by other shareholders.

I attended the EGM this morning and was the only “ordinary” shareholder other than the directors who turned up at 9.30 at the offices of FinnCap in the City.

After a few questions (see a full report on the ShareSoc Members Network in the AGM Forum, if you are a member), we took the two resolutions with the first one (the waiver resolution) having to be on a poll. But the registrar was well prepared and it only took a couple of minutes. As the directors had not changed my mind, I voted against it.

The outcome of the poll (on which the concert party could not vote) was 14.6m FOR and 5.5m AGAINST, i.e. a 27% vote against which is a substantial proportion. It is a pity that more did not vote and vote against though.

On the second resolution (to allot the new shares), the proxy counts were 35.2m FOR and 5.5m AGAINST and was passed on a show of hands.

So with 58.3m shares in issue they got about 70% of potential votes cast (including abstentions). Indeed in terms of the “independent” shareholders, this implies a turn-out of only 53%. On such an important matter you would have thought that shareholders would at least have bothered to vote. But these are not untypical figures nowadays and probably just reflect the difficulties shareholders have in voting, particularly those in nominee accounts.

ShareSoc has of course repeatedly called for reform of the nominee system, and this again reinforces the need for it.

In reply to ShareSoc, post #271

Roger

Whilst I suspect the employees did deal on inside information, because otherwise they were not doing their key operational jobs properly, that is not the only issue.

The point that hurt me financially, as my investment decision was in part based on this, is that seeing PDMRs deal one should be able to be 100% confident that all material information re LAM was in the public domain. This was patently not the case. IMHO the company has got off very lightly for there being a false market in their shares which affected a lot of shareholders who suffered consequential loss as a result of their incompetence.

ATB. Martin

In reply to Edward Croft, post #270

Hi Ed,

Just my tuppence worth - see you at Mello Central on Wednesday !

Tsk, Tsk, It's not Mello Central but the inaugural ShareSoc Tech Seminar. Look forward to seeing you there & to hear Stockopedia's take on the fundamentals of the presenting companies. :0)

Take your point that one needs to have one's armour on when seeing companies, but very interesting to hear Gervais Williams views last night at the Beckenham Mello event. One questioner asked him how he discovers the companies that he invests in. His response: by meeting lots and lots of company managements! Further, he tends to make on-site visits if results don't match up to his expectations.

There are a lot of events now where private investors can meet and question company managements. Many are free to attend. I do encourage even inexperienced investors to participate: it is helpful to get a feel for how these things work. Whilst it can be dangerous to be too swayed by a single company meeting, by meeting with a larger number of managements, one can learn to sort the sheep from the goats. The experience of meeting managements is invaluable for anyone that fancies themselves as a stockpicker. As in all walks of life, experience is an excellent teacher.

I am deliberately starting ShareSoc's new events with a review of the cold, hard numbers from Stockopedia, before getting into the "touchy feely" stuff. That way, investors are forearmed with some fundamental facts which the presenting managements can then be challenged to explain or build upon.

Cheers,

Mark

In reply to marben100, post #274

Mark - sorry about that ! Have made up for it with some tweets with the correct info.

Access to company management is something that frankly needs democratised - we don't have Reg FD in the UK and the City still gets all the access... The work you guys are doing is amazing - I couldn't support it more! See you tomorrow.

In reply to shanklin100, post #273

Of course the employees dealt on inside information. The finding that this was not released to the market in a timely manner by the company surely means that individuals are culpable and the fine should be clawed back. Shareholders should be insisting on it.

Posted by ShareSoc at 09:25, March 21 2013.

The Budget - Is it good for investors?

Is the Chancellor of the Exchequer’s budget good for investors? Or should we drown our sorrows in beer (which will be slightly cheaper as a result)?

It’s by no means a revolution in the country’s finances. But given the latest gloomy economic forecasts contained in the budget, perhaps that’s simply because the Chancellor had little room for manoeuvre. On the whole it looks quite positive for investors. Corporation tax will be reduced to 20% in future years which will certainly make it one of the lowest rates in the developed world.

Stamp duty will be removed from AIM and ISDX share trading and from some fund transactions. Together with the ability to include such shares in ISA accounts, this might encourage investors to invest in those shares more, but of course might also stimulate over-trading. The Chancellor said he wants to encourage equity investment in SMEs rather than them having to rely on debt finance and this is surely a sensible policy. Whether those kinds of measures alone will have the required impact is surely unlikely.

The SEIS tax relief scheme is also to be extended for another year, which was signposted in advance but it has not proved to be as popular as anticipated probably because of the tight limitations on usage. There will also be a new capital gains tax relief provision where a controlling interest in a company is sold to its employees.

Who are the business winners and losers from the detail changes? House building companies will no doubt benefit from the mortgage subsidies that were announced - interest free loans on 20% of the value of a property and mortgage guarantees. One commentator suggested it was another “sub-prime mortgage” fiasco in the making, and it’s surely also likely to drive up the prices of houses. That of course may please property-owning voters. This policy is of course a reflection of the UK population’s traditional mania for retail property investment to the prejudice of investment in other sectors of the economy.

Drinks companies will be positively affected by the reduction of beer duty by 1p, but spirits and wine producers will be impacted by increases in duties so they are squealing it’s unfair.

Shale gas production is to be encouraged by tax reliefs and pottery manufacturers and other “traditional industries” such as brick production will be exempt from the climate change levy. One has to ask on what basis some industries should be exempt and others not?

R&D tax credits are to increase to 10% which might benefit some technology companies.

Banks are still the whipping boy of the financial world so the Chancellor said “As with previous reductions in the corporate tax rate, I do not intend to pass the benefit onto the banking sector – so I will offset this reduction by increasing the bank levy rate next year to 0.142 per cent”. That might not sound much, but it might mean them paying as much as £1.5bn more per annum.

Child trust funds will be able to be converted to Junior ISAs, and there is to be some compensation to Equitable Life investors who were previously not eligible.

Personal tax changes were of course previously announced, but the £10,000 personal tax allowance for everyone is being brought forward.

In conclusion it looks on the whole therefore to be mildly beneficial for investors. All we need now is for the Chancellor to figure out some way to stimulate the UK economy so that real business growth returns, because only if underlying profits grow can investors obtain improved returns. Stimulating economic growth still seems to be a “work in progress”. In summary, this is a “mostly harmless” budget which is the best one can usually expect from most politicians. But it surely misses a few opportunities to make significant changes to the investment scene.

Posted by ShareSoc at 09:19, March 24 2013.

Turbotec Products delisting

Turbotec Products (LON:TRBO) is an AIM listed manufacturer of heat exchangers, mainly for residential heating systems, air conditioning, and domestic swimming pools. The company has factories in Connecticut and North Carolina, and the majority of the directors are based in the US. Activity is dependent on US house-building, so business has been tough in recent years. Turbotec has nevertheless been profitable in every year since listing in 2006, although profits fell substantially last year. The latest accounts to 31 March 2012 show earnings of only 1c, but tangible assets of around 90c (60p per share).

Prior to the announcement of the delisting proposal, the share price had been static at around 20p for the past six months. After the announcement on the 22^nd March the share price halved within minutes.

The announcement does not outline any strategy for future returns to shareholders by way of dividend or trade sale of the company. Nor does it offer any reassurance about future governance arrangements. The reasons given for delisting are that:

- there is limited liquidity in the shares;

- the company’s market capitalisation has become disassociated from its inherent value;

- a stagnant or falling share price has a demotivating effect on the business and its employees and a potentially adverse effect on customer and supplier perception.

None of these reasons seems compelling to minority shareholders in a business which has been resilient through the recession, and is now expected to recover towards its former profit levels in line with the resurgence of US house-building.

The company states in the delisting announcement that a key point “is the lack of demand for its shares and, in practical terms, a small free float, which further reduces demand. Given the lack of liquidity in the shares, in practice minority shareholders have not been able easily to trade their shares”. It is certainly true that recently there has been poor liquidity with no trading on many days. However that is true of many AIM company shares.

Turbotec’s parent company prior to Admission to AIM in 2006 was the US-based Thermodynetics Inc, which retains a 13% shareholding. The two other largest shareholders are non-executive director Joseph DeSana (24%) and Execuzen Ltd a company controlled by Adrian Ezra (18%). Both these shareholders appear to have acquired the majority of their shareholdings from Thermodynetics in April 2010. According to the 2012 accounts, L’Espoire Trust has a 6% shareholding. No other current shareholdings above 3% have been disclosed. This leaves around 40% of the shares held by smaller shareholders.

A particularly unattractive feature of the proposed delisting is the possible conversion at a very low price of a recent convertible loan of $200,000 from major shareholder Execuzen Ltd. The loan was made in January 2013, only two months before the delisting proposal. The terms of the loan provide for conversion into shares at 0.25p above the average share price on AIM in the 5 business days prior to conversion. Following the delisting announcement - which has predictably halved the share price as shareholders who cannot or will not hold unlisted shares rush for the exit - Execuzen now appears able to convert its loan at an artificially low price. The terms of the loan were agreed as fair and reasonable for shareholders by the independent directors in late January, after consultation with the Nominated Adviser Seymour Pierce (now Cantor Fitzgerald).

Some Sharesoc members who hold shares in the company do not agree that it is fair and reasonable to set loan conversion terms referenced to the share price on AIM, shortly followed by a delisting proposal which predictably halves the share price on AIM.

Shareholder Guy Thomas said: “There are two aspects of this delisting proposal which are particularly galling for shareholders. First, Turbotec is a consistently profitable company with no immediate financial distress which necessitates delisting. Second, the convertible loan issued at a time when delisting was probably already under consideration will dilute shareholders at a very low price.”

This case highlights that investors on AIM face not only the trading risks inherent in a company’s business, but also governance risks arising from the ability of profitable companies to delist at the whim of directors and a handful of major shareholders.

ShareSoc advises shareholders in Turbotec to vote against the delisting.

Posted by ShareSoc at 13:21, March 25 2013.

Bankers Pay falling, but it’s all relative

Bankers’ pay has been falling relative to other professionals according to a report commissioned by the FT from PWC. It’s now only 5.8 times the private sector average when it was 9.5 times in 2006. It seems that deliveries of Aston Martins to Canary Wharf have also fallen sharply in recent bonus seasons when they used to be a commonplace sight. One might ask why it should even be 5 times, let alone 9 times. Keep up the good work must be the message to bank boards because they still have a long way to go to get more commonsense into bank pay structures.

Readers will be pleased to hear that it is possible that ShareSoc’s blog and newsletters will not be subject to the allegedly draconian measures in the new bill to regulate the press. We might otherwise have been subject to exemplary damages if we libelled those overpaid bankers (for example). Not that we would of course, but other bloggers might welcome the change. 

Posted by ShareSoc at 09:38, March 26 2013.

ShareSoc Technology Company Seminar Report

Last week ShareSoc held its first “Technology Company Seminar” in the City of London, with dotDigital (LON:DOTD) , Deltex Medical (LON:DEMG) and Escher Group (LON:ESCH) presenting. This was an opportunity to learn more about three technology companies, and we plan to run such events on a regular basis. That is particularly so as the first event was a resounding success with over 50 people attending which is really the limit of capacity if people are going to get the opportunity to ask all the questions they wish to put to the presenting executives.

Why are we running these events? Because informed investors are better investors and it’s very worthwhile for investors to meet the management of companies in which they hold shares. But the focus on technology companies is because we see a gap in the market. There are lots of seminars on small-cap mining and other natural resource companies, often raising funds for speculative exploration projects. But there are few on those profitable (and often dividend paying) technology companies that sometimes have a low profile in the marketplace.

We expect this to be the first of a series of such events focussed on technology companies and the organiser Mark Bentley, is already planning the next event for June. Thanks to Mark for organising this first event so well and it went off without any hitches.

A full write-up of the event and a copy of the individual company presentations, plus the financial analysis specially done for this event by Stockopedia are now on the ShareSoc Members Network.

If you have any suggestions for companies who it would be good to cover, or who are keen to present at such events, please contact ShareSoc.

Posted by ShareSoc at 14:34, March 27 2013.

Elementis and Voting at AGMs

Elementis (LON:ELM) have put a resolution on their AGM agenda to adopt new Articles. This of course is not a particularly unusual event in that Articles do need to get brought up-to-date occasionally, particularly to reflect changes in Company Law and practice. However, there are two specific changes to the revised Articles in this case which shareholders need to consider. These are:

1. They are mandating that in future all resolutions shall be determined by a poll. In other words the traditional “show of hands” vote will no longer apply and a poll must be taken on all resolutions. The company says “this is considered best practice, and should reduce the duration of the formal voting process”. On both points they are surely wrong. From past experience, polls often take time because a poll card must be completed and the votes collected, even if people do not wait around for the result. A “show of hands” vote is both quicker and simpler and the big advantage is that meeting attendees can see the mood of the meeting and get the results of the vote immediately (if there is any doubt about the verdict or there is any other reason to call a poll, the Chairman always has discretion to call a poll anyway). Poll votes alone, unless there is an electronic voting system with the results instantly displayed, undermine the vitality of AGMs. As to where they are getting the view from that polls are “best practice” is not known although it is now commonplace for registrars to give that opinion, even though it is not based on any independent advice from a responsible body. It is even more inappropriate to embed the requirement for a poll in the Articles when subsequent Chairmen might prefer to have discretion on this matter.

2. In addition they are increasing the maximum limit of total directors’ pay to £750,000 per annum. This of course applies only to directors’ fees and not to remuneration for the executive directors in respect of their operational duties. One might ask what the current limit is as it is not obviously present in the AGM documentation. Well the answer is £500,000. In addition, there is a provision in the current Articles that says it can be increased by an ordinary resolution, either temporarily or permanently, so it is not at all clear why they need this clause to be changed. Are they reluctant to put any increase required in an ordinary resolution and hence perhaps bring the spotlight upon it? If so that is a poor excuse for putting it in as a change to the Articles. One might also ask whether £500,000 is adequate for the existing number of directors anyway, and why such a large increase is now justified.

Shareholders might like to consider whether they should vote against the resolution to change the Articles at this company.

Posted by ShareSoc at 11:03, March 31 2013.

BAE Systems AGM and Voting Recommendations

We recommend shareholders vote against the re-election of Chairman Dick Olver at the BAE Systems (LON:BA.) AGM on the 8^th May, and against the Remuneration Report and some of the other resolutions. See this note which we have sent to supporters of the ShareSoc campaign on BAE for more information: www.sharesoc.org/BAE_Newsletter_5.pdf

Posted by ShareSoc at 19:09, April 4 2013.

How much would you pay for a review of Barclays business practices?

If you were a director of a company, how much would you pay someone to tell you about your company’s business practices? Nothing on the assumption this is something you should know anyway? Perhaps ten thousand pounds to a consultant to review the matter and write a report? Well Barclays (LON:BARC) just paid £17 million for a report from Anthony Salz on the subject.

Is it worth the money? It’s certainly worth reading if you are a Barclays’ shareholder. You can see it here: https://www.salzreview.co.uk

It gives the history of Barclays and does of course cover the events in the company during the banking crisis of 2008 and subsequently. But much of this has been covered elsewhere and Barclays did of course remain relatively unscathed in comparison with other banks such as RBS, HBOS or Lloyds by avoiding taking capital from the Government. Many other things such as the LIBOR scandal have since damaged the reputation of Barclays and the report spends some time talking about culture and how it went adrift in the company. Barclays’ customers probably noticed the change as did the customers of other banks where there was a similar focus on transactional driven profits and return on capital.

The report suggests the growth of the bank and its ultimate size meant the directors failed to comprehend the business and the details of its operations at times. High pay and the pay structure seemed to also encourage a certain type of business behaviour to the detriment of the customers and the banks reputation. Indeed Barclays was paying significantly more than its peer group, and still is.

Recommendations include reforming pay with a strengthened HR function, lower bonuses and higher base salaries – all good policy surely and in line with what ShareSoc advocates.

The report supports the new CEO’s focus on improving the ethics and culture of the company, and it also suggests that Barclays’ relationship with their regulators needs to improve where in the past there seemed to be mutual distrust.

Rather surprisingly on page 15 the report even suggests that “The Board should design, adopt and publish from time to time a communications policy for promoting effective and open communication with shareholders and encouraging their participation in general meetings”. It would certainly be good to have more institutions participating in that event if that is what it means.

So in summary, it’s all sound stuff which no doubt Barclays’ directors and senior management will take to heart. Whether it’s worth £17m is another matter.

Posted by ShareSoc at 09:26, April 4 2013.

RBS Legal Action – it finally gets serious

Investors who held shares in Royal Bank of Scotland (LON:RBS) at the time of the rights issue in 2008, and subsequent almost fatal collapse of the company, may have been wondering after over four years whether the legal cases allegedly being pursued were real. Were these real cases with sound claims and adequate finance, or just hot air generated by irate investors and backed by lawyers hoping to earn some fees? But last week one group filed an action in court, and yesterday another one did also.

This indicates that finally RBS, and the former directors (Fred Goodwin et al), may actually have to defend against these cases in court. You know it’s now serious because the adverse costs if the plaintiffs lose their case will start racking up. So it’s not just lawyers writing letters to the defendants any more and promoting their claims in the public arena.

As some may know, I was personally involved in one of these groups early on. The biggest problem faced was that the prospective size of the legal bills from both sides was enormous – running into tens of millions of pounds. Actually raising the necessary funds to pursue the case in court, or obtaining litigation funding from third parties, proved to be exceedingly difficult even though the legal basis of the claims seemed to have obvious merit. In addition adverse costs insurance was also required. RBS will no doubt be asking the court to require the plaintiffs to show they have sufficient funds to cover the costs if they lose so even getting started was problematic.

Private investors were some of those most directly affected by the collapse in the share price of RBS with many being impoverished as a result. Many investors, including former RBS employees, had very high proportions of their retirement savings in RBS shares (and other banks unfortunately) and were often relying on the dividends for living expenses. The crisis at RBS had a devastating effect on the lives of some of these investors. But it was clear that private investors could never finance the action alone (and the size of their claims would never attract litigation funding either).

It was therefore essential for institutional investors to step up to the plate, which they were slow to do. Many had business connections with RBS, and nobody wished to be seen to be effectively suing the Government (RBS is of course now owned 82% by the Government, i.e. indirectly by taxpayers). But these objections now seem to have been overcome. Perhaps institutions have come to realise that RBS will not be recovering quickly and the subsequent disclosures since 2008 of more financially damaging events has probably helped to change their minds on the probity of the action.

But the game has now definitely changed it seems.

The Basis of the Claims

To remind those not familiar with the case, these legal claims have been focussed on the prospectus issued in 2008 when the bank raised £12bn in a deeply discounted rights issue at £2 per share (it subsequently fell to under 20p and is not comparable to the current price as there has been a subsequent share consolidation). The general legal principle, based on the Financial Services and Markets Act, is that a prospectus must disclose all relevant information to investors, and must not be misleading. There should be no significant omissions. Both the directors at the time, who personally signed off the prospectus, and the company, are responsible and hence are named in these lawsuits. This does of course mean that shareholders are to some extent suing their own company, and the size of the claim will certainly run into billions of pounds because the share price collapsed after the rights issue and shareholders lost enormous amounts of money. RBS is not really in a position to absorb the likely size of the claim if they lost, and it’s possible some of the directors would be bankrupted (no doubt that might please some shareholders of course).

The basis of the claims is simply that the prospectus misled investors over the financial position of the company, gave an over-optimistic view of its future prospects and omitted some very specific information. For example one group is now alleging that the company had been forced to undertake the rights issue by the FSA, but this was not disclosed to investors. As someone who read the original prospectus at the time, I certainly believe it gave too rosy a picture of the financial position of the company and did not suggest that the rights issue was needed to financially rescue the business from a funding crisis. It also suggested that the funds raised would ensure that the company had adequate liquid cash resources for at least the coming year, which definitely turned out not to be true as the Government had to step in soon after to stop it going bust when it simply ran out of money.

No doubt the company and its lawyers (Herbert Smith) will claim that this is all hindsight and that the prospectus was based on what was known the directors and the company at the time. The evidence will be undoubtedly voluminous, and subject to extensive legal debate. Particularly the issue of how much the company and its directors knew about the problems in the ABN-AMRO acquisition before the rights issue. The discovery phase of the legal process may of course reveal a lot more than is already known and may provide the basis for other legal claims.

Who are the Plaintiffs?

The two groups who have filed are:

a) Stewarts Law represents 21 claimants including the Trustees of the Mineworkers Union Pension Scheme, the Coal Staff Superannuation Scheme, Electricity Pension Trustees, Illinois Teachers and various ING funds.

b) Bird & Bird represent the RBoS Shareholders Action Group (see www.rbosaction.org ) who claim to have 12,000 individual shareholders (out of up to 100,000 affected) supporting them and a number of institutions such as Deutsche Bank and some Scottish funds. As is often the case, the institutional investors seem to want to keep a low profile. Private investors might ask whether they can still join this group, and it appears you probably can, but of course if the case is won (and the two actions are likely to be heard together as they are obviously very similar) then shareholders might be able to pursue a claim anyway. If there is a settlement before the claim gets into court then it might be more problematic.

The merits of the action

It’s worth stating that no doubt there will be the usual comments in the ill-informed sections of the media that shareholders should expect to lose money sometimes in the stock market because are they not repeatedly told that this is a speculative game and share prices can go up and down. In other words, the case is misconceived and morally defective. But that would certainly not be my view. If company directors have broken the law (in this case the Prospectus Directive), or have otherwise misled shareholders about the financial position of a company, then they should be accountable to shareholders. Investors in public company shares accept many risks, but they should expect companies and their directors to act with integrity and honesty. As to whether any failings can be proven in this case remains to be seen.

Roger Lawson