As the dust slowly settles on the rescue of the Western banking system from the edge of oblivion the inevitable recriminations begin. First in line are the shareholders in banks that have been bailed out by the government. This is a potential shareholder dispute on a massive scale.
These shareholders, whose holdings have been heavily diluted or even made valueless by the whole or partial nationalisation of banks such as Royal Bank of Scotland, HBOS and Bradford & Bingley, are looking round for somebody to blame.
Many of these shareholders invested in response to very recent rights issues that were in themselves designed to recapitalise the banks. RBS raised around £12bn from a rights issue in April of this year, HBOS around £4bn in the same month and Bradford & Bingley £400m in June.
The shareholders are now looking carefully at the prospectuses that accompanied these rights issues. Lawyers will scan every word of these documents to see whether they presented an accurate picture to prospective investors. In particular they will look at any statements given or assurances provided with regard to the underlying capital position of the bank. What the banks knew and when is going to be a key question.
If it can be shown that the prospectuses were inaccurate and that those statements that were inaccurate were material in causing the investment in the rights issue then the shareholder has the basic grounds for legal action. The most likely defendant is the bank itself but they may join their professional advisers into any action if they feel that it is the adviser at fault in preparing the prospectus.
As the numbers quoted above indicate there is plenty of money involved and the scale of potential losses will inevitably encourage speculative litigation. A 10% chance of recovering a £100m is worth £1m of speculative legal fees on the part of an aggrieved shareholder.
The biggest problem for any disgruntled shareholder contemplating a claim is trying to avoid the pitfalls of hindsight. It is necessary to forget what we now know and look instead at the position existing when the prospectuses were issued. Who would have thought in Spring or early Summer of this year that we would witness the near collapse of our banking system? In light of this, can it really be said that the banks’ assessment of their own capital stability was clearly wrong.
Of course, there is always the possibility of a smoking gun - that the banks knew far more about the problems than they revealed at the time - but that is another story.