Group mulls appeal as bid to halt HBOS takeover fails

A LAST-DITCH legal attempt to stop the takeover of HBOS collapsed yesterday after a watchdog ruled the move had "no merit".

Members of the Competition Appeal Tribunal (CAT) rejected a challenge to Lord Mandelson's decision to approve the Lloyds TSB deal.

Last night, the Merger Action Group (MAG), a consortium of business leaders, bank customers and shareholders that brought the case, was in talks to decide whether to seek leave to appeal against the ruling at the Court of Session in Edinburgh.

Malcolm Fraser, the MAG spokesman, pledged to "explore every available avenue in making sure the merits of our case are fully explored".

If the group does not appeal, the fate of the bank will rest in the hands of HBOS's shareholders, who vote on the takeover tomorrow.

MAG was set up last month in an 11th-hour effort to overturn Lord Mandelson's decision not to refer the deal to the Competition Commission.

He waved through the takeover despite of a report from the Office of Fair Trading that raised concerns about its effects on the mortgage, personal account and small to medium-sized business markets, particularly in Scotland.

MAG argued that the decisions taken by the UK government were "unlawful and against the interests of fostering employment, competition and the taxpayer's best interest".

Its case was heard under Scots law in a two-day session at the CAT's headquarters in London. MAG's lawyer, Ian Forrester, told the hearing that the decision to "rip up" competition rules and approve the proposed takeover had been "preordained" by Alistair Darling, the Chancellor, and Gordon Brown, the Prime Minister.

However, lawyers for HBOS, Lloyds TSB and the Department for Business and Regulatory Reform claimed the appeal included "paranoid delusions".

And yesterday, the tribunal's president, Mr Justice Gerald Barling, said the evidence in the case was "all one way". He said: "There is simply no basis for the allegation that the issue of the continuing need for the merger was not properly considered by the decision-maker."

The tribunal unanimously accepted that MAG had the required legal standing to bring a case before it, but dismissed its case that Lord Mandelson's decision not to refer the merger to the Competition Commission was unlawful.

The announcement of the tribunal's decision was delayed until the closing of the London Stock Exchange, as it could have influenced the share prices of Lloyds and HBOS.

Although the tribunal found that the applicants' legal standing was "borderline", it said it agreed to hear the case because it was exceptional.

The panel said: "We consider that in the wholly exceptional circumstances of the case, and particularly in view of the specific interest and strong feeling which the merger has aroused in Scotland, the applicants are 'persons aggrieved'."

Andrew Bowen, representing MAG, sought leave to appeal on the grounds that the tribunal had made an error in law in its definition of "fettered".

MAG had claimed that comments by the Prime Minister and the Chancellor, indicating that competition law would be waived to allow the merger to proceed quickly, must have influenced – fettered – Lord Mandelson when he came to decide on the deal. But Sir Gerald rejected the appeal, saying it appeared to be on the grounds of "facts and evidence" rather than a point of law, meaning MAG would have to seek leave from the Court of Session to appeal.

Sir Gerald also dismissed an application by Paul Harris, representing the Secretary of State, to appeal the decision that MAG had legal standing to take the case, arguing that its members were not "aggrieved" as defined in the Enterprise Act, and that it was a matter of interpretation, not law, being raised.

Mr Harris also indicated the Secretary of State was seeking to recover "serious and substantial" legal costs from the case. He said those representing Lord Mandelson had incurred costs of more than £60,000. "Those ought to weigh on the minds of the applicants when determining their next steps," he said.

MAG said it was "heartened" that CAT "found they were right and proper people to bring the action, which had been raised under public interest concerns".

Mr Fraser said: "We are pleased that Sir Gerald Barling, QC, the tribunal chairman, acknowledged in his findings that we were absolutely right to bring this case forward in the public interest, despite the best efforts of Lord Mandelson's legal team to have our case rejected.

"We will now be having intensive meetings with our legal team regarding a possible appeal to the findings of the tribunal. This whole process has been run on a truncated timetable and we have complied with that."

If MAG bows out now, tomorrow's vote will be pivotal.

The takeover needs the support of half the shareholders and 75 per cent of the shareholdings.

This means that even if it is backed by institutional investors – many of whom will have stakes in both HBOS and Lloyds TSB – those with small interests could block it.

Shareholders hold key if case goes no further

IF THE Merger Action Group does not appeal successfully, Lloyds TSB faces its final hurdle in its bid to take over HBOS tomorrow. Shareholders in the Edinburgh-based bank will meet in Birmingham to vote on the deal.

There are two million small shareholders, 200,000 of whom are in Scotland; the rest are institutions. Under the scheme of arrangement, which determines how the vote is conducted, the board has to win the backing of parties holding 75 per cent of the bank's shares between them.

Financial institutions, holding about 80 per cent of the shares, are expected to support the deal. But for the merger to pass, it also has to be backed by 50 per cent of all shareholders. This makes the institutions a minority of all shareholders.

The HBOS board has consistently backed the deal and called on its shareholders to vote in favour of it. If the deal is approved, the banks will work together to create the new superbank which should come into being early in the new year.

If it is rejected, the position is less clear. HBOS still requires funding to shore up its ailing balance sheet.

It might attempt to do this by going to the government for a share in its recapitalisation pot. It could also try to deal with another institution.

Bill Jamieson

Few crumbs of comfort as tribunal delivers its crushing judgment

AFTER one of the swiftest judgments ever arrived at by the Competition Appeals Tribunal, the verdict of the panel comprising Mr Justice Barling, president, Michael Blair, QC, and Professor Peter Grinyer is emphatic, strongly argued – and at times crushing.

The one consolation for the six who brought the action is that it rejected assertions, principally by lawyers to the two banks, that the appellants were not "sufficiently aggrieved" as to merit a hearing.

The somewhat belittling objection advanced was that it was not enough for Malcolm Fraser, Mark Shaw, Peter de Vink, David Alexander, Timothy Noble and Dan Macdonald to be merely interested in a question of general public interest, but had to be "injuriously affected by the decision under challenge".

The applicants were merely, in the words of counsel for HBOS, Nicholas Green QC, an "officious bystander". But the tribunal ruled that "in the wholly exceptional circumstances of this case, and particularly in view of the specific interest and strong feeling which the merger has aroused in Scotland, the applicants were 'persons aggrieved'".

So why did the appeal fail? The tribunal found not just that there was no evidence of "fettered" discretion that would have affected Lord Mandelson's decision, but also that there was "a wholly proper approach to the decision-making process".

Moreover, if the over-arching fettering submission was correct, "the conclusion would be that the Secretary of State's statements to parliament, the process of instructing the OFT to investigate and report to him, the receipt and consideration of representations from other bodies including the Treasury … were little more than an elaborate sham designed to deceive parliament and others and achieve a preordained result without the exercise of the independent decision-making required by the governing legislation".

To claims that there was a "tinkering", or "denigrating" of the concerns expressed by the Office of Fair Trading, the tribunal found that "there is absolutely nothing in this point. The drafting neither diminishes the OFT finding nor indicates that the Secretary of State was failing to treat that finding as binding. Those OFT findings are set out in full in a public document for all to see. It is difficult to see what could have been gained by misrepresenting them in the decision. Nor, in our view, does the decision do so."

On the argument that the recapitalisation scheme might have enabled a stand-alone HBOS was insufficiently considered by Lord Mandelson, the judgment finds this was "simply unsustainable in the light of the evidence. The question … was discussed by the Secretary of State during the House of Lords debate … in the run up to the decision (he] received representations from several sources dealing with this issue".

The view of regulators was that the recapitalisation programme "was complementary and not alternative to the merger and, accordingly, that the merger was necessary notwithstanding the recapitalisation programme …The evidence is therefore all one way and there is simply no basis for the allegation that the issue of the continuing need for the merger was not properly considered".

Charting the timeline of a takeover

Wednesday, 17 September: News breaks that Lloyds TSB is to take over HBOS in a £12.2 billion deal. It follows a run on HBOS's shares.

Thursday, 18 September: Eric Daniels, Lloyds TSB's chief executive, confirms the deal would mean job cuts.

Thursday, 9 October: The government announces a bail-out that recapitalises both banks, but insists the £17 billion total will be available only if they merge.

Friday, 31 October: Lord Mandelson reconfirms decision to waive competition rules. Lloyds names the new bank's leadership, snubbing most of HBOS's senior directors. MSPs back motion to keep HBOS independent.

Monday, 3 November: The Chancellor, Alistair Darling, says an independent HBOS could still be in financial trouble.

Tuesday, 12 November: Gordon Brown insists the only alternative to the Lloyds merger is nationalisation.

Wednesday, 12 November: Rumours of Bank of China bid for HBOS prove unfounded.

Monday, 17 November: Mr Brown accused of "putting ego before jobs" by continuing to back the Lloyds deal.

Monday, 18 November: Mr Darling tells the Commons he opposes HBOS remaining independent.

Wednesday, 19 November: Lloyds TSB shareholders agree to the merger.

Thursday, 20 November: Scottish banking knights Sir Peter Burt and Sir George Mathewson abandon their bid to keep HBOS independent.

Saturday 29 November: A group of prominent businessmen calling themselves the Merger Action Group lodge a last-minute legal challenge that might yet derail the takeover bid.

Thursday 4 December: John Swinney, finance secretary, gives Scottish Government's tacit support to campaigners trying to halt takeover of HBOS by Lloyds TSB.

Friday 5 December: Consumer watchdog Which? throws its weight behind last-ditch attempt to stop deal.

Wednesday 10 December: The legal challenge rejected by Competition Appeal Tribunal.