WATCHING THE CORPORATIONS

'Unlawful' bank merger to go ahead

An appeal against the government's controversial move to allow the merger of Halifax Bank of Scotland (HBOS) and Lloyds TSB without referring it to the Competition Commission has been dismissed by the Competition Appeal Tribunal (CAT). The legal challenge was mounted last month by a group of Scottish businessmen, shareholders and customers calling themselves the Merger Action Group (MAG), which argued that the decision by Business Secretary Peter Mandelson to ignore competition law and allow Lloyds TSB to buy HBOS was "unlawful" and would "be bad" for Scotland's economy.

In a two-day hearing earlier this month, the tribunal, which has the power to overturn the government's decision, considered a 37-page appeal submitted by MAG, in which it argued that Mandelson, who approved the controversial move on 31 October this year, made an error in relation to competition law and that neither he, PM Gordon Brown nor Chancellor Alistair Darling had the authority to waive the rules as set down in legislation. Only parliament has the power to alter the legal criteria that would have permitted the deal to go ahead without reference to the Competition Commission. Although the case was heard in London, the Tribunal accepted a plea by MAG that it was conducted under Scots Law as the appellant was Scottish and both Lloyds TSB and HBOS are registered Scottish companies.

Prior to the hearing, the group's spokesman said, "As a group, we are extremely concerned that due legal process has been ignored. In Scotland particularly, there is a widespread and growing unease about what has taken place." Malcolm Fraser, an Edinburgh architect, added that, "given that taxpayers are ultimately funding the takeover, we are simply asking that the law is properly applied, and that our long-term interests are protected. We do not feel that is too much to ask."

The merger will create a banking giant with around 145,000 staff and 3,000 branches across the UK. Up to 40,000 jobs, however, may be lost as a result. HBOS shareholders voted overwhelmingly in favour of the Lloyds TSB merger at a general meeting in Birmingham last week. Shareholders in Lloyds TSB had also voted in favour of the deal, which is due to be completed in mid-January.

The Office of Fair Trading (OFT) had warned in a report that the merger could lead to "a significant lessening of competition" and should be referred to the Competition Commission for further investigation. On 18 September, the then Business Secretary John Hutton announced that the government would introduce an Intervention Order that would set aside the OFT's concerns. Under competition legislation, such concerns by the OFT would automatically lead to the matter being referred to the Competition Commission. But this step was bypassed after the government intervened and, instead of using the legislation in place at the time as justification for his action, the Secretary of State made new rules specifically to approve the merger, thereby retrospectively giving himself powers that were not available to him at the time the merger was announced. Hutton's successor, Lord Mandelson, disregarded the OFT advice and described its concerns as a "manifestation of the fettering of [his] decision." Both Brown and Darling had spoken publicly in favour of the merger. In fact, the Prime Minister revealed that he had personally intervened to broker the deal and made clear that the government was prepared to "rip up Britain's competition laws" to allow the merger to go ahead.

The government's decision was predicated on the justification that, if the merger did not take place, HBOS would collapse and destabilise the financial system. On 16 September, the HBOS share price fell to 88p, casting serious doubts on the bank’s ability to raise funds. The following day, it emerged that HBOS was already in advanced merger talks with Lloyds TSB. By the beginning of October, however, it was decided by both the UK and US governments that a 'rescue package' was required to support the 'stability' of the financial system. The UK government announced a package of £400 billion and, on 13 October, announced a total of £37 billion to be invested in three banks: RBS, Lloyds and HBOS. The decision to go ahead with the merger, therefore, was made on a false assumption, MAG argues, as there was now provision for the government to provide the capital as stated by the OFT. According to MAG, it is clear that government had "a clear policy" that the deal should go ahead without it being open to public scrutiny.

At the Lloyds TSB shareholders meeting last month, one shareholder was met with applause when he suggested the deal was "cooked up at a cocktail party." He expressed his anger that the government had waived competition laws, adding: "Most of us think this deal stinks." Another said shareholders were being "robbed". Yet, 95.98 percent of shareholders, many of them institutions which may have stakes in both parties to the deal, backed the merger.

Expressing its "disappointment" at the Tribunal's decision, MAG said it did consider appealing the tribunal's decision to the Court of Session in Edinburgh but has subsequently decided to withdraw its case altogether. MAG spokesman Malcolm Fraser said, "It remains our belief, shared by many, that allowing this proposed merger to go forward without due and proper consideration by the Competition Commission, sets a dangerous precedent." He added that they "did not embark lightly on this task. It has been onerous and at times highly charged, ranged as we were against the combined might of the Department of Business, Enterprise and Regulatory Reform (BERR), HBOS and Lloyds TSB."

For more details on MAG and the HBOS takeover, see the group's website. The judgement and hearing transcript can be found on the CAT website. The OFT report can be found here.