Lloyds chooses court in HBOS merger case as it rejects shareholder’s £500m settlement offer

On the eve of the case that will see appearances from some of the UK’s most prominent financiers, Sky News has reported that the Lloyds Shareholder Action Group (LSAG), which is said to be seeking damages of about £600m, last week told the bank that it would abandon its claim in exchange for a payment of roughly £500m.

However, according to the broadcaster’s reports, Lloyds rejected out-of-hand the offer from Harcus Sinclair, the law firm acting for the claimant group of 6,000 former Lloyds TSB investors.

The prospects of a further settlement proposal being tabled before the trial is due to start on Wednesday are “slim”, said a person close to the situation.

Lloyds TSB shareholders claim they were “duped” into buying HBOS, and without a pre-trial deal, their case will be one of the most significant pieces of litigation to emerge from the British banking crisis.

It comes after a similar case relating to the contemporaneous collapse of Royal Bank of Scotland was averted by a last minute settlement.

That trial would have seen Fred Goodwin, the bank’s former boss, take the stand.

A Lloyds trailwill see former executives including Eric Daniels, the chief executive who steered Lloyds TSB through the merger, and Sir Victor Blank, the then chairman, among those cross-examined as defendants.

Sir Hector Sants, the former chief executive of the Financial Services Authority, is understood to have agreed to give evidence in private.

In a statement issued to Sky News, Paul Sanders, chairman of the committee of LSAG, declined to comment on the settlement proposal, but added: “These are more dirty tricks.

“Lloyds’ top brass had hoped that we would go away and that we wouldn’t have the means to bring this David and Goliath case to trial.

“Well here we are and at long last, and the directors and the bank itself, which is continuing to defend their ex-directors and footing their huge legal bills, will be forced to account for their failures towards their own shareholders.”

In the Lloyds case, roughly 300 of the claimant group are institutional investors such as pension funds.

Their lawsuit argues that the directors of Lloyds TSB breached their duties to shareholders by recommending the takeover of HBOS without disclosing either a £10bn loan facility from the acquiring bank to its merger partner or “covert funding” from the UK and US central banks.

“In particular, the claim asserts that the acquisition of HBOS was a very bad deal for the shareholders of Lloyds because exchanging 0.605 Lloyds shares for each HBOS share constituted a gross over-valuation of HBOS’s share capital and resulted in the share capital of the Lloyds shareholders being excessively diluted,” an LSAG statement issued on Monday said.

“Furthermore, it was a breach of the directors’ duties to the Lloyds shareholders for the directors of Lloyds to recommend the acquisition at the EGM on what they knew to be incomplete and misleading information, statements and advice.”

The trial could shed fresh light on the extent to which Labour government ministers and regulators were involved in orchestrating the deal, following a now-infamous encounter between Sir Victor and Gordon Brown shortly before the merger was announced.

As the scale of HBOS’ loan losses emerged in the wake of the merger, British taxpayers were forced to pump in more than £20bn to keep the combined entity afloat.

Sir Victor stepped down within months of the deal, and the Government was left holding at least part of its 43 per cent stake until as recently as this year.

A spokeswoman for Lloyds said the action group’s claim had “no merit” and “would be defended vigorously”.