Shareholders' wrongs

I don't know whether Sir Branson's bid for Northern Rock is better than the other offers on the table. We don't know the full details of what old Beardy is proposing, and we know even less about the other potential buyers. However, it's clear to me that the shareholders in NR are going to make it difficult for the Government to push any deal through, unless it is prepared to threaten the use of the "nuclear" option of driving the company out of business.

There are two groups of shareholders that the Government needs to worry about. One is the hedge funds, who have been acquiring NR shares since the company's troubles erupted, and have built up a pretty substantial stake. In the US these would be called "vulture funds". Some of them are already calling for a special meeting of the NR board, and demanding a new by-law to prevent the sale of more than 5% of the company's assets without shareholder approval. No bank in the world could operate with such a stipulation in place, but of course the point of it in this particular case would be to make it impossible for the company to liquidate itself in an orderly fashion in order to pay off its creditors, notably the UK taxpayer. The Government may try to portray the hedge funds as opportunistic leeches, which of course they are -- as the Bishop of Southwark might say, "it's what they do". Even so, they are leeches who can afford expensive lawyers, and they can make things very difficult for NR and for the Government.

The second group are the small shareholders, over 100,000 of them, many of whom became owners when NR demutualised. Here the problem is a bit different: if the pronouncements of their supposed spokesmen are typical, these people simply don't understand what being a shareholder means. They see themselves as "stakeholders", with a claim comparable to that of NR's creditors. This is simply not the case: the shareholders own NR and NR owes a lot of people -- in effect, everyone in the UK, as well as its own depositors -- a lot of money. Shareholders are of course protected by the principle of limited liability, but in some sense it is they who "owe" that money. What's more, they cheerfully sat by and collected their dividend cheques as their company greatly overextended itself by excessive borrowing in wholesale markets -- a classic example of overtrading.

One of these small shareholder spokespeople said on Radio 5 on Monday that it they resented having to make a decision "with a gun to our heads". Well I tell you what, sunshine, just give us back our money and I promise you'll never hear from us again. He also said that he wanted the chance to see the non-Branson offers so as to make sure that the best one was being chosen. Given that he seems not to understand even a basic concept like share ownership, I don't think that would be a good idea.