Magic circle firm Linklaters advised Lloyds executives that informing shareholders about an emergency £10bn loan it gave to HBOS before its disastrous takeover of the bank in 2008 would ‘inevitably’ reveal its dire financial situation, court documents show.
Transcripts from opening arguments in a £600m group action brought by shareholders refer to correspondence between lawyers at the firm and Lloyds executives in which Lloyds is told of various ways it could disclose details of the ‘covert’ loan. Linklaters also conceded that due diligence during the takeover process was ‘less than would be normal’.
Linklaters, the court heard, prepared a document for Lloyds suggesting three possible categories of disclosure: class tests (performed when a listed company enters into a transaction outside its ordinary course of business), inside information and disclosure in the form of a circular. ‘If class tests do apply, such that this is a disclosable or circularisable transaction, this means that the transaction will be high profile and that the financial situation of [HBOS] will inevitably become widely known,’ the document stated.
Richard Hill QC, of 4 Stone Buildings, acting for the shareholders, said: ‘So Linklaters are acknowledging that the consequence of notifying to the market the existence of a loan transaction is that the financial situation of [HBOS] will inevitably become widely known. And that is the thing that Lloyds are trying to avoid, and no one has any doubt about what the consequences are.’
Hill said last week that it was well known among directors that HBOS had received a £10bn loan from Lloyds and had been receiving funding of more than £25bn from the Bank of England, yet this was concealed from shareholders.
Lloyds opted to send a circular informing shareholders of the proposed deal. Hill said Linklaters advised that the circular should contain ’all information that investors and their professional advisers would reasonably require’ and expect to find for the purpose of making an informed assessment. ‘We say the circular obviously omitted this information, just as it omitted to disclose the existence of the Bank of England [loan] facility, and the consequence of that is that it omitted a very significant part of the information about HBOS’s financial position,’ Hill said.
The court also heard that emails from Lloyds executives regarding HBOS’s request for an extra £25bn were ‘potentially, dynamite stuff’, adding ‘ we don’t want people getting all excited.’
Hill said: ‘We will obviously have to explore this with the witnesses, but we would suggest the reason this is “dynamite stuff” is the obvious reason that disclosure of this requirement for funding by HBOS would entail disclosure of HBOS’s funding difficulties and that would be dramatic in the market.’
In its own opening submissions last week, Lloyds argued that its decision to buy HBOS was a ‘unique opportunity’ and in the ‘best interest’ of shareholders.
After the 2008 takeover, which came at the height of the financial crisis, Lloyds took on a portfolio of bad assets owned by HBOS as well as huge debts. The government bailed out the conglomerate to the tune of £20.3 billion. The 6,000 shareholders bringing the claim say they would never have voted through the deal had they known of HBOS’s financial woes.
Lloyds denies the claims.
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