Outside the marginals

a commentary on the politics that followed the UK 2010 & 2015 elections

Suing yourself?

Today we hear that shareholders are suing RBS (BBC News Website 3 April 2013 Investors launch £3.5bn compensation claim against RBS)

I can understand the idea of suing directors personally, but how can shareholders sue the institution that they own?

Thousands of investors have launched a joint compensation claim for more than £3.5bn against Royal Bank of Scotland.

The group claims the bank deliberately misled shareholders into believing it was in good financial health just before it collapsed in 2008.

More than 12,000 private shareholders and 100 institutional investors have raised a class action against the bank.

They are also suing former top RBS executives, including ex-chief executive Fred Goodwin.

I welcome the idea that directors should be in fear of being sued (although I suspect their employers will give them some form of insurance policy – so the shareholders still pay!), but for shareholders to sue the company of which they are shareholders is far more problematic.

In this instance it refers to:

The action group maintains that the bank’s directors sought to mislead shareholders by misrepresenting the underlying strength of the bank and omitting critical information from the 2008 rights issue prospectus.

This means that RBS will be liable for the losses incurred on shares subscribed in the rights issue, by reason of breaches of Section 90 of the Financial Services and Markets Act 2000.

Presumably only those shareholders who took up the rights are involved – which means that if successful the cost of the compensation will be paid by the company and therefore its current shareholders.  Can those current shareholders (particularly who became shareholders post the rights issue) then sue the company for an undisclosed liability at the time they bought their shares which caused their shares to be over-valued? Well the company is technically “them” so that would seem to be a nonsense – and you cannot go back to the share register at the time to ensure that you only sue those shareholders who were the company at the time.

We are losing sight of what a “limited liability company” is.  The shareholders are the company and take the risk of failure in return for the possibility of dividend income and growth in value of the shares – so should not be able to sue themselves.  They appoint directors who have a fiduciary duty to the shareholders, they set the remuneration for those directors and they can hold them to account (in theory) at company general meetings.

Shareholders should not be frightened of setting remuneration policies that limit immediate pay and put a huge emphasis on contingent pay (contingent on nothing nasty happening for say 10 years).  I have suggested previously that shareholders should (in advance) vote a remuneration pot which should be used as follows:

  1. Paying a minimal wage to directors
  2. Covering losses
  3. Covering fines against the company
  4. Paying contingent pay to directors

If directors don’t like it, presumably they are either lacking confidence in their own abilities (and should therefore go elsewhere) or are not confident of the company actually being able to afford them (and should therefore go elsewhere).

If shareholders don’t like the idea of taking responsibility for their limited liability company, they should invest elsewhere.

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