Legislation aims to head off legal action by Northern Rock investors

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The Independent Online

The Government has tied the hands of the independent valuer of Northern Rock's shares by laying down strict terms in draft legislation that went before Parliament yesterday.

The Treasury wants to head off shareholder litigation by getting an independent valuation of Northern Rock's shares which it would use if investors in the stricken bank sued for higher compensation.

The compensation scheme order for Northern Rock stated: "In determining the amount of any compensation payable by the Treasury to any person ... it must be assumed ... that Northern Rock is unable to continue as a going concern and is in administration."

The Government had been planning to use a valuer for some time as a means to limit the compensation it might have to pay shareholders if the Rock were nationalised. Experts had said the valuer might pronounce the shares near worthless without the Government's guarantee and the terms of the legislation make this almost certain.

The Government has come under great pressure from the hedge funds SRM Global and RAB Capital, which built a combined stake of almost 20 per cent in Northern Rock.

They tried to face down the Government, but the decision to nationalise the bank could leave them with little or nothing in return for their stakes.

About 180,000 small shareholders also face losing out, though many of these would have received their shares free when the former building society demutualised in 1997.

The hedge funds and the Northern Rock Small Shareholders' Group are demanding at least £4 a share. SRM has threatened to sue the Government for breaching European human rights laws.

The Bill to nationalise Northern Rock includes general powers for deposit takers to be nationalised if they receive lender-of-last-resort support from the Bank of England. This raised concerns that any bank which went to the Bank of England for emergency support could face nationalisation.

But the trigger point only comes in for emergency assistance that is backed by a Treasury guarantee. The Bank of England's original support for Northern Rock on 14 September did not have a guarantee, but the Treasury stepped in when Northern Rock ran out of assets that would meet the Bank of England's lending criteria.

The nationalisation of Northern Rock has raised fears among some competitors that its Government guarantees would give it an unfair advantage in competing for retail deposits and wholesale funding. But John Varley, the chief executive of Barclays, said yesterday that he was unconcerned. "I can understand how in theory the industry might be concerned at a competitor that had historically been an aggressive competitor now being owned by the Government. The Government understands that. It does not concern me at all... the playing field will be level."

Investors who gained from shorting Northern Rock's stock crowed at their "easy" gains yesterday. Simon Cawkwell, who started shorting the stock at 500p, told Bloomberg: "I'd say it was shooting fish in a barrel, but it was easier than that. It was just pulling the trigger."

The bank's shares were delisted on Monday after closing at 90p on Friday, down 90 per cent in the previous six months.