The Vice Chancellor so declared on an application by the Building Societies Commission in respect of the proposed takeover of the Cheltenham and Gloucester Building Society by the Lloyds Bank group.
Jonathan Sumption QC, Richard Sykes QC and Malcolm Waters (Slaughter & May) for the building society; Philip Heslop QC, Stephen Richards and Stephen Moverly Smith (Treasury Solicitor) for the commission.
SIR DONALD NICHOLLS V-C said the Cheltenham & Gloucester was one of the largest and most profitable building societies in the country. The Lloyds Bank group was offering pounds 1.8bn to take over its business.
Under the 1986 Act, the transfer of a building society's business must be approved by prescribed resolution of its members and have the confirmation of the commission, which had a supervisory role. In this case, the commission considered that some of the proposed terms were outside the society's powers and were unlawful.
The 1986 Act gave building societies the power to offer a wider range of services than had been permitted under previous statutory controls. By sections 97 to 102, it also introduced a power enabling a society to become an authorised banking institution under the Banking Act 1987.
Under this scheme the building society entered into a transfer agreement with its successor.
The successor company could be specially formed for this purpose, or it might be an existing company, which would then assume conduct of the society's business. But Parliament intended these procedures to facilitate the organic development of an institution, not its takeover by an outside institution tempting members with the offer of substantial cash bonuses. There was an obvious risk the members might snap up such an offer, regardless of the society's long-term best interests.
The Act therefore contained safeguards. If the successor was an existing company, the transfer had to be approved by a shareholders' resolution passed by at least 75 per cent of the shareholders voting. In addition, it must be passed by at least 50 per cent of the members qualified to vote, or by qualified shareholders representing not less than 90 per cent of the total value of the shares held by members qualified to vote.
The prospect of an immediate cash bonus was precisely the incentive which could be expected to overcome these hurdles. To prevent speculative investment in building societies, the Act placed limits on the distributions and benefits which might be made available to members.
By section 100(9): 'Where the successor is an existing company, any distribution of funds to members of the society . . . shall only be made to those members who held shares in the society throughout the period of two years which expired with the qualifying day . . .'
In this case, the society proposed to enter into a transfer agreement with an existing company, Chambers & Remington Ltd, which was wholly owned by Lloyds Bank plc through an intermediate holding company, Lloyds Bank Financial Services (Holdings) Ltd.
The holding company was to pay pounds 500 to each shareholding member of the society, pounds 500 to each borrowing member in respect of each mortgaged property, pounds 500 to each employee and pensioner, and a proportionate cash payment, equal to about ten per cent of the amount in each account, with a likely maxium of pounds 10,000 in any one case, to each shareholding member and each holder of a deposit account with the society.
But about 27 per cent of the society's members were newly- joined and any payments to them would fall foul of section 100(9). Without their votes, the bid might fail. Did it make any difference that the payments to them came, not from the proposed successor, but from its parent company? On a proper reading of the Act, it did not.
The power under section 100(1), to make a distribution of part of the society's funds to its members in consideration of the transfer, although permissive and dependent on the society's own rules, was nevertheless subject to the statutory restriction in section 100(9).
Accordingly, the proposal for payments to be made by the successor's holding company to members of the society who had held shares for less than two years would be outside what was authorised by the Act just as much as if the payment were made by the successor company itself.