Law Report: Court bars bank takeover: Cheltenham and Gloucester Building Society v Building Societies Commission. Chancery Division (Sir Donald Nicholls, Vice Chancellor), 8 June 1994

An agreement for the transfer of a building society into new ownership could not include a term under which the successor would make a cash distribution to members of less than two years' standing. This prohibition, imposed by section 100(9) of the Building Societies Act 1986, applied regardless of whether the payments were made by the successor company or another company in the same group.

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.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Senior Environmental Adviser - Maternity Cover

£37040 - £43600 per annum: Recruitment Genius: The UK's export credit agency a...

Recruitment Genius: CBM & Lubrication Technician

£25000 - £27500 per annum: Recruitment Genius: This company provides a compreh...

Recruitment Genius: Care Worker - Residential Emergency Service

£16800 - £19500 per annum: Recruitment Genius: Would you like to join an organ...

Recruitment Genius: Senior Landscaper

£25000 - £28000 per annum: Recruitment Genius: In the last five years this com...

Day In a Page

Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

Cameron lowered the flag for the dead king of Saudi Arabia...

But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

Humanity must be at the heart of politics, says Jeremy Corbyn
Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

Joe Biden's 'tease tour'

Could the US Vice-President be testing the water for a presidential run?
Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

Britain's 24-hour culture

With the 'leisured society' a distant dream we're working longer and less regular hours than ever
Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

The addictive nature of Diplomacy

Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

Fashion: Ooh, Lady Chatterley!

Take inspiration from DH Lawrence's racy tome with equally racy underwear
8 best children's clocks

Tick-tock: 8 best children's clocks

Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

Charlie Austin: ‘If the move is not right, I’m not going’

After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones