RBS legal battle with former shareholders isn't over despite some of them choosing to settle

The largest group of plaintiffs by number aren’t impressed

Cleaning up the past – but some former RBS shareholders are fighting on (Reuters)

It’s not often that an £800m punch to the face inspires a company’s share price to rally. But this is Royal Bank of Scotland we’re talking about, and with RBS nothing is ever simple.

The shares found some support in early trading after the bank confirmed weekend reports that it has agreed to settle one of the most costly and pressing issues it faces under the “legal and conduct” banner.

That is the lawsuit brought by former shareholders, who have long argued that they weren’t given the full picture of the bank’s financial situation before signing up to its record breaking £12bn rights issue in April 2008.

The bank needed the money to plug a huge hole in its finances. It didn’t do the job, and just months later its executives were at the taxpayer’s door with their caps in their hands seeking still more money.

The new shares issued through the rights issue lost most of their value after the Government pumped in north of £45bn, leaving the state with a more than 80 per cent stake.

A £4bn law suit brought by disgruntled investors has been years in the making, and involves five separate groups of plaintiffs. Three of them, representing 77 per cent of the claims by value, have agreed to a settlement that will cost the bank £800m assuming the other two were to join them.

This counts as a win for the bank. RBS has a vast pool of money set aside in provisions to cover its various issues. The settlement is covered by those provisions.

The trouble is the two other groups, the larger of which is represented by Signature Litigation and includes 27,000 small shareholders in addition to a number of city institutional investors.

The Signature group wasn’t part of the settlement talks – it was only informed at the end of last week and the group says it is “considering the issues and implications”.

While joining the settlement obviously isn’t beyond the bounds of possibility, I’d be surprised if it that happened.

The group says its action is fully funded, and the small shareholders, if not the institutions, that make it up would probably be quite keen to have their day in court given the trial would likely see a public (and hostile) cross examination of the man widely seen as the villain of the piece, former RBS chief executive Fred Goodwin. Along with several of his lieutenants.

One of the great political and regulatory failings of the financial crisis of 2007-2008 is the fact that so much was swept under the carpet, and so few people were ever called to account.

Seeing Mr Goodwin taking the stand in a courtroom might go some way towards helping lance a painful boil. It could be said to be in the public interest, not that that will come into the calculations of any of those involved.

The odds are still against it happening. The trial isn’t scheduled until March, which leaves plenty of time for negotiations to continue. The case could easily end up being settled at the last minute, as contentious lawsuits often are.

But the fact that RBS has proved willing to pay something out could give the refuseniks heart. We could get more! And why not? The settlement figure – £800m – sounds big, but it’s not much when set against the £4bn the five groups were collectively seeking.

There is still good reason for the stock market to feel optimistic. The two groups outside the settlement account for just 23 per cent off the case by value. They could hurt the bank if they were to take the case to trial and win, but RBS could bear the pain. This isn't the biggest issue it faces. For that you have to look across the Atlantic to another case, brought by America's Department of Justice.

For the bank’s current investors, the case brought by former shareholders has gone from being unknown and frightening to merely worrying and unpleasant.

All the same, this isn’t over and there might just be a few fireworks to enjoy before it is.