Hedge funds fight Northern Rock board for small investors' votes

Northern Rock and its two biggest shareholders are battling for the votes of small investors who could decide the outcome of the bank's extraordinary general meeting next week.

Individual investors rarely decide votes at company meetings, which are dominated by giant institutions. But Northern Rock has around 180,000 small shareholders, holding more than 20 per cent of the stock. Many have held shares since the former building society demutualised in 1997.

Northern Rock's two largest investors, SRM Global and RAB Capital, are appealing to individual shareholders because they know the votes will be tight. Three of their four resolutions require 75 per cent of votes cast to be in favour. To win the votes, they may also need the tracker funds, which usually side with the board, to abstain.

The hedge funds have proposed four resolutions that would limit the board's ability to sell or buy assets and issue new shares. The funds are trying to stop the bank, which has borrowed more than 25bn from the Bank of England, being sold off too cheaply.

Northern Rock has hired Georgeson, a shareholder relations company, to contact investors ahead of the meeting and advocate the board's view. Roger Lawson, the communications director of the UK Shareholders Association, said many small shareholders contacted were unhappy about being cold called.

"Bearing in mind that even the smallest shareholders have been contacted, it surprises me that the company has gone to such expense, which must be considerable," Mr Lawson said.

Northern Rock's biggest shareholder, the Monaco-based fund SRM Global, yesterday added its voice to that of RAB Capital in appealing to all shareholders for their support. The two funds forced the bank's board to announce the EGM last month.

SRM said Northern Rock was "a strong and viable business".

"It is nothing like the 'lame duck' that some would have you believe. We are shareholders in a company that has true value in its assets, its brand and its employees," it added.

Next Tuesday's EGM, to be held at the Metro Radio Arena in Newcastle, pits the hedge funds and many small investors against Northern Rock's board, which opposes the resolutions.

The UK Shareholders Association has recommended that investors vote for the resolutions put forward by SRM and RAB. Mr Lawson reported a high level of interest from individuals, with a response of more than 30 per cent.

SRM and RAB have added to their holdings as the EGM has drawn nearer and now hold almost 18 per cent of Northern Rock between them. RAB announced yesterday that it had bought another 250,000 shares, taking its holding to 7.75 per cent.

Northern Rock's board is opposing the resolutions because they could place potential extra hurdles in the way of a sale. The hedge funds argue that, in the bank's predicament, investors need extra safeguards to ensure political pressure does not negate shareholders' interests.

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