Germany’s government expects to take a decisive step on Tuesday in resolving its biggest bank crisis by winning majority control of Hypo Real Estate, ending the threat of expropriation hanging over investors.
The government has clashed with private shareholders over the fate of the lender, which ran into liquidity problems and needs billions of euros in fresh capital to avoid being closed down by regulators.
Berlin insists that HRE – which is said by authorities to pose a systemic risk to the banking system – needs to be taken entirely into state control so it can be restructured more easily and at lower cost.
Shareholders in the lender will vote on Tuesday on a huge share increase to be underwritten solely by the government. The proposed issue of extra shares to the government, via Soffin, its bank rescue vehicle, would increase Berlin’s stake to 90 per cent.
The government already controls 47.3 per cent of HRE following a public takeover offer last month. This stake should be decisive in controlling Tuesday’s extraordinary meeting in Munich, unless there is an unexpectedly large attendance by investors opposed to the government’s plans. HRE management supports the measures.
With 90 per cent control, the government should then be able fully to nationalise the bank, invoking a so-called “squeeze-out” process to force remaining minority shareholders to sell their shares.
Berlin wants to avoid stirring controversy by resorting to expropriation of HRE’s investors to achieve its aims. Expropriation was one of a number of possible measures that lawmakers approved in April, supported by regulators who fear the contagion for other banks if HRE is closed.
However, some investors may argue that a squeeze-out in such circumstances is tantamount to an expropriation, even if the measure has precedent in German takeover law.
JC Flowers, the private equity fund that is HRE’s largest private shareholder, remains opposed to the government’s plans and rejects the argument that the bank needs to be entirely in state hands to be restructured.
Founder Christopher Flowers said in an interview with Germany’s Die Welt newspaper over the weekend that the fund would not support the share increase but acknowledged that the government would be able to push the measure through. Mr Flowers, who wants to remain as a long-term shareholder to help restructuring and recover some value from the fund’s investment, doubted the legality of a planned squeeze-out and said compensation should be higher than the €1.39 a share offered by the government in its public offer last month.
HRE shares have continued to trade slightly above the public offer price, suggesting other investors also believe they may get a better deal – although the government has said any compensation to remaining investors is likely to be made below the public offer price.
JC Flowers bought a stake of almost 25 per cent in HRE a year ago at €22.50 per share.