Shareholders take comfort in history

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Alistair Darling is expected to argue on Monday that if Northern Rock were nationalised it would be treated as if the government guarantee had never been made – rendering the shares almost worthless.

However, shareholders could put up a strong fight. They are expected to point to several legal precedents in the UK where the government has been obliged to provide compensation.

For example, the Aircraft and Shipbuilding Industries Act 1977, which nationalised the sectors, contained provisions for shareholder compensation. The Act referred to payments in respect of shares listed on the London Stock Exchange based on their average price over the six months prior to the date on which nationalisation was effectively announced.

The reasoning was that nationalisation had been under discussion for some time and had led to the drop in the share price, so it was necessary to adjust the compensation to account for this.

When the current government banned fur farming under another act in 2000, it was again deemed necessary to pay reasonable compensation. The government-sponsored scheme became the subject of a successful legal challenge by the Fur Breeders Association of mink fur farmers to win greater compensation.

If the aircraft and shipbuilding industries compensation scheme were applied to any nationalisation of Northern Rock, it would mean a valuation of 946p per share and total of approximately £3.98bn ($7.77bn).

This figure is based on the average share price in the six months prior to September 13 2007 – when the Bank of England facility was first announced and nationalisation began to be discussed.

Any potential challenges to the nationalisation of Northern Rock would also focus on whether the process was lawful – in other words, a proportionate means of achieving the government’s objectives and an appropriate level of compensation for shareholders.

Article 1 of the First Protocol of the European Convention on Human Rights requires compensation to be payable – otherwise the expropriation of property, or the prohibition of someone’s business, is unlawful.

Moreover, the compensation must bear a reasonable relationship to the value of the property being expropriated.

The Article says: “Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.”

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