The Financial Services Authority has today published its report into the failure of Royal Bank of Scotland. One of the principal causes of the collapse of RBS was its acquisition of ABN AMRO, which the FSA concludes was conducted “without appropriate heed to the risks involved and with inadequate due diligence”. The FSA press release is here and the full report can be read here.
However, the FSA has decided to take no action with regard to that due diligence failure, for the following reasons (at section 2.3 of Part 3 of the report, at paragraph 247):
“• It [the FSA] did not identify material failures in the processes followed by the Board to govern its decision-making during the acquisition or instances where knowingly inaccurate or unreliable due diligence information was presented to or withheld from the Board.
• It did not find evidence that Board members were pressured by the executive or that the executive had acted inappropriately to push through the decision to proceed with the acquisition.
• The RBS Board received legal advice as to whether it had given the acquisition proper consideration and whether the amount of due diligence undertaken was in line with generally accepted practice.
• When it became apparent that the market conditions were deteriorating in 2007, RBS sought legal advice on its ability to withdraw from the acquisition or reduce the price.
• There are no rules, codes, or practice standards which define the appropriate and required level of due diligence in a takeover. In the absence of such rules, codes or practice standards, the decision to proceed with the takeover would have to be so obviously wrong at the time that it was clearly outside the bounds of reasonableness.
• The degree to which the extent of the due diligence conducted and the overall limitations of the transaction were transparently communicated to investors, the FSA and the general public meant in this case that the deficiencies in the due diligence could not in themselves be the basis for a successful enforcement action.”
The FSA report states that the legal advice referred to above “is subject to legal professional privilege and cannot be referred to in this Report. [The FSA] Enforcement Division took account of the fact that legal advice had been sought as well as the content of the advice”.
Earlier in the FSA report, discussing an RBS Chairman’s Committee discussion during the period when the RBS Board was considering the ABN AMRO acquisition in the context of the problems caused by ABN AMRO’s sale of its La Salle business, the report notes that:
“The minutes of the meeting recorded that RBS’s various advisers were comfortable with the transaction[i.e the ABN AMRO acquisition] and that it had received advice from its lawyers, Linklaters, on the issue of whether the RBS Board had given the proposed transaction proper consideration.”
That is one of only two named references to RBS’s lawyers in the FSA report.
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