RBS 2013 Annual Report Download - page 529
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Additional information
527
The Group is subject to a variety of risks as a result of implementing the
State Aid restructuring plan, including required asset disposals. In
particular, the Group agreed to undertake a series of measures including
the disposal of a number of businesses now completed, the disposal of
Direct Line Group (DLG) and the disposal of the Royal Bank branch-
based business in England and Wales and the National Westminster
Bank Plc (NatWest) branches in Scotland, along with the direct and other
small and medium-size enterprise (SME) customers and certain mid-
corporate customers across the UK. The initial sale of 34.7% of DLG
through an IPO was completed in October 2012, with further sales in
March and September 2013 reducing the Group’s stake to 28.5% at year-
end, marking the continuation of the Group’s disposal strategy as part of
its on-going delivery against EU-mandated commitments. In respect of
the Royal Bank and NatWest branch-based business, the divestment
process continues to progress following the withdrawal of its original
buyer in October 2012 and a pre-IPO investment by a consortium of
investors was announced in September 2013. The Group is currently in
discussions with HM Treasury and the EC in relation to certain matters,
including the potential retirement of the Dividend Access Share.
There is no assurance that the price that the Group receives or has
received for any assets sold pursuant to the State Aid restructuring plan
will be or has been at a level the Group considers adequate or which it
could obtain in circumstances in which the Group was not required to sell
such assets in order to implement the State Aid restructuring plan or if
such sale were not subject to the restrictions contained in the terms
thereof. Further, if the Group fails to complete any of the required
disposals within the agreed timeframes for such disposals, or fails to
negotiate extensions in respect of such disposals, under the terms of the
State Aid approval, a divestiture trustee may be empowered to conduct
the disposals, with the mandate to complete the disposal at no minimum
price.
Furthermore, if the Group is unable to comply with the terms of the State
Aid approval, it could constitute a misuse of aid. In circumstances where
the EC doubts that the Group is complying with the terms of the State Aid
approval, it may open a formal investigation. At the conclusion of any
such investigation, if the EC decided that there had been misuse of aid, it
could issue a decision requiring HM Treasury to recover the misused aid,
which could have a material adverse impact on the Group.
In implementing the State Aid restructuring plan, the Group has lost, and
will continue to lose, existing customers, deposits and other assets (both
directly through sale and potentially through the impact on the rest of the
Group’s business arising from implementing the State Aid restructuring
plan) and the potential for realising additional associated revenues and
margins that it otherwise might have achieved in the absence of such
disposals.
The disposal of Global Merchant Services and RBS Sempra
Commodities reduced the Group’s assets by approximately £13.0 billion
and £2.4 billion, respectively (based on total assets immediately prior to
disposal). The quantum of assets and deposits that would be included in
a divestment of the Royal Bank branch-based business in England and
Wales and the NatWest branches in Scotland is not certain. However, at
31 December 2013, this business included approximately £19.4 billion of
assets, £23.2 billion of deposits and two million customers.
The implementation of the State Aid restructuring plan may also result in
disruption to the retained business and give rise to significant strain on
management, employee, operational and financial resources, impacting
customers and employees and giving rise to separation costs which could
be substantial.
The implementation of the State Aid restructuring plan may result in the
emergence of one or more new viable competitors or a material
strengthening of one or more of the Group’s existing competitors in the
Group’s markets. The effect of this on the Group’s future competitive
position, revenues and margins is uncertain and there could be an
adverse effect on the Group’s operations and financial condition and its
business generally.
The occurrence of any of the risks described above could have a material
adverse effect on the Group’s business, results of operations, financial
condition, capital position and competitive position.
HM Treasury (or UK Financial Investments Limited (UKFI) on its behalf)
may be able to exercise a significant degree of influence over the Group
and any proposed offer or sale of its interests may affect the price of
securities issued by the Group
The UK Government, through HM Treasury, currently holds 63.9% of the
issued ordinary share capital of the Group. On 22 December 2009, the
Group issued £25.5 billion of B Shares to the UK Government. The B
Shares are convertible, at the option of the holder at any time, into
ordinary shares. The UK Government has agreed that it shall not
exercise the rights of conversion in respect of the B Shares if and to the
extent that following any such conversion it would hold more than 75% of
the total issued shares in the Group. Any breach of this agreement could
result in the delisting of the Group from the Official List of the UK Listing
Authority and potentially other exchanges where its securities are
currently listed and traded. HM Treasury (or the UKFI on its behalf) may
sell all or a part of the ordinary shares that it owns at any time. Any offers
or sale of a substantial number of ordinary shares or securities
convertible or exchangeable into ordinary shares by or on behalf of HM
Treasury, or an expectation that it may undertake such an offer or sale,
could negatively affect prevailing market prices for securities issued by
the Group.
In addition, UKFI manages HM Treasury’s shareholder relationship with
the Group and, although HM Treasury has indicated that it intends to
respect the commercial decisions of the Group and that the Group will
continue to have its own independent board of directors and
management team determining its own strategy, should its current
intentions change, HM Treasury’s position as a majority shareholder (and
UKFI’s position as manager of this shareholding) means that HM
Treasury or UKFI may be able to exercise a significant degree of
influence over, among other things, the election of directors and
appointment of senior management, dividend policy, remuneration policy,
or limiting the Group’s operations. The manner in which HM Treasury or
UKFI exercises HM Treasury’s rights as majority shareholder could give
rise to conflict between the interests of HM Treasury and the interests of
other shareholders. The Board has a duty to promote the success of the
Group for the benefit of its members as a whole.