State's right to appoint B of I directors to remain

THE GOVERNMENT will assume ordinary shareholder voting rights attached to its 36.5 per cent holding of Bank of Ireland, but its right to appoint 25 per cent of the bank’s board of directors will remain.

Yesterday, the Government increased its stake in Bank of Ireland from 16 per cent to 36.5 per cent, through the conversion of approximately half of its preference shares in the bank into ordinary share capital.

The Government had become a reluctant shareholder in the bank in February after the European Commission forced the Government to take a 16 per cent ordinary shareholding in the bank in lieu of a cash coupon payment due to the Government on its preference share investment.

Yesterday’s capital raising announcement means the Government will assume the voting rights associated with its 36.5 per cent ordinary shareholding. This will have no impact on the rights granted to the Minister for Finance last year under the €3.5 billion preference share recapitalisation which included the right of the Minister to directly appoint 25 per cent of the bank’s directors.

Despite the fact that the Government’s preference shareholding is now well under 25 per cent, the conditions applied to the March 2009 recapitalisation still apply, including the provision to appoint 25 per cent of the directors.

Yesterday’s announcement also states that, in the event of the Government’s equity stake falling below 25 per cent, the Government will still retain voting rights equivalent to a 25 per cent shareholding, based on its preference shares.

The State will continue to hold approximately €1.78 billion of preference shares after the conversion of some of its stake into ordinary equity, netting the State a coupon of 10.25 per cent according to the Department of Finance.

Despite the fact that the European Commission had forbidden the Government from receiving its coupon payment in cash in February, the Minister for Finance Brian Lenihan said yesterday that the Commission had now sanctioned this payment, which would be in cash rather than equity.

Other conditions attached to the conversion of the Government’s preference shares – which are held through the National Pensions Reserve Fund (NPRF) – into ordinary equity is the cancellation of the Government’s warrants which had been attracted to the preference shares issued in March last year.

Bank of Ireland is to pay the NPRF €491 million in cash for the warrants, which had given the Government the option to purchase up to 25 per cent of the ordinary share capital of the bank. If exercised, the warrants would have given the Government a 34.3 per cent ordinary shareholding in the bank. This right will now be cancelled if the deal goes ahead.

In addition, Bank of Ireland will pay the NPRF a transaction fee of €22 million at the closing of the placing, as well as a fee equal to 1 per cent of the subscription price for the converted preference stock. According to the Department of Finance the State will receive some €51 million in total in fees as part of the NPRF’s share placing.