Weir was amazed. A former employee of the FTSE 100 company, he owned 1,100 Railtrack shares. They now seemed to be worthless.
Two days earlier, he and 250,000 other shareholders had received a dividend payment from the company, which Weir, like many others, chose to take in shares rather than cash. “My immediate thought was that I could have had £150 in my pocket rather than 57 more worthless shares,” he said. “And I thought that this was really sneaky on the part of the government — if they were going to pull the plug, why did they let people take their dividend in shares, knowing they would be worth nothing?” Leaving aside his personal loss, Weir felt a deeper, personal anger at Railtrack’s fate. His last job for the company had been as privatisation manager at its base at Swindon. He had been responsible for encouraging staff to buy shares in the company when it was sold off by the government in 1996. “We had a privatisation pack for staff, and a script from head office to explain to people the benefits of investing,” he said.
Hundreds of Weir’s fellow employees, mostly signalmen and train drivers, took the bait, and bought discounted shares. “They were not what I would describe as sophisticated investors. Most of them had never bought shares before.” When Railtrack went under they, like Weir, were left holding the baby.
Weir’s personal connection to the Railtrack sell-off meant he was not inclined to let the government get away with it. This week, after three and half years of arduous campaigning that raised a fighting fund of about £3m, he and the other Railtrack shareholders, represented by the Railtrack Private Shareholders’ Action Group, will finally get their chance for revenge. Weir is the lead claimant in a High Court action for damages by 47,940 shareholders against the Department for Transport and Stephen Byers, the former transport secretary.
The case starts tomorrow in London before Mr Justice Lindsay and is expected to last two to three weeks. It promises to be the trial of the year, with the prospect of revelations that will severely embarrass senior civil servants, former ministers and members of the current cabinet, including Tony Blair and Gordon Brown.
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It has a star-studded witness list. Top of the pile is Byers, a close ally of the prime minister, who co-authored the Labour manifesto for the recent election. He still has hopes of a return to government, hopes that could be left in tatters by what is expected to be a withering cross-examination from the claimants’ QC, Keith Rowley.
Another star turn will be Tom Winsor, the acerbic and cerebral rail regulator who claims to have been ambushed by the government to stop him saving Railtrack. Also appearing is Sir Richard Mottram, the former permanent secretary at the Department for Transport, whose alleged summing up of one internal crisis — “We’re all f***ed. I’m f***ed. You’re f***ed. The whole department’s f***ed,” — has passed into civil-service folklore.
To give the company’s side of the story, its reluctant former chairman, John Robinson, has been subpoenaed to appear, and a harsh light will be shone on the work of Labour’s army of controversial special advisers, with the appearance of Dan Corry, then special adviser to Byers and now with education secretary Ruth Kelly.
Regardless of the result, the ramifications of the case could go beyond the narrow issues of compensation. The shareholders’ central claim is that ministers, their political advisers and civil servants planned for some time to drive a major British company into administration, and did so with an intent to harm shareholders’ interests.
Their action may prove to have fundamental consequences for international investors’ views of British markets, the independence of economic regulation, and the attitude of government to private property. “This case is about Railtrack plc,” said one aggrieved company shareholder. “But it is also about UK plc.”
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LABOUR’s antipathy to Railtrack had a long history. The company was created as part of John Major’s much derided break-up and sale of British Rail. The state rail group was split into more than 80 different units, the largest of which by far was Railtrack, which owned and operated the track, signals and biggest stations.
In opposition, Labour were vociferous opponents of the sale, vowing they would renationalise if elected.
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By the time the Railtrack prospectus landed on investors’ desks in early 1996, the position had softened. It contained a section on political risk, including a letter from Clare Short (then shadow transport secretary) steering clear of promising a buy-back, but insisting that Labour did have the means to reassert its control of the network. She may not have known it at the time, but her words were prophetic.
After the float, Railtrack was for a while the surprise star performer among the Major sell-offs. By 1998, the company’s shares had climbed from a list price of 390p to £17.68.
It was all downhill from there. Dogged by mounting costs on its flagship project to upgrade the West Coast Main Line — originally costed at £2 billion, a budget that had grown to a projected £13 billion by 2001 — the company was dealt hammer blows by fatal accidents at Ladbroke Grove and Hatfield. The latter reduced the company to a state of nervous paralysis, with the nation’s railways nearly grinding to a halt as managers panicked. In a few short years Railtrack had gone from a success story to the most hated company in the country.
By the start of 2001, the company’s financial crisis was acute. According to the government, ministers and officials continued to review the options for the future of the railways until finally deciding it had lost confidence in Railtrack on October 6, and moving to put to it into administration two days later.
But the documents so far uncovered in the shareholders’ legal action appear to question this version of events. A crunch meeting took place on July 25, when Robinson, Railtrack’s chairman, went to see Byers in an attempt to solve the funding crisis.
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Just six days later, according to documents lodged with the court in support of the shareholders’ claim, Shriti Vadera, a key adviser to the chancellor, had sent an e-mail analysing the problem and setting out possible solutions: “Can we engineer a solution through insolvency — finding the balance between not having triggered it and therefore (not having to pay compensation under the) Human Rights Act but enough to have been seen to have acted decisively rather than reacting to a failed privatisation that we refused to see and deal with earlier?” By August, three months before the axe was finally swung, Byers was advised that the company’s own refinancing plans would not work, and that something more radical was required. “This (the Railtrack plan) essentially is a recapitalisation of Ariel (the codename for Railtrack) by the government for the immediate future in return for shares in the business. However, the costs and terms involved make this clearly unacceptable.”
Instead, some type of publicly controlled company had to be created. In order to do this, the advisers noted, “HMG must be prepared to see Ariel insolvent. If not, it has no negotiating leverage. Conversely, HMG must continue dialogue with management until ready to pull the trigger.”
The documents detail how the plan was steadily worked up between advisers such as Vadera, Corry and officials including Andrew Adonis, head of the No10 policy unit. There was constant debate about how the government should treat Railtrack shareholders — referred to in some memos as “grannies”. Ian Kemsley, a senior civil servant at the Treasury, pointed out one obvious problem in the differing treatment of creditors and shareholders: “If lenders are seen to have been bailed out by government in dealing with Railtrack’s administration this will make it harder to refuse to help out the shareholders: fat cat city bankers will get 100p in the pound and grannies (who probably invested at privatisation) will lose their blouses.”
A note of caution was injected by one of the government’s advisers, who appeared to foresee what the likely fall-out would be. On September 25, David Challon, a senior investment banker at Schroder Salomon Smith Barney, which provided financial advice to the Deparment for Transport, sent a memo to Vadera and David Rowlands, the department’s permanent secretary: “Furthermore, we remain (as laymen) surprised that the government can, with impunity (albeit through a parliamentary process) remove the effect of a key component of a regulatory regime on the basis of which shares were sold, shares have been traded and contracts have been entered into.”
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CHALLON may inadvertently have hit upon one of the critical points for the upcoming trial. Winsor, who was rail regulator at the time, will be a key witness. During the critical three days of the collapse, he retained the power to advance Railtrack a financial lifeline by allowing it to generate more money from the network. But according to Winsor’s subsequent testimony to the Commons transport select committee, Byers threatened to suspend his powers if he attempted to use them.
“Mr Byers said that they had thought of that and if such an application were made, he had the necessary authority immediately to introduce emergency legislation to entitle the secretary of state to give instruction to the regulator,” Winsor told MPs, adding that he had then to take stock to wonder “whether I had really heard what I had heard.”
This challenging of independent regulation — a cornerstone of all of Britain’s privatised utilities, and other industries besides — spooked the City. In a letter to the chancellor in March 2002, the cream of fund managers jointly sounded the alarm: “The government . . . therefore challenged the whole concept of economic regulation for monopoly utilities. This has enormous consequences for the returns any investor is going to demand from governmentrelated projects. We believe that it is important for the government to realise that the issues raised by the Railtrack administration, as well as its handling, have far-reaching consequences.”
Legal experts are divided over the shareholders’ likelihood of success. The case is novel; it is thought to be the first time that European human rights legislation has been used by a shareholder group to claim compensation from a state.
Matthew Newick, partner at the City law firm Clifford Chance, said he thought the claimants faced a difficult task: “The bar is incredibly high for them. It is one thing to show what was being done, another to show it was done in deliberate bad faith to damage them.”
David Greene, partner at Edwin Coe, which has handled the claim for the shareholders, said that it had demonstrated their determination as a group: “The fact is that this group of people really want a proper explanation of what happened, and that is what this hearing should provide.”
Weir said he was “frankly awestruck” at the efforts that had brought the case to court: “We have come so far in the last three and half years. It has become a way of life for some of us.”
HOW RAILTRACK HIT THE BUFFERS
RAILTRACK was meant to be the cornerstone of a bold new privatised railway that would leave behind the fusty image and poor performance of British Rail. It did not quite turn out that way; it survived as a quoted company for just over five years before losing the confidence of the government and crashing into administration.
May 1996 Railtrack shares are listed on the London Stock Exchange at 390p. The flotation is oversubscribed, and values the company at about £1.9 billion.
June 1998 Railtrack makes friends with Labour by signing a £5.8 billion deal to save the high-speed rail line to the Channel tunnel. The company’s shares peak at 1,768p during the year.
October 1999 Two trains collide at Ladbroke Grove. The accident in London kills 31 and injures 400.
October 2000 Four people die when a GNER express train derails at Hatfield, Hertfordshire. Near-paralysis of rail network ensues, with urgent checks for broken rails and widespread speed restrictions imposed.
November 2000 Chief executive Gerald Corbett resigns.
May 2001 John Robinson, the former chief executive of healthcare group Smith & Nephew, is appointed chairman of Railtrack.
July 2001 Robinson begins talks with Stephen Byers, transport secretary, on solutions to the company’s growing financial crisis.
July 2001 Government advisers, civil servants and ministers begin discussions on alternatives to Railtrack’s refinancing strategy, with plans to take advantage of the potential of the company going into administration.
October 5, 2001 Byers tells Robinson the government will not advance any more money. On the same day, Byers tells Tom Winsor, the rail regulator, that he will take emergency legislative powers if Winsor tries to provide a financial lifeline.
October 7, 2001. The High Court appoints Ernst & Young as Railtrack’s administrator.