Why a member vote is expected under Section 92A of the Building Societies Act (1986)

WHY A VOTE IS EXPECTED UNDER THE BUILDING SOCIETIES ACT (1986) 

Section 92A of the Building Society Act (1986) specifies what should happen when a building society makes an acquisition. 

In effect, it states that a building society must resolve to do so by resolution (subsection 1), and such a resolution must be passed by a majority of eligible members – either at a meeting or via a ballot (subsection 2).

This is not required when a building society acquires a business that it is:

(i) similar to a building society using an income test (subsection 3), AND 

(ii) sufficiently small using a size test (subsection 4).

Virgin Money fails both these tests on the basis of the most recent public information found in the 2023 Annual reports.

Test 1: the income test

In effect, subsection 3 states that for a vote note to be required, the target company must make most of its business income from loans secured on residential property i.e. mortgages.

It does not. In the Virgin Money 2023 annual report (page 61), the group stated that its 2023 income from mortgages was 1,537 million against a total income of 3,863 million.

1537 / 3863 is 39.8% i.e. mortgages do not make up 50% or more of the business income.

UPDATE AS OF FRIDAY 3RD MAY

Nationwide has now admitted that they are including some of Virgin Money’s £600M swap income to get over the 50% line (see picture extract from 2023 VM annual report).

We are now challenging the board – is this legally and morally safe? Swaps are usually investment contracts between a bank and other financial institutions (they are not secured loans on residential property, unlike mortgages), often used to hedge interest rate risk. It’s not clear that they have a direct “connection to loans secured on residential property” i.e. mortgages, as described in the 1986 Act.

Test 2: The size test

In effect, subsection 4 states that for a vote not to be required, the value of the shares of the acquisition target must be less that 15% of the amount of the society’s own funds.

It is not.  The proposed takeover values Virgin Money at £2.9 billion. The amount of the Nationwide’s own funds, using “members equity and interests” as the measure from the Nationwide 2023 annual report (page 74), is £16.9 billion.

2.9 / 16.9 = 17.2% i.e. the proposed acquisition is larger than 15% of the size of Nationwide.