EU Court OKs Bailout of Regional German Bank

(CN) - The European Commission properly approved Germany's bailout of a failing regional bank during the global economic meltdown, the General Court of the European Union ruled Thursday.

Germany's fifth-largest regional bank, HSH Nordbank took a one-two punch with the subprime lending crisis in 2007 and the bankruptcy of Lehman Brothers in 2008. The German government went into rescue mode, recapitalizing the bank's shares to the tune of $3.2 billion and offering a general guarantee of nearly $11 billion - as well as a liquidity guarantee of over $18 billion.

In 2011, the European Commission found that while Germany's bailout of Nordbank constituted state aid, it was legal provided the bank granted its majority shareholder HSH Finanzfonds a lump-sum payment of $538 million which Finanzfonds then put back into Nordbank.

Additionally, Nordbank was prohibited from paying dividends until at least 2014, with possible restrictions continuing into 2015 and 2016.

Two minority shareholders sued seeking annulment of the commission's decision, angry that their holding in Nordbank had dropped from 25.67 percent to 9.19 percent in the recapitalization.

On Thursday, the General Court of the European Union dismissed the shareholders' lawsuit - finding their only valid legal interest in the commission's decision stemmed from the required lump-sum payment to Finanzfonds. As to the bailout itself, the EU lower court found that it served both the interests of the shareholders and the bank equally given the bank would have failed without it.

As to the $538 million payment to Finanzfonds, the Luxembourg-based court found that while the shareholders did see a dilution of the amount of Nordbank they held - and Finanzfonds' holdings increased - Finanzfonds necessarily received more shares because it provided the bailout money.

Accordingly, the minority shareholders failed to show that the lump-sum payment required by the commission was disproportionate or unfair treatment, the court ruled in an opinion that was not made available in English.

The minority shareholders have two months to appeal to the European Court of Justice.

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