Railtrack shareholders told of legal plan

By CNN's Charles Hodson

LONDON, England (CNN) -- The British government may find itself fighting a legal case in the United States after pulling the financial plugs on the privatised UK rail infrastructure company Railtrack.

Lawyers are considering taking action in the UK and the U.S., alleging investors were misled by the prospectus issued by Conservative government that was in power at the time of Railtrack's sale in 1996.

The case was outlined to a group of Railtrack shareholders at a London hotel on Friday by Stephen Alexander, a partner at the London firm Class Law Solicitors.

A U.S. class action suit increases the prospect of a bigger payout for the collapsed company's 250,000 shareholders, and may make it easier for the plaintiffs to put the British government on the spot.

Class Law Solicitors is just one of several London law firms seeking the support of Railtrack shareholders or bondholders in suing the government.

Allen & Overy has been hired by the Railtrack Shareholders' Action Group, set up a week ago by major shareholders. Its chairman Simon Haslam is a senior executive at fund management group Fidelity International.

What is different about Class Law's approach is its focus on what it says are false statements in the privatisation prospectus.

Alexander told shareholders the original document claimed Britain's rail infrastructure was in good condition and promised enough funding to keep it sound for a further 10 years.

The Hatfield disaster on October 17, 2000, shattered that comfortable illusion. Four people died when a rail broke on a key stretch of track north of London.

Railtrack was forced to undertake emergency repairs, disrupting the rail network for months and forcing the company and its shareholders into financial ruin.

Quiet relief

The would-be litigants' second key argument concerns the current UK Labour government's subsequent intervention in Railtrack's affairs, culminating in its successful application to the London High Court on October 7 to put the company into receivership.

Alexander does not dispute that the government was trying to uphold the national interest and maintain rail services. But he adds: "They also have an obligation to the shareholders and maybe they just forgot that there were shareholders."

An extensive legal feasibility study is next on his agenda, with any action unlikely to start until early in 2002.

But any class action will attract attention way beyond even the estimated 10 million mainly British investors who directly or through fund managers had an interest in Railtrack.

Britain's rail privatisation, with its unique separation of the owner of the infrastructure from the train operating companies, has long attracted international attention and some international observers and opponents of privatisation were quietly relieved when Railtrack failed.

If its shareholders succeed in winning compensation, the episode will go down as a privatisation too far -- earning a reprieve for many other public transport systems that might otherwise have been heading for a sale to the private sector.