On the eve of a critical week to determine the future of Scottish banking it emerged that the fate of HBOS will be decided by the bank's two million small shareholders, not its big institutional investors.

They will have the final say on whether the controversial takeover of HBOS by Lloyds TSB will go ahead at a meeting in Birmingham on Friday.

Today a tribunal in London hears a claim by an anti-merger action group that Lord Mandelson, the Business Secretary, broke the law in approving the takeover that threatens to end the bank's 313 years of independence.

Sir Peter Burt, the Bank of Scotland chief executive who oversaw the merger with Halifax, has already voted against the takeover. He said yesterday: “It is not outwith the bounds of possibility that the board may not get the support they need.”

Under the takeover, called a “scheme of arrangement”, the board has to win the backing of people holding 75 per cent of all the banks' shares. Financial institutions, holding about 80 per cent of the shares, are all expected to support the deal.

More problematic is a rule introduced to protect small shareholders that gives the holder of 100 shares the same voting weight as holders of 10 million shares.

The rule says that the deal must be supported by 50 per cent of all shareholders and makes the institutions a minority of all shareholders.

The business campaign group fighting the takeover stepped up a gear yesterday, recruiting Sir Sean Connery to their cause and rebuffing a government legal attempt to get them to drop their action.

A swift verdict at the tribunal in London may then prompt a move to the Court of Session in Edinburgh, should the losing side decide to appeal against the outcome.

The heightening tension around the vote this Friday was underlined by the business group's rejection of an offer from Lord Mandelson's lawyers saying that they would not seek to recover the Government's legal costs, already thought to be approaching £50,000, if they dropped the case.

The group responded by announcing that Sir Sean had sent a message of support, arguing against the creation of a “super bank”. “I never saw anything that got bigger, get better,” he said.

The group claims that Lord Mandelson unlawfully overruled a report by the Office of Fair Trading that the deal raised concerns that competition, particularly in Scottish business banking, would be reduced.

Though the Government has come under severe criticism recently for seemingly discouraging any alternative bid for HBOS, Sir Peter refused to join in the criticism during a television interview yesterday, instead pointing the finger of blame at the HBOS board.

On BBC Scotland's Politics Show, Sir Peter said that Alistair Darling, the Chancellor, had been in an extremely difficult position: “In fairness has been the only solution put forward on the table. I blame the HBOS board myself, rather than the Government. If they had displayed a bit more spine than a jellyfish, they could have done a very much better deal for the shareholders, the customers and the employees.”

HBOS said that the legal action was meritless, adding: “There is only one transaction on the table which provides certainty and benefits for our shareholders, including the 200,000 small shareholders in Scotland.”

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