Shares in First Active dropped well below the price offered by Royal Bank of Scotland (RBS) in its takeover bid yesterday after it emerged that the transaction could be referred to the Competition Authority.

RBS has the right to walk away from the €887 million deal if it is referred to the Competition Authority before Thursday, when First Active shareholders are due to vote on the offer at an extraordinary general meeting. It is not automatic, however, that RBS will abandon the deal

First Active's shares fell 2 per cent to €6.02 yesterday, touching their lowest level since news of the takeover at €6.20 was made public on October 6th.

It is thought the prospect of a competition inquiry prompted the exit of several hedge funds from the stock. The decline came as First Active issued a statement describing the regulatory process surrounding the takeover as "normal".

The statement, understood to have been issued at the request of the Irish Stock Exchange, said the deal had been referred to the European Commission's Competition directorate on November 3rd. "The Irish Competition Authority is part of that process," it noted. The Irish authority is known to have met representatives of First Active and RBS last week.

No party involved was in a position to comment directly on the discussions yesterday, but it is likely that any competition concerns will have focused on the combined entity's 15 per cent share of the Republic's mortgage market. If the Competition Authority concludes that the deal creates specific competition worries, it can ask the European Commission to pass over jurisdiction on the whole takeover.

If this were to occur before Thursday, it would lead to the dissolution of the transaction, since the takeover is conditional upon being passed without referral to "a competent authority of Ireland".

The transaction had to be notified to the European Commission in the first place because of its size. The Commission must rule on the issue within a month of being notified, or else seek a further two months to study it.

If the Irish Competition Authority wants to consider it instead, it must request jurisdiction within the first month.