European regulators said on Wednesday they had agreed that Britain's part-nationalized Royal Bank of Scotland can cancel a government-owned share that effectively stops it from paying dividends.
RBS and Britain's finance ministry said in November they were in advanced talks with the European Commission to free the bank from the dividend access share - which gives the state priority over dividends and has been seen as a major obstacle to full privatization.
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RBS was rescued by the government through a 45.5 billion pound ($76.21 billion) bailout during the 2008 financial crisis, leaving the government with an 81 percent stake.
Sources familiar with the matter say RBS will pay 1.5 billion pounds to buy itself out of the arrangement, in line with the government's previous valuation of the share.
European regulators also said they had agreed an extension to a deadline for RBS to sell 315 branches, which it had to offload as a condition of the bailout.
In a statement, the EU executive Commission said a delay to the sale of RBS's British bank entity for small businesses, code-named Rainbow, would not jeopardize the viability of the business.
"Establishing Rainbow as a standalone market player is key to increasing competition in the UK market for banking services to SMEs," EU Competition chief Joaquin Almunia said.
"The Commission has agreed to extend the deadline for divesting Rainbow because the UK authorities and RBS have proven their commitment to create and divest Rainbow as a solid standalone bank." ($1 = 0.5971 British Pounds)
(Reporting by Matt Scuffham and Barbara Lewis, editing by Robert-Jan Bartunek and Simon Jessop)