Shell Holders Suit Meant To Correct Governance

The Wall Street Journal: Shell Holders Suit Meant To Correct Governance

By David Bogoslaw

DOW JONES NEWSWIRES

Posted 26 June 04

NEW YORK — A shareholders derivative lawsuit filed Friday against the boards and some top executives of Royal Dutch Petroleum Co. (RD) and the Shell Transport & Trading Co. (SC) would break new ground, if won, by explicitly requiring the companies to correct corporate governance problems, a lawyer and consultant for the plaintiffs said.

Robert Monks, an authority on corporate governance and founder of Institutional Shareholders Services, argues that the convoluted corporate structures of the companies known collectively as the Shell Group were a key contributor to the oil reserve revision fiasco earlier this year.

Where the embedded culture and psychology of a corporate board prevents a company from improving its governance, lawsuits can act as a catalyst to “provide a changed and better company coming out of litigation,” Monks said during a conference call with reporters.

Monks is a consultant to Lerach Coughlin Stoia & Robbins LLP, the law firm that filed the suit by the National Retirement Fund of UNITE – the North American apparel, textile and laundry workers union – and the Plumbers and Pipefitters National Pension Fund. The suit was filed in the Superior Court of New Jersey, Middlesex County.

First on the list of governance changes the plaintiffs are seeking is a shift from dual boards to a single board to which management would be accountable.

“The inability to have coherence in the governing boards is one reason the company suffered these damages and has to be remedied,” Monks said.

The suit is also pushing for shareholders to be given the right to nominate at least three directors to the board to help ensure such behavior doesn’t recur.

Unlike class action suits brought against companies by stockholders, this lawsuit was filed by the two pension funds on behalf of the Shell Group and doesn’t seek damages for the plaintiffs, said William Lerach, the counsel for the funds.

Instead, the lawsuit demands that board directors and executives reimburse the Anglo-Dutch oil giant for an estimated hundreds of millions of dollars it could lose from various class-action suits, likely fines by the Securities and Exchange Commission, as well as the loss of $100 billion in anticipated future cash flows due to the elimination of 4.47 billion barrels of proved reserves from the company’s balance sheet.

The lawsuit also seeks to force fired and certain current Shell executives to disgorge hefty bonuses and severance packages they accepted for the years during which their misconduct led to the oil revisions. It is also going after directors to give back directors’ fees for the years in question.

With the suit, pension fund shareholders hope to send a message to other foreign companies like Shell listing and selling shares in the U.S. that if they disregard U.S. laws – including the 2002 Sarbanes-Oxley Act – intended to improve corporate behavior and protect stockholders, that they will get sued, Lerach, the counsel, said.

Lerach conceded that in demanding certain governance changes, “we are probably at the cutting edge of the powers of the equity court,” where the case will be heard and which has broad authority to shape whatever remedy is necessary to correct the harm done.

“But corporate laws are evolving to meet economic and corporate challenges,” he added, citing the growing impact of foreign companies on U.S. investors. “The leverage of the lawsuit hopefully will enable us to engage the boards of these companies.”

Also named in the lawsuit are accounting firms PriceWaterhouseCoopers and KPMG, which audited the Shell Groups’ financial statements for the years in which oil reserves were overbooked.

“Oil reserves information and future cash flows from it fall within the ambit of auditor responsibility and we believe overstatements of the magnitude involved here could not have been overlooked if due care had been exercised,” Lerach said.

Some non-executive board members are also being sued for skimping on their duties to ensure the company’s integrity and compliance with the Sarbanes-Oxley Act, he added.

Prior to splitting into east and west coast divisions – the latter being Lerach Coughlin Stoia & Robbins LLP – Milbank Weiss Bershad Hynes & Lerach had filed a shareholders class action suit under federal securities laws. This suit is being filed in a state court because Shell has extensive operations in New Jersey and to comply with legal technicalities in order to name the accounting firms as defendants, Lerach said.

While the pension funds would only benefit from the suit to the extent that a victory forces money back into the Royal Dutch and Shell companies and the stocks regain value lost over the past six months, as members of the federal class action suit, the plaintiffs would be entitled to a portion of any damages awarded in that case, he said.

How quickly the New Jersey case will be heard is the hands of the companies, however.

“If they choose to spend millions of dollars on a scorched-earth defense policy to entrench themselves, they can delay it for a long time,” Lerach said. “We’d like to work with them constructively to get this company straightened out so it can return to providing shareholder value.”

The suit also comes just days before thousands of shareholders are expected to convene for the companies’ concurrent annual general meetings on Monday in London and The Hague, respectively. These will the first public forums where they will be able to confront Shell’s management with their concerns about the oil reserve revisions.

-By David Bogoslaw, Dow Jones Newswires; 201-938-5289; [email protected]

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