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Shareholders could be damaged beyond repair

The Times: Shareholders could be damaged beyond repair

“Several lawyers specialising in class actions on behalf of aggrieved investors are circling the Anglo-Dutch group, which is well within the orbit of American law.”

By Graham Searjeant

August 26, 2004

AMERICA’S Securities and Exchange Commission promises to deliver even more embarrassment to the corporate heart of Royal Dutch/Shell than to its London equivalent.

For shareholders, however, the agreement of fines and the switch in emphasis to errant individuals should be an enormous relief.

Other regulators can have their say, but the main damage is clear, quantifiable, done and over with.

Except that it isn’t. The unquantifiable peril for shareholders, the one that could wreck their investment, comes from themselves. Several lawyers specialising in class actions on behalf of aggrieved investors are circling the Anglo-Dutch group, which is well within the orbit of American law.

One suit, filed by West Coast lawyer William Lerach on behalf of a pension fund, aims to target named directors and the boards of the two companies, but it is not clear who would pay compensation if they did not. Another suit, thought to be on comparable lines, is being linked to Melvyn Weiss of Milberg Weiss, who used to be Mr Lerach’s partner.

The potentially disastrous suit comes from Stanley Bernstein of Bernstein Liebhard & Lifshitz, who has two Pennsylvania pension funds in tow. Mr Berstein claims to be acting for all investors who bought stock in the past five years and is claiming damages from the company as a whole.

Shareholder actions are common in America but most seem to relate to disputes over the terms of takeovers. After the merger of the St Paul and Travelers insurance groups, for instance, former Travelers’ shareholders reasonably complained about an unexpected £1 billion charge. In a oblique parallel to Shell, this was needed to make St Paul’s reserving as conservative as Travelers.

Other groups sued over excessive benefits to directors from agreeing a takeover, and against a board agreeing an excessive breakdown fee if shareholders rejected the deal.

Kirk Kerkorian, the litigious billionaire, has a long-standing suit against Daimler Chrysler. He claims that he was deliberately misled into thinking that the German-American combine was a merger of equals when in fact it was a takeover of Chrysler that ought to have attracted a premium payment. The underlying problem, however, is that Daimler Chrysler shares have fared badly since the merger. Mr Kerkorian wants his money back and does not appear to care if the other shareholders have to pay.

At Shell, the conflict is far more stark. One large group of shareholders is claiming huge amounts in damages from the other shareholders. No fixed amount has yet been claimed but the noughts seem to be multiplying in front of Mr Bernstein’s eyes.

If such a suit succeeds in full, it could comfortably exceed the financial damage done by the overestimation of reserves and regulatory fines. Shareholders will be holding each other to ransom. Companies, like governments, have no money of their own.

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