The Times: Shell shareholders’ squabbles are sheer lunacy

Graham Searjeant
PEOPLE are playing many strange new roles on the stock market that were never envisaged when the capitalist system of joint ownership was developed and the principles of company law evolved. The most peculiar of these new life forms are institutional shareholders who sue the companies they own. They are so odd that it is hard to square their relationship with the company with the formal roles of shareholders, such as voting to elect directors and to approve or reject their stewardship.
Last week 26 Dutch pension funds that had owned shares in Royal Dutch Petroleum got together to sue its successor, Royal Dutch Shell, in an American court for a sum that their lawyer could only estimate as “hundreds of millions” of dollars, euros or pounds. The funds, led by the £140 billion civil servants and teachers’ scheme, together represent more than half Dutch pension scheme members.
They are rightly aggrieved that Shell’s former management reported figures for proven oil and gas reserves using the sort of generous interpretation that the Treasury so often commends to the Office for National Statistics. As we now know, this went on for years and was a subject of debate within Shell. But the figures were wrong only if you assume that the archaic definition preferred by the US Securities & Exchange Commission, but also criticised by rival BP, is the gold standard.
Lawyers will argue whether the figures affected the share price. BP had been running ever farther ahead of Shell for several years but the market’s hysterical reaction to Shell’s restatement of reserve figures widened the gap. If you bought Shell and BP a week before the announcement of January 9, 2004, you would have gained about 45 per cent on BP and 33 per cent on Shell, although Shell’s higher dividend would have narrowed the difference.
That is hardly a disaster, but it is still annoying. Unless you sell out in advance, however, it does not make universal sense to vent that annoyance by suing the company that you part own, knowing that it must pay damages with your money. If all shareholders sued, it would be like cutting off your nose to spite your face.
In that case, success would be like forcing a company to pay back capital regardless of its needs, as Kirk Kerkorian mistakenly thought of doing at General Motors and William Ackman’s Pershing Square hedge fund first essayed at McDonald’s. Shell could easily pay out more but there are cheaper ways to achieve that and it might not be the best remedy for lack of reserves.
The other way is to sue other people, usually the auditors, or to differentiate yourself from other investors. The Dutch funds are also suing former directors, more to vent frustration than for financial reasons. They claim to have lost by buying during the key period, implying that others cannot claim compensation.
If the US courts collaborate in this kind of sophistry, they will send a message that any investor who does not employ a lawyer is a second-class shareholder. If institutional investors, hedge funds and billionaires band together to win damages for themselves, the damages will have to be paid not by former directors but by small shareholders.
Shell is not in a strong position to resist the Dutch, having provoked them by settling a different but related lawsuit in the US. But if the oil group’s unified board has learnt from its mistakes over the restructuring, it will try to stop small investors from being fleeced by moralistic institutions. This can be done by promising to pay out equally to all shareholders on whatever basis a court mistakenly decides. At least all investors would be equal, even if the outcome is bad for future returns.
Company articles and company law also need to take account of this daft phenomenon. If a shareholder is suing its fellow shareholders, it has such a perpendicular conflict of interest that it should automatically lose its voting rights. Nor should investors accept the debts of their predecessors.
If investors or former investors sue a company for past misdemeanours, it should be equally obligatory for the company to sue those who owned its shares at that time to compensate present shareholders. That should create such legal and financial chaos that pension funds will think again before trying to extract money unfairly from private investors.

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