Shell wins lengthy insider trading case

By KRIS HALL – The Dominion Post | Friday, 05 September 2008

Multinational Shell has emerged victorious from New Zealand’s longest-running insider trading case, but still faces legal bills in excess of $10 million and the prospect of appeal.

Claims brought by a group of investors that their shares in gas and oil subsidiary Southern Petroleum were undervalued during a 1995 takeover by Fletcher Challenge Energy were dismissed by the High Court at Auckland – perhaps dashing any chance of recouping millions of dollars through compensation.

The claim, in its simplest terms, was one alleging insider trading under the Securities Markets Act 1988.

The lawsuit stretches back to 1999 and rested on a claim that Fletcher Energy’s James Patek, a director of both Petrocorp and Southern, knew that the potential size of the Mangahewa prospect, in which the two companies operated a joint venture, was greater than the Southern minorities were told when they accepted the bid.

Shell ended up in court by virtue of its 2001 takeover of Fletcher Energy, whereby Petrocorp and Southern both became part of the Shell Group of companies.

Because of a quirky feature of New Zealand’s insider trading law, the public issuer was required to fund the litigation, with Shell inheriting Southern’s expenses.

The matter has its origins in a takeover announcement nearly 13 years ago and has involved high-profile business people, including John Oakley, Hugh Green, Eric Watson and Bill Falconer.

In essence, the plaintiffs maintained that while the contested takeover was in progress, material came to light during a “deep gas study” presentation, by Petrocorp staff, in New Plymouth.

Included in the material was one slide listing Mangahewa as “world-class size”, about 150 square kilometres and holding multi-trillion-cubic-feet potential (TCF). Another slide compared the McKee formation’s total 3.7 TCF with Mangahewa’s 18.9 TCF potential.

After the takeover, the Mangahewa prospect was drilled and the Mangahewa gasfield discovered.

In 2002, the High Court ruled the case could go ahead and Shell later failed in its appeal.

In Monday’s judgment, Justice Hugh Williams dismissed all eight causes of action against both Mr Patek and Petrocorp. He also ruled that “the pleaded inside information would not have been likely to materially affect the price of Southern’s shares”.

A Shell spokeswoman told BusinessDay: “We are delighted with the outcome and obviously all the claims have been dismissed. The case has been in the court system for nearly 10 years and cost [Shell] in excess of 10 digits.”

The claimants’ lawyer, Gary Judd, QC, said he hadn’t yet read the entire judgment and it was too early to tell whether an appeal would be sought.

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