Case Study: Shell Hydrocarbon Reserves Scandal

Class action reformBook Title: The Reform of Class and Representative Actions in European Legal Systems: Book by Christopher Hodges, MA (Oxon), PhD (Lond), FSALS: June 2008: Front Cover, Chapter 3 Court Rules for Multiple Claims – Extracts from Pages 75 & 76, plus Back Cover.

ISBN 978-1-84113-902-9 (Hart Publishing Limited)

The Netherlands

Case Study: Shell Hydrocarbon Reserves

On 9 January 2004, following an internal review, Shell (Royal Dutch and Shell Transport, the two former parent companies of the ‘Shell Group’) announced that it would re-categorise approximately 3.9 billion barrels of oil equivalent (‘boe’) out of its reported proved reserves. The re- categorisations were based on a determination that the reserves did not strictly comply with the definition of ‘proved’ reserves established by the US Securities and Exchange Commission (‘the SEC’). On 24 August 2004, the UK Financial Services Authority and the SEC announced final settlements of their investigations with respect to Shell. As a result of the settlement, Shell, without admitting or denying the SEC’s findings or conclusions, entered into a consent agreement with the SEC and paid a civil penalty of $120 million.

A number of putative class actions were filed in the United States against Shell in relation to the re-categorisation. One class action was commenced in the US District Court for the District of New Jersey. A non-US shareholder, Mr Peter M Wood, was recruited into that action through an appeal on the website (<http://royaldutchshellplc.com> accessed 10 June 2008). The US District Court for New Jersey initially ruled that Mr Wood could represent all non-US shareholders, but a new judge reversed the ruling on the issue of ‘subject matter jurisdiction’.

After the announcement of the re-categorisations, the price of Shell’s shares fell. Shell made an offer to compensate certain non-US shareholders for losses alleged as a result of the price fall, without any admission of wrongdoing, illegal conduct or causation of loss. Shell entered into an agreement with a foundation (the Shell Reserves Compensation Foundation) and various associations that represent the interests of retail shareholders and the institutional investors, including the Dutch Equity Holders’ Association and others, under which non-US Shell shareholders would receive $352 million. The agreement called on the SEC to distribute $96 million of the $120 million fine to the non-US investors, an amount that corresponded to their share of investor base. The non- US arrangement would benefit both the shareholders who were parties to the agreement and other shareholders who fell within the definition of participating shareholders. That agreement was contingent on the US District Court of New Jersey declining jurisdiction over the non-US investors, which it did on 13 November 2007, and on approval by the Amsterdam Court of Appeal, which is expected to rule in early 2009. An agreement approved in this way would be expected to be enforceable throughout the EU.

In March 2008, Shell announced settlement in principle of the US shareholder class action claims for an additional $79.9 million plus $2.95 million, being proportional to the amounts payable under the proposed Dutch settlement, plus legal costs, subject to approval by the US Court. If the Dutch and US settlements are achieved, the combined cost would be around $600 million, including the $90 million paid in 2005 to the US employee shareholders. The US legal fees would be approved by the court as a percentage of the total recovery paid.

In practice, it should be understood that the Netherlands has two systems for collective claims. In addition to the Settlement Law discussed above, the litigation system permits a foundation or association to bring a collective claim without an individual lead plaintiff. Under that mechanism, there is no court supervision over appointment of lead counsel and it is only possible to bundle claims if there are no individual issues. No damages are claimable, but it has instead been the practice to request a declaration that there has been a breach. Res judicata only applies between the parties, and this is problematic for defendants, who want to avoid more cases.

EXTRACTS END

INVOLVEMENT OF JOHN DONOVAN AND THIS WEBSITE IN THE ROYAL DUTCH SHELL RESERVES LITIGATION

In September 2004  we published an appeal by U.S. class action lawyers, Bernstein Liebhard & Lifshitz LLP for evidence in respect of the above US class action law suit brought against Shell in relation to an oil and gas reserves recategorisation. The law firm subsequently confirmed that Shell insiders contacted them in response to the appeal.

Bernstein Liebhard & Lifshitz LLP were the court appointed lead plaintiff attorneys representing The Pennsylvania State Employees Retirement System and The Pennsyvania Public School Employees Retirement System.

Following the filing with the U.S. Courts by Bernstein Liebhard & Lifshitz LLP of an Amended Complaint, our main contact at the law firm, Mr Steven J. Peitler, supplied me with a copy of the court document for publication on our website. Several hundred visitors to the website subsequently downloaded the relevant files and as a result, I received the following email.

From: “Steven J. Peitler” <[email protected]>
Date: 29 September 2004 15:22:11 BST
To: “John Donovan” <[email protected]>
Subject: RE: Royal Dutch Shell

Thanks, I will give him a call in a few days.  I am swamped with people calling me after reading the compliant.

Steven J. Peitler
Investigator
Bernstein  Liebhard & Lifshitz LLP
10 East 40th Street
New York,  NY 10016
[email protected]

In March 2006 the litigation was initially given permission to proceed as a global class action against Royal Dutch Shell. This was after we found a Shell shareholder to represent all non holders of Royal Dutch Shell stock following a further appeal on this website on behalf of the law firm, which we published on 20 January 2006. The successful appeal on our website followed a telephone conference call between the senior partners of Bernstein  Liebhard & Lifshitz LLP (Stanley Bernstein and Jeffrey Haber) and John Donovan (arranged by Mr Peitler during email correspondence).

Subsequent developments are covered in the extracts from the book by Christopher Hodges.

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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