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Long road to justice for Southern Petroleum litigants

By Shoeshine

Friday 11th April 2003

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Sitting down this week to read the Court of Appeal's decision on the Southern Petroleum insider trading case, Shoeshine wondered how it would go down in Royal Dutch Shell's London boardroom.

In one of the most bizarre outcomes our oddball laws have yet produced, Shell's local subsidiary will now have to fund litigation against itself in a case that stretches back eight years, long before it had any involvement in the matter at issue.

Its shareholders could potentially end up parting with $23 million. Even if it wins at trial it will still have to pay the plaintiffs' legal bills.

Still, it knew about the litigation when it bought Fletcher Energy in 2001. The price it paid presumably factored in all outcomes, so Shoeshine's handkerchief remains dry.

The court's decision allows a group of investors who held Southern shares when it was taken over by Fletcher Challenge Energy in 1995 to proceed with their case at Southern's expense.

As the takeover was successful, and as Fletcher Energy was then itself taken over by Royal Dutch Shell and Apache Corporation, Southern's expense is now Shell's. Hence the absurdity of a company being ordered to pay to sue itself.

The court's decision is a monument to the persistence of Wellington lawyer John Oakley and Auckland businessman Tony Gavigan.

These two have led the exhausting lawsuit in which Southern minorities allege Fletcher, which owned 85% of Southern at the time it launched its bid, had insider information that showed Southern's oil prospects were worth far more than Fletcher was offering.

The takeover has attracted accusations of double-dealing and skulduggery ever since it was launched.

Even before the insider trading allegations cropped up, Oakley vigorously opposed Fletcher's 63c offer, hiring his own energy consultants to assess the price and orchestrating resistance from other minority holders.

Eventually he forced Fletcher to lift its offer to 75c after revealing that the Ministry of Commerce had since offered Southern five onshore exploration permits.

Inexplicably for a company subject to a takeover, Southern's independent directors, Norman Geary and John Cameron, failed to respond to the permits' award until four weeks after they were made.

Phase one of the legal fallout involved the alleged non-payment of preference share dividends to another listed company, New Zealand Petroleum, now Eldercare New Zealand. Fletcher settled, claiming the non-payment was "an oversight."

New Zealand Petroleum was also the instigator of the current insider trading litigation but it settled in 2000 for $1.3 million.

The other shareholders ­ Oakley, Rosemary Haycock, Stuart Cairns and Green & McCahill Properties ­ are boxing on.

The case rests on the allegation that Fletcher Energy's Jim Patek, a director of both Fletcher subsidiary Petrocorp and Southern, knew that the potential size of the Mangahewa prospect, in which the two companies operated a joint venture, was greater than what the Southern minorities had been told when they accepted the bid.

Patek was allegedly told of this when a Petrocorp "deep gas study team," partially funded by Southern, presented the results of its study of Mangahewa on November 2, 1995.

The next day Patek wrote a report recommending Fletcher buy out the Southern minorities.

The case, as Justice Robert Fisher observed in the High Court last year, is "not without difficulty." The appeal court also declined to conduct a "trial or mini-trial," noting the evidence was untested. But from the appeal judges' body language the case has a good chance of succeeding.

In appealing the High Court judgment Shell has already shot off a battery of defensive missiles and seen them shot down.

One key issue is whether the Securities Act says you can be liable for trading or tipping while being merely in possession of inside information ­ in this case whether Patek's knowledge of the report in fact impelled him to recommend a takeover to Fletcher.

The court found the plain words of the act indicated Parliament didn't intend that a causative link needed be proved.

Another issue is whether Patek and Petrocorp had the information by reason of being a director and shareholder, respectively, in Southern.

The judges found it was arguable Patek was, saying "there is no element of corporate veil-lifting in recognising that knowledge in the possession of a director of two companies engaged in joint operations was obtained and was in his possession in both capacities."

They also found it was arguable the joint venture existed only because Petrocorp was a big shareholder in Southern.

A third line of defence was that the deep gas study didn't provide information of sufficient significance or "maturity" to have affected the price of Southern's shares if it had been known at the time of the takeover.

The court said that would be a tough line to argue when Fletcher had conceded the receipt of new licences for uninvestigated areas justified a 19% lift in its offer price.

The result has been welcomed in some quarters as evidence the laws as they stand work ­ that is, that shareholders can pursue claims by requiring the share issuer to fund insider trading cases. It shows, the argument goes, that deep-pocketed defendants can't wear down plaintiffs by dragging them through every legal hoop in the book.

In Shoeshine's opinion it shows just the opposite.

Eight years after the takeover the case hasn't even got to a trial. It's still subject to Privy Council appeal so it may be many months more before it even gets that far. Then it could go back through the appeal process all over again.

The plaintiffs may no longer have to bear the legal expenses but the costs to them in time must have been enormous.

How many shareholders are there with the Southern group's resources, tenacity and sheer bloody-mindedness?

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