Insider trading case gains pace

By JIM EAGLES business editor

The Court of Appeal has unanimously upheld the right of former minority shareholders in Southern Petroleum to press on with a landmark insider-trading case that dates back eight years and could involve more than $50 million.

The court decision, issued yesterday, means that Shell, which now owns the assets of Southern Petroleum, will be required to pay the costs of bringing the case.

A Shell spokesman said the company was reviewing the decision and considering the options for an appeal to the Privy Council.

The case was brought in 1998 by 750 former shareholders in Southern Petroleum who were bought out by majority owner Petrocorp, then a subsidiary of Fletcher Challenge.

They argue that when the company bought them out in 1995 it was aware of good news in a deep gas study of Southern Petroleum's Mangahewa field, in Taranaki, but kept that information secret.

That study, the court was told, evaluated the Mangahewa structure as "potentially bigger than Maui" and said the likelihood of recovering hydrocarbons was "at the highest level on accepted industry standards".

The judges described company slides showing the study results as reflecting "considerable enthusiasm".

After that study was presented, the company increased its offer to the minority shareholders and successfully bought them out.

The claimants are seeking to recoup the difference between the 75c they were paid for the shares and what they would have been worth had that information been made public, estimated by them to be as much as an additional $2.

The 750 shareholders behind the claim - who include Auckland businessman Hugh Green and Wellington lawyer John Oakley - themselves owned about 10 million shares.

But the law would allow 6000 further shareholders at the time, with an additional 20 million shares, to piggyback on the claim depending on when they sold.

Shell's lawyers argued that Petrocorp and its senior officers were not insiders in terms of the act, did not engage in insider trading or use the information about the gas study to benefit in any way and the claimants did not suffer any loss.

But the Court of Appeal, while noting that the key evidence remained untested, found that the case was not so weak as to justify preventing it from proceeding.

If there is no appeal, yesterday's decision will allow the claimants to issue proceedings immediately and to commence the process of discovering information.

Under a provision of the Securities Markets Act it will also require Shell - or, if there is some form of indemnity arising from its purchase of Southern Petroleum, Fletcher Challenge - to pay the cost of bringing that action including the costs incurred to date.

In making its decision, the court rejected a bid by Shell to restrict costs only to the future proceedings.

The judges said it would be quite incompatible with the provision for companies to be required to fund insider-trading proceedings "if complaining shareholders were dissuaded from seeking leave to initiate that scheme by the burden of costs on leave applications".

Some of the shareholders have also lodged further proceedings against Petrocorp and the former head of Fletcher Challenge's energy division, John Patek, for breach of fiduciary duty.

The History

* 1993 - Southern Petroleum and Petrocorp agree to share their interests in a gas prospect in Taranaki called Mangahewa.

* July 1995 - Fletcher Challenge, through its Petrocorp subsidiary, decides to buy Southern Petroleum, a listed company.

* November 1995 - a presentation to Petrocorp/Southern Petroleum suggests Mangahewa has great potential as a major gas field. The information is not made public.

* November 1995-January 1996 - Southern Petroleum shareholders sell to Petrocorp.

* 1998 - Former shareholders sue Southern Petroleum.

* March 2001 - Shell buys Southern Petroleum as part of its Fletcher Energy purchase.