KEY POINTS:
The Southern Petroleum insider trading High Court case finally came to an end on Tuesday following closing submissions by Gary Judd, QC, and Jim Farmer, QC.
The saga, which has its origins in a takeover announcement made nearly 13 years ago, has involved a large number of high-profile business people and companies. These include John Oakley, Hugh Green, Luke Moriarty, Eric Watson, Bill Falconer, Norman Geary, Tony Gavigan, Stuart Cairns, Tony Gibbs, Fletcher Challenge, GPG, and the oil giant Shell.
The case clearly demonstrates that minority shareholders have to undergo a long and costly process before their grievances are heard in court.
Southern Petroleum was listed on the NZX in 1983 following the issue of shares paid to 25c. The company's main objective, which was to drill two exploration wells in the Great South Basin, was greeted with great enthusiasm and its shares and options, which were issued free, quickly jumped to 36c and 32c respectively.
Unfortunately the Great South Basin adventure was unsuccessful and the company shifted focus to Taranaki.
Brierley Investment became the major shareholder in the June 1987 year but sold its 71 per cent stake to Fletcher Challenge in July 1991.
The insider trading case had its origins in an announcement to the NZX on July 31, 1995 when Fletcher Challenge revealed its intention to make a takeover offer for Southern Petroleum at 63c a share. By this stage the 50c shares were paid up to 45c.
Fletcher Challenge had 87.5 per cent effective ownership at the time and two of the largest minority shareholders were Wellington lawyer John Oakley and Auckland entrepreneur Hugh Green.
Oakley immediately opposed the deal. He wrote letters to the two independent directors, John Cameron and Norman Geary, and employed his own oil and gas consultants.
He was particularly concerned that the Buttle Wilson report did not contain any assessment of the potential outcome of the Taranaki exploration permits tender, the results of which were announced on October 16. He also criticised Buttle Wilson for using a $4.50 to $6.50/barrel oil forecast in its assessment of Southern Petroleum's reserves.
Oakley had a major setback when New Zealand Oil & Gas accepted the offer in mid-September. But when the new Taranaki exploration permits were announced, he convinced the independent directors to ask for a new Buttle Wilson assessment.
Fletcher Challenge raised its offer from 63c to 75c a share after Buttle Wilson increased its valuation from the 50c-60c range to a 59c-69c range.
Oakley wanted 85c but GPG had purchased a large minority stake during the takeover and, on November 15, Tony Gibbs called Oakley to tell him that he had accepted the revised 75c offer. Oakley, a long-time friend of Sir Ron Brierley, was now on his own.
Oakley reluctantly accepted the offer and at Southern Petroleum's annual meeting, which was held the following day in Wellington, he told Chairman Bill Falconer and fellow shareholders that "it is pleasing to note that the settlement price removes the uncertainty and costs of further protracted negotiations".
Luke Moriarty, Fletcher Challenge's man in charge of the takeover, sat slumped in his seat as Oakley had won a small victory over the country's second largest listed company.
Southern Petroleum also had preference shares which were held by New Zealand Petroleum, a small listed company effectively controlled by Stuart Cairns and Tony Gavigan of stockbrokers DF Mainland.
NZ Petroleum later became the backdoor listing for Eric Watson's Eldercare and is now called Abano Healthcare.
Eldercare asked Gavigan to facilitate the redemption of the preference shares. During this process Gavigan concluded that Southern Petroleum shareholders had not been fully informed, particularly during the latter stages of the 1995 takeover.
Gavigan and Eldercare filed proceedings that finally ended up, after many long and complex legal proceedings, with the High Court case that ended this week. One of the most important decisions was made by Justice Fisher in June 2002 when he decided that the plaintiffs had an arguable case and their costs would be paid by Fletcher Challenge or its successor, which is now Shell.
Thus the plaintiffs in the just-completed case were Rosemary Haylock, a Southern Petroleum shareholder, Stuart Cairns and Hugh Green and the defendants Jim Patek and Shell Exploration. Shell is responsible for all the plaintiffs' and defendants' costs.
The dispute is based on three main issues, namely the role of Jim Patek, the potential oil and gas prospects of Taranaki's onshore Petroleum Prospecting Licence 38705, an area known as Mangahewa, and a meeting held on November 2, 1995.
At the time of the bid Fletcher Challenge had an energy division and two wholly owned energy production and exploration companies, Fletcher Challenge Petroleum and Petrocorp Exploration.
Patek was General Manager of the Energy Division, Chief Executive of Fletcher Challenge Petroleum and a director of Petrocorp Exploration and Southern Petroleum.
Southern Petroleum and Fletcher Challenge, through Petrocorp Exploration, had a 50/50 agreement regarding the ownership, funding and information relating to Mangahewa.
In late 1994 Southern Petroleum and Petrocorp established a "deep gas team" to investigate the gas potential of Mangahewa. Southern Petroleum and Fletcher Challenge were authorised to pay $156,842.50 each for the study.
By June 1995 the Deep Gas Team had compiled a database indicating that Mangahewa had potentially large gas reserves but it was uncertain whether they were commercial.
The Deep Gas Team became more and more enthusiastic about Mangahewa as the study progressed yet this was not conveyed to Buttle Wilson, which valued the structure at only $1.11 million.
The key event fell on November 2 when the Deep Gas Team presented its findings on the proposed drilling of Mangahewa-2. According to Justice Fisher the Team's assessment of Mangahewa was "strongly positive".
The Deep Gas Team's November 2 presentation was not relayed to Southern Petroleum's management, the independent directors or Buttle Wilson even though the target company paid 50 per cent of the costs and Patek was familiar with the details. Nor was the information revealed to Oakley and his representative at the November 7 and November 10 meetings even though Fletcher Challenge had a meeting with Methanex on November 13 to discuss the potential sale of Mangahewa gas.
Insider trading regulations are extremely complex but the crux of this case is whether the details of the Deep Gas Team presentation on November 2 should have been disclosed to Southern Petroleum's independent directors, Buttle Wilson and the company's shareholders.
The plaintiffs argue that it should and, if so, would have added more than $1 a share to the value of Southern Petroleum, whereas the defendants claim "the information contained in the 2 November presentation would not have, or would not be likely to have, affected materially" the share price.
Justice Hugh Williams will make the final decision but the overriding message from the Southern Petroleum takeover is that the country's independent directors underestimate value and are far too quick to accept low-priced takeover offers. This was reinforced by a later recommendation to shareholders to sell the Fletcher Energy Division to Shell at a fraction of its current value.
Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.
bgaynor@milfordasset.com
BUYOUT
Southern Petroleum 1995 takeover
* June 16: Southern Petroleum (SP) downgrades its reserves and profit forecasts
* July 31: Fletcher Challenge Limited (FCL) announces it has 87.5% of SP and intends to offer 63c for the remaining shares
* August 16: Directors recommended acceptance after Buttle Wilson assessed value at 50-60c a share
* October 16: SP was granted five new onshore licences & FCL five offshore licences
* October 17: FCL has 95.1% of SP
* November 2: Deep Gas Team's presentation
* November 7: Jim Patek meets with John Oakley
* November 10: Tom Haskell, on behalf of John Oakley, meets with FCL
* November 13: FCL meets with Methanex to discuss the future sale of Mangahewa gas
* November 14: Buttle Wilson raises its value from the 50-60c a share range to 59-69c
* November 15: FCL raises its offer for SP from 63c to 75c a share
* November 15: John Oakley accepts revised 75c offer after phone call from Tony Gibbs
* November 16: SP annual meeting
* December 18: FCL has 99.2% of SP
* December 22: SP delisted from the NZX
