Haylock v Patek
[2011] NZCA 674
•21 December 2011
| For a Court ready (fee required) version please follow this link |
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA247/2008 CA591/2008 [2011] NZCA 674 |
| BETWEEN ROSEMARY PHYLLIS FILLBRIDGE HAYLOCK |
| AND STUART HAMILTON CAIRNS |
| AND HUGH GREEN PROPERTIES LIMITED |
| AND JAMES WARREN PATEK |
| AND SHELL EXPLORATION NZ LIMITED |
| Hearing: 11 to 14 October 2011 |
| Court: Arnold, Randerson and Harrison JJ |
| Counsel: G J Judd QC and P A B Mills for Appellants |
| Judgment: 21 December 2011 at 11.30 a.m. |
JUDGMENT OF THE COURT
A The appeal and cross-appeal in CA591/2008 are dismissed.
B The application for leave to appeal in CA247/2008 is dismissed.
CCounsel are to confer and provide a memorandum as to costs within one month of the date of this judgment.
___________________________________________________________________
REASONS OF THE COURT
(Given by Randerson J)
Table of Contents
| Para No | |
| Introduction | [1] |
| The elements the appellants needed to prove | [12] |
| The Judge’s findings | [13] |
| Grounds of Appeal and cross appeal (CA591/2008) | [16] |
| Issues | [20] |
| Pleadings and statutory framework | [21] |
| Factual background | |
| The Mangahewa prospect | [28] |
| PPL 38705 and the Joint Venture and Alignment Agreements | [32] |
| The work of the DGS team | [37] |
| The Mangahewa 2 well proposal | [45] |
| Progress towards the acquisition of the Southern minority interests in the period up to early November 1995 and Mr Papalia’s first report of 12 August | [52] |
| Buttle Wilson’s report of 14 August | [57] |
| Events between Buttle Wilson’s report of 14 August and the 2 November meeting | [64] |
| The 2 November 1995 presentation | [68] |
| The events of 3 to 6 November | [78] |
| Events – 7 to 15 November | [89] |
| The second reports from Mr Papalia and Warburg | [93] |
| The meeting with Methanex on 13 November | [97] |
| Events after effective completion of the acquisition on 14 November | [101] |
| First issue: Was the Mangahewa Information “inside information”? | [111] |
| The information in this case | [127] |
| To what extent was the Mangahewa Information already in the public domain? | [133] |
| Disclosure of the Mangahewa Information | [134] |
| Was the Mangahewa Information price-sensitive? | [136] |
| Technical and valuation evidence | [138] |
| Share price analysis | [147] |
| Sharebroking evidence | [154] |
| The significance of the NZX Disclosure Rules | [157] |
| Conclusion on price-sensitivity | [183] |
| Second issue: If the Mangahewa Information was “inside information”, did Mr Patek and/or Petrocorp have it at the time of the alleged acts of encouragement? | [185] |
| Third issue: If Mr Patek had “inside information” at relevant times, did he have it “by reason of” his role as a Southern director? | [201] |
| Fourth issue: If Petrocorp had “inside information” at relevant times, did it have it “by reason of” its role as a substantial security holder in Southern? | [211] |
| Fifth issue: If Mr Patek and/or Petrocorp had “inside information” at relevant times and by reason of the pleaded capacities, did either or both encourage PIL to buy the Southern shares? | [213] |
| Sixth issue: Does there need to be a causative link between the possession of the inside information and the acts of encouragement or advice? | [216] |
| The application for leave to appeal in CA247/2008 | [219] |
| Summary | [220] |
| Disposition | [221] |
Introduction
In 1995, Southern Petroleum No Liability (Southern) was a publicly listed company engaged in the oil and gas industry, mainly in Taranaki. Approximately 85 per cent of its issued shares were owned by Petrocorp Exploration Ltd (Petrocorp), a wholly owned subsidiary within the Fletcher Challenge group of companies (Fletchers).
This appeal is concerned with a takeover offer made on 31 July 1995 under the Companies Amendment Act 1963 by Fletchers for the remaining shares in Southern not already owned by Fletchers. For the purpose of implementing the takeover, a Fletchers’ subsidiary (Petroleum Industries Ltd (PIL)) was incorporated. The takeover was eventually completed in January 1996 but not without strong challenges by minority shareholders in Southern to the adequacy of the offered share price.
The appellants were amongst the minority shareholders in Southern. In 2002 they and another shareholder (a Mr Oakley) were granted leave by Fisher J[1] under s 18 of the Securities Markets Act 1988 (the Act) to bring proceedings under the insider trading regime alleging the respondents had acted in breach of the Act.[2] This Court upheld the grant of leave in 2003.[3]
[1]Haylock v Southern Petroleum NL [2002] 3 NZLR 518 (HC); Haylock v Southern Petroleum NL (No 2) [2002] 3 NZLR 819 (HC).
[2]The insider trading regime was introduced by the Securities Amendment Act 1988 (later renamed the Securities Markets Act 1988). The regime was later repealed and replaced by the Securities Markets Amendment Act 2006 but the new regime so introduced is not relevant to this appeal.
[3] Haylock v Southern Petroleum NL [2003] 2 NZLR 175.
The first respondent, Mr Patek, was a director of both Petrocorp and Southern. He was also the Chief Executive Officer of another wholly owned Fletchers’ subsidiary, Fletcher Challenge Petroleum Ltd (FCP) to whom Petrocorp reported. FCP reported in turn to the Fletchers’ parent company, Fletcher Challenge Ltd (FCL).
The second respondent, Shell Exploration (NZ) Limited (Shell) is the successor to the energy interests of Fletchers including Petrocorp and Southern.
The essence of the appellants’ case was that Southern was the holder of interests in a number of licences to explore and prospect for oil and gas, mainly in the Taranaki region. In particular, Southern and Petrocorp each held a 44.5 per cent interest in a prospecting licence, PPL 38705, relating to a prospect at Mangahewa. Wells had been drilled into the Mangahewa structure previously but with disappointing results. In 1994 and 1995, Petrocorp employees known as the Deep Gas Study (DGS) team reviewed existing data in relation to the Mangahewa prospect and undertook further work with a view to presenting a proposal to executives of Fletchers. Their objective was to persuade the executives that another well (Mangahewa 2), was warranted in order to evaluate the potential to recover gas at depth from the Mangahewa structure.
For that purpose, the DGS team made a technical presentation to the Fletchers’ executives on 2 November 1995. The focus of the appellants’ case on appeal was on two aspects of the material presented. First, the size of the Mangahewa structure including the indicative volume of gas initially in place (GIIP). This was said to be 22.6 trillion cubic feet (TCF). Secondly, the proposal to drill Mangahewa 2 by 31 March 1996. We refer to this information as the Mangahewa Information.[4]
[4]The information relied on in the High Court was wider than that relied upon on appeal but covered much the same ground.
The appellants alleged that Mr Patek and Petrocorp were aware of the Mangahewa Information but did not disclose it to the Southern directors, their advisers or the public directly. Two of those directors were independent and were advising the minority shareholders whether to accept the price offered by Fletchers. The independent directors engaged the services of Nicholas Papalia and Associates and Buttle Wilson and Co Ltd (later SBC Warburg NZ Ltd (Warburg)) to assist them in their task.
The sum initially offered for the shares in July 1995 was 63 cents each but, in consequence of the acquisition by Southern of further licences, FCL announced on 15 November 1995 an increase in the offer to 75 cents per share. Soon afterwards, Warburg assessed the increased offer as being fair and reasonable and the minority shareholders sold their shares to PIL at that price. The takeover of Southern was formally completed on 19 January 1996.
The appellants alleged that Mr Patek recommended to Fletchers on 3, 5, 6 and 14 November 1995 that the takeover offer price be increased. It was said Mr Patek thereby encouraged the purchase of shares by PIL in Southern in breach of the insider trading legislation. It was alleged that Mr Patek’s acts of encouragement should be treated as those of Petrocorp as well.
Finally, the appellants claimed that if they had received the Mangahewa Information, they would have continued to resist the takeover offer and would not have accepted the price offered of 75 cents per share. They alleged they had suffered a loss of $1.24 per share. Between them, the appellants held in excess of two million shares in Southern.
The elements the appellants needed to prove
We will set out the relevant statutory provisions shortly but, for the present, we summarise the key elements the appellants were required to prove in terms of their case as ultimately pleaded and relied upon at trial:
(a)At relevant times, Mr Patek and Petrocorp had information in relation to Southern which was not publicly available and which would, or would be likely to, affect materially the price of the shares if made publicly available.
(b)Mr Patek had the information by reason of being a principal officer (director) of Southern.
(c)Petrocorp had the information by reason of being a substantial security holder in Southern.
(d)Mr Patek and Petrocorp encouraged Fletchers to purchase the Southern shares.
(e)In consequence, the appellants suffered loss.[5]
The Judge’s findings
[5]The Judge referred to the receipt of inside information “in confidence” as a further ingredient. This is relevant for the purposes of s 3(1)(c) of the Act but not to s 3(1)(b) which was the provision ultimately relied upon by the appellants.
After a trial occupying some six weeks, Hugh Williams J found against the appellants by a judgment delivered in September 2008.[6] The Judge heard evidence from 22 witnesses including a number of experts in a variety of disciplines. His comprehensive and highly detailed judgment runs to over 150 pages. An appreciation of the volume of evidence at trial can be gained from the fact that the case on appeal extends to over 7,500 pages.
[6] Haylock v Patek [2009] 1 NZLR 351 (HC).
In essence, the Judge made factual findings that:
(a)Mr Patek did not have the Mangahewa Information in his possession at the time of the alleged acts of encouragement.
(b)The Mangahewa Information was not price-sensitive, that is it would not have been likely to materially affect the price of the shares if publicly available.
Those findings were sufficient to dispose of the appellants’ case, but the Judge also found that:
(c)If Mr Patek had received the Mangahewa Information, it was arguable he had received it in his capacity as a director of FCP, Petrocorp and Southern and not by reason alone of his directorship in Southern.
(d)If Mr Patek went on to had been in possession of inside information, he would have been found to have encouraged the purchase of the Southern shares by recommending to FCL on 3, 5, 6 and 14 November 1995 that the offer be increased to 75 cents per share.
(e)Although Petrocorp had the Mangahewa Information during the relevant period, it was not an insider because it did not have it by reason of its role as a substantial security holder in Southern.
(f)No causative link is required between the possession of inside information by an insider and any acts of encouragement to buy or sell shares.
Grounds of appeal and cross appeal (CA591/2008)
The appellants contend on appeal that Hugh Williams J erred in:
(a)Finding that Mr Patek did not have the Mangahewa Information at relevant times.
(b)Finding that the Mangahewa Information was not price-sensitive.
(c)Finding that Petrocorp was not an insider because it was not a substantial shareholder in Southern.
(d)Failing to find that Petrocorp itself encouraged the purchase of the Southern shares.
The respondents have cross-appealed on the grounds that the Judge erred in finding that:
(a)If Mr Patek possessed inside information, it was arguable he possessed it (at least in part) by reason of his directorship in Southern.
(b)No causative link is required between the possession of inside information by an insider and any acts of encouragement to buy or sell shares.
We record that shortly before the hearing of this appeal, the appellants applied for leave to amend the statement of claim by adding a new act of encouragement to buy the Southern shares. However, this application was opposed and was abandoned by the appellants during the hearing.
We also had before us an application for leave to appeal[7] against a refusal by Hugh Williams J to order particular discovery of documents in respect of a related proceeding brought by Mr Oakley in the Wellington High Court.[8] Mr Judd QC advised us on behalf of the appellants that the fate of the application for leave depended on the outcome of the substantive appeal against the judgment of Hugh Williams J.
Issues
[7] CA247/2008.
[8]These proceedings were later settled and Mr Oakley did not continue as a plaintiff in the proceeding before Hugh Williams J which is the subject of the substantive appeal.
Against that background, the issues are whether the Judge erred in:
(a)Finding that the Mangahewa Information was not “inside information”.
Sub-issues:
(i) Was it “information” at all?
(ii) To what extent was it already in the public domain?
(iii) Was it price-sensitive?
(b)Finding that if it was “inside information”, Mr Patek and/or Petrocorp had it at the time of the alleged acts of encouragement.
(c)Finding that if Mr Patek had “inside information” at relevant times, he did not have it “by reason of” his role as a Southern director;
(d)Finding that if Petrocorp had “inside information” at relevant times, it did not have it solely “by reason of” its role as a substantial security holder in Southern.
(e)Failing to determine that if Petrocorp had “inside information” at relevant times and by reason of its role as a substantial security holder in Southern, it encouraged PIL to buy the Southern shares.
(f)Finding that there was no need for a causative link between possession of the inside information and the acts of encouragement or advice.
Pleadings and statutory framework
The appellants proceeded in the High Court on the basis of an amended statement of claim dated 31 July 2006 alleging eight separate causes of action. By the conclusion of the trial, two causes of action had been abandoned with six remaining. Three of these were directed against Petrocorp (now Shell) and the other three against Mr Patek. All alleged a breach of s 9(1)(a) of the Act which relevantly provided:
9 Liability of insider for tipping about securities of a public issuer
(1)An insider of a public issuer who has inside information about the public issuer and who –
(a)advises or encourages any person to –
(i)buy or sell securities of the public issuer; or
(ii)advise or encourage any other person to buy or sell securities of the public issuer;
... is liable to the persons referred to in subsection (2).
The appellants contended that the respondents were each “insiders” in relation to a public issuer (Southern) under s 3(1)(b) of the Act as persons who:
By reason of being a principal officer ... of, or a substantial security holder in [Southern] [had] inside information about [Southern] ...
It is not in dispute that Southern was a public issuer and that, as a director of Southern, Mr Patek was a principal officer of that company.[9] It is common ground that Petrocorp was, by virtue of its substantial shareholding in Southern, a substantial security holder in that company as defined.[10]
[9] A principal officer is defined as including a director by the Securities Markets Act 1988, s 2.
[10] Substantial security holder is defined by the Securities Markets Act 1988, s 2.
The appellants next asserted that Mr Patek and Petrocorp had inside information about Southern and that they advised or encouraged PIL to buy the appellants’ shares in Southern. It followed, the appellants claimed, that Mr Patek and Petrocorp were liable to them under s 9(2)(a) of the Act.
“Inside information” was defined as follows:[11]
Inside information in relation to a public issuer, means information which –
(a) is not publicly available; and
(b)would, or would be likely to, affect materially the price of the securities of the public issuer if it was publicly available.
[11] Securities Markets Act 1988, s 2.
If the respondents had been held liable, they would have been responsible under s 9(2)(a) for any loss incurred by the appellants. In that respect, s 15 of the Act provided that:
(a)a person who sells a security in a public issuer for less than its value incurs a loss equal to the difference between the value of the security and the consideration receivable ...
Section 15(2) defined “value” for the purpose of calculating the loss under the legislation:
(2)In this section value, in relation to a security in a public issuer, means the value the security would have had at the time of the sale or purchase if the inside information known to the insider about the public issuer was publicly available.
Factual background
The Mangahewa prospect
The Judge received a substantial body of expert evidence concerning the relevant geological structures in the Taranaki region. Much of the geological evidence related to the Mangahewa and McKee formations in the upper part of the Kapuni Group. This Group also included the Turi and Kaimiro formations. The Judge described the Mangahewa formation as:[12]
... the thickest of the Eocene deposits and is a body of rock comprising interbedded sandstones, siltstones and coals probably deposited as a uniform blanket across the area. The Mangahewa structure is a large, closed, low-relief anticline, 15km long, 8km wide, with a total relief of 240m and an area of 150km2.
[12] At [49].
The Judge explained that the Mangahewa structure was first mapped in the mid-1950s. The drilling of Mangahewa 1 commenced in 1960 and established that the structure was a low porosity/low permeability (known in the industry as “tight”) reservoir gas/condensate trap system. Relatively small quantities of gas were produced from the well but the Judge found that it was obvious the result was of sub-commercial value. Mangahewa 1 was abandoned in 1974.
Six other wells were drilled in the Mangahewa structure, all of which encountered gas but, again, not in economically recoverable commercial quantities. The drilling revealed high water saturation which the Judge said could make extraction economically impossible.
It is common ground that, in order to extract gas in commercial quantities from the Mangahewa structure, it would be necessary to use a hydraulic fracturing technology known in the industry as “fraccing”. The evidence was that although this process was commonplace overseas, experience in New Zealand of using the technique was fairly limited. The purpose of this technology is to fracture (or stimulate) the rock formations to improve permeability so the gas may be more readily recovered.
PPL 38705 and the Joint Venture and Alignment Agreements
Petroleum prospecting licences (PPLs) run for five year periods and require defined work programmes to be effected during their currency. PPL 38705 was originally issued in 1988. PPL 38705 was later renewed but was due to expire on 9 August 1998.
By mid-1993, Petrocorp and Southern each owned 44.5 per cent of PPL 38705. The Minister of Energy retained the remaining 11 per cent. On 2 June 1993, those three parties entered into a Joint Venture Operating Agreement (JVOA). Petrocorp was appointed as the operator of PPL 38705, taking responsibility for the day-to-day management of work undertaken under the licence and providing technical expertise to the joint venture.
Shortly afterwards, on 18 June 1993, Petrocorp and Southern signed an Alignment Agreement covering the various licences each held in relation to the Taranaki Basin. Arrangements such as these are known in the industry as “farm-in” and “farm-out” agreements. The Alignment Agreement gave the parties the right to share equally in the licences each held, including future licences which might be obtained during the currency of the agreement.
Under the terms of the JVOA, an operating committee comprising representatives of both Petrocorp and Southern was established. In addition to its obligations as operator under the licence, Petrocorp was also obliged to prepare programmes, budgets and authorities for expenditure (AFEs) in respect of the joint operations. These required approval by the operating committee.
The JVOA also contained a number of provisions requiring the sharing of information concerning the joint operations.[13] Under these provisions, Petrocorp was obliged, for example, to promptly provide to each member of the joint venture full reports of all seismic, geological and geophysical data as and when it was produced, daily drilling reports, monthly reports on the joint operations and monthly production reports. Petrocorp was also obliged to provide to the appropriate government authorities all reports and information required by law and under the relevant licences. Similar provisions requiring co-operation and the sharing of information existed under the Alignment Agreement.[14]
The work of the DGS team
[13] Clauses 4.02(a), 4.07 and 13.01(a).
[14] Clauses 5.1, 9.3 and 9.4.
By the early 1990s, it had become apparent that the gas reserves from the Maui field were declining. It was decided a replacement source needed to be found within the next decade to provide long-term security for the gas market and, in particular, to supply Methanex, the largest industrial gas buyer. The Judge found that in 1994 there was concern that, in the absence of secure future supply, Methanex might curtail its production and close one of its two methanol plants. This was confirmed by Methanex in a public statement on 6 October 1995. If this were to occur, it would have had a significant financial impact on Fletchers’ energy interests.
In June 1994, the work programme under PPL 38705 was amended to require, amongst other things, drilling a well and reviewing the potential gas productivity of Kapuni Group sandstones in existing wells. This was to include the likely effectiveness of reservoir stimulation techniques. The amendment to the work programme also required the drilling of a further well by 1 August 1996. Failure to comply with the work programme would result in the surrender of the licence.
These events caused Petrocorp to set up the DGS team in September 1994. The DGS team was to carry out a study to confirm the value of on-shore Taranaki gas potential in respect of some eight deep gas Kapuni Group projects including PPL 38705. The costs of the study were to be shared equally by Petrocorp and Southern.
Mr Warwick Dobbie was a geologist and Southern’s technical manager. He was made aware of these developments and, it is safe to assume, was involved on behalf of Southern in approving the proposed study and the necessary funding for that purpose.
By the end of July 1995, the DGS team had completed data collection and compilation exercises. A meeting of a technical review team (TRT) was held on 27 July 1995 attended by a number of staff or contractors from Petrocorp and Mr Dobbie. The reports obtained by that date included a petrophysical examination reviewing all wells drilled on the Mangahewa structure. This confirmed that onshore Kapuni Group penetrations outside the Kapuni and McKee fields were low-quality reservoirs with poor permeability.
A Petrocorp geophysicist, Mr Philip Wolter, had reviewed seismic interpretations in order to map the Mangahewa structure. Maps delineated the shape and elevation of the Mangahewa and Ohanga structures but only to the top McKee formation level. The Judge said the maps available at that stage were unsuitable for volumetric estimations. Mr Wolter did not give evidence at the hearing but his map was produced along with an affidavit he had filed in opposing the leave application. This noted that the potential of the Mangahewa structure first became apparent through its sheer size, but that the poor quality of the reservoirs precluded economic gas flow. He produced his first version of the top McKee sandstone reservoir depth map on 5 August 1995. It showed the Mangahewa structure but said nothing about gas accessibility.
The Judge also recorded that:[15]
In addition, Petrocorp commissioned a report from the Centre for Petroleum Engineering at the University of New South Wales on the Kapuni Group. Professor Khurana concluded there was a “high probability of gas reserves in the range of 100‑300bscf [billion standard cubic feet] being present in the equivalent of the McKee/Mangahewa Formations” but that “overcoming the long term detrimental effect of retrograde condensation on well productivity through hydraulic fracturing would be difficult”. Water saturation, or “mobile water”, was foreseen as a problem since all Deep Gas wells in onshore Taranaki, with the exception of Kapuni, had co-produced water with gas.
[15] At [67].
A comprehensive report was prepared by the DGS team for the purpose of the meeting on 27 July 1995. This recorded that there had been significant development in the understanding of the structures in PPL 38705 and their reserves potential. The options were either to complete the documentation of PPL 38705 in order to meet the work programme or to continue the study which would “likely result in a well or re-entry proposal and a lengthy testing programme”. The decision was made to continue with the study.
The Mangahewa 2 well proposal
A Mr Ken McCagherty was employed by Petrocorp in 1995 as an engineering manager. The Judge found that Mr McCagherty was an enthusiastic supporter of the DGS who played a significant role in the Mangahewa project. His objective was to drive the project through to fruition which meant either to drill a second well or to abandon the project. His immediate focus was to obtain sufficient funds to drill. He envisaged two wells, one to prove the concept and the second to duplicate the results. His evidence was that the DGS team had not generated any new data or used new techniques. The data on which the team worked was well known and was public knowledge through Ministry of Commerce reports. He considered Mangahewa to be valueless as a Southern “reserve”. Reserves could only be described as such, and attributed value, in the event of a successful well. Commercial value could only be established by that means.
Mr Dobbie of Southern was kept informed of progress by the DGS team and was also involved under the terms of the JVOA in decisions being made about the forward work programme under the various licences and associated budgeting and work priority decisions. For example, he was informed by letter of 6 October 1995 from the chief geologist at Petrocorp:
The Deep Gas review has been largely completed. The mapping has confirmed the Mangahewa structure as a valid structural closure with considerable reserves potential. The critical factors for success appear to be drilling and testing/completion techniques and we will be continuing work on these aspects after the report is lodged. Our assessment of gas market opportunities indicates that we have a 12-18 month window in which to demonstrate a sustainable gas supply beyond 2005, although we are unlikely to access the market until - 2007.
Proving commercial gas volumes in the Mangahewa structure would also enable the JV to place a large proportion of the exploration licence under a PML. [Petroleum Mining Licence]
The same letter set out a proposed work programme for the year ended 31 July 1996. This included a proposal for “a deep well to appraise the Kapuni gas reservoirs in the Mangahewa anticline”. The probability of proceeding (POP) for the Mangahewa 2 well was assessed at 33 per cent at a cost of $5.75 million. The work programme was not confined to Mangahewa 2 but included proposed seismic and drilling work on three other prospects. The letter emphasised that approval of the budget by Southern did not constitute approval of specific projects or expenditure. This would be gained through the normal review and AFE processes.
Mr Dobbie responded by letter of 10 October confirming that Southern supported the philosophy behind the proposed work programme for PPL 38705 and agreeing that “we must accelerate the exploration programme in order to fully evaluate the licence prior to its expiry in 1998”. Petrocorp replied to Mr Dobbie noting that the DGS would be completed before the end of the year “with a likely drilling recommendation”. Mr Dobbie was advised that Petrocorp did not see any reason why the Mangahewa 2 well could not be drilled within the licence year along with a shallow well at another prospect.
Mr Patek confirmed that the Southern directors were aware of the proposal to drill Mangahewa 2. They met monthly and were provided with reports on operations under the JVOA. These reports included documents known as Gantt charts which showed projected dates for planned events. For example, in the period April to July 1995, the Gantt charts included in Southern’s board papers (with one exception) showed February 1996 as the project drilling date for Mangahewa 2. By October 1995, the Gantt chart showed that Mangahewa 2 was “now high priority”. This was done for planning purposes but all were aware that inclusion in the charts did not infer any commitment to proceed with drilling at any particular time, or at all.
While Southern was aware of the proposal to drill Mangahewa 2, it also knew that formal approval was required under the JVOA. On Petrocorp’s side, this would involve obtaining the approval of Petrocorp executives and, ultimately, the FCL Board. It is not disputed that there was real scepticism by the Fletchers executives (including, particularly, Mr Patek) about the prospects of success for commercial exploration of the Mangahewa structure, given the very poor history of previous drilling operations. The DGS team was well aware that there were substantial hurdles to overcome if their aspirations were to be approved.
Mr Patek also confirmed in evidence that the Southern directors were all kept informed during 1995 through Board papers that the DGS was proceeding with seismic interpretation and mapping of the Mangahewa deep gas prospect.
Progress towards the acquisition of the Southern minority interests in the period up to early November 1995 and Mr Papalia’s first report of 12 August
In the meantime, there had been ongoing activity to progress the takeover offer Fletchers had made on 31 July for the minority interests in Southern. Southern’s two independent directors (Mr Norman Geary and Mr John Cameron) had engaged Mr Papalia (of Nicholas Papalia and Associates) and Buttle Wilson to advise them. The managing director of Southern, Mr Trevor Taylor, was said to be pushing strongly for Southern to have Mr Papalia extract every ounce of value for the company and the minority shareholders. Mr Taylor put in place an arrangement to ensure a proper flow of information between Southern and Petrocorp which the Judge said was designed to ensure that the takeover transaction was transparent, uncomplicated and at arm’s length.
The Judge found that Southern gave Mr Papalia all relevant information concerning its exploration and prospecting interests.[16] Mr Papalia obtained from Petrocorp additional data concerning the prospects Southern was entitled to access. Mr Dobbie also sent other material to Mr Papalia including a copy of the report already mentioned from Professor Khurana and underlying generic economic models.
[16]We note that the Judge’s use of the word “relevant” is a matter of contention since there is no dispute that Mr Papalia was not given the Mangahewa Information.
Messrs Taylor and Dobbie went to Sydney on 5/6 August 1995 to assist Mr Papalia with his valuation. The DGS was discussed, as were issues arising from the meeting Mr Dobbie had attended on 27 July when he met members of the DGS team.
Mr Papalia reported on 12 August 1995 to Southern’s independent directors, valuing all of Southern’s exploration interests at $10.17 million using discounted net present value methods. Working papers prepared at the time show that the highest value attributed to all the prospects within Southern’s portfolio was a figure of $5 million for Mangahewa. Southern’s 44.5 per cent interest in Mangahewa amounted to $2.23 million on that basis. Mr Papalia then assessed the POP at 50 per cent to arrive at $1.1 million as the value of Southern’s interest in the Mangahewa prospect. Mr Papalia’s POP figure was higher than Petrocorp’s own assessment of 33 per cent.
It is important to recognise that the value attributed to Southern’s exploration interests formed only a relatively small part of Southern’s overall value. Mr Papalia assessed Southern’s “proved reserves” to have a pre-tax value of $66.77 million and its “proved plus probable reserves” to have a value of $79.63 million. The expressions “reserves”, “proved reserves”, “unproved reserves” and “possible reserves” are terms defined in guidelines recommended by the Society of Petroleum Engineers in 1988 which depend on the degree of certainty attaching to their existence, scale and recoverability. We discuss these and other such guidelines further below.
Buttle Wilson’s report of 14 August
Mr Papalia’s report was provided to Buttle Wilson who reported on 14 August that the fair valuation range for the Southern shares was 50 to 60 cents each. The report concluded that the offer of 63 cents per share was fair and reasonable to minority shareholders.
Buttle Wilson used a variety of different valuation methods but noted that greater reliability could be placed on three valuation methods namely break-up, going concern and price to net assets. Their report noted that the nature of the oil and gas industry was such that future earnings (and hence future share values) were highly uncertain. Southern’s prospects would depend, amongst other things, on the success of its exploration programme, the productivity of its oil and gas fields, world prices and foreign exchange rates. The share valuation was therefore to be regarded as subjective.
The report also said that discovery of significant oil or gas reserves had the potential to materially increase share prices within a short period but Buttle Wilson was not aware of any greater than normal probability of such a discovery being made. The report further recorded that, in the first five months of 1995, Southern’s shares had traded at prices consistently above the offered price but fell below in the six weeks prior to the takeover offer being made. This was considered to be due to Southern’s disclosure of adverse conditions. Various events had resulted in a significant decline in reserves and reduced expectations for field extensions and exploration with Southern’s Waihapa and Ngaere licences.
The Buttle Wilson report contained the following passage with regard to Southern’s prospecting operations:
Further details of Southern’s prospects are contained in the report of NPA [Nicholas Papalia and Associates]. Oil and gas exploration is highly speculative, and it is not possible to accurately quantify Southern’s chances of success. Some of Southern’s exploration can, at best, only provide incremental increases in reserves. Other projects might possibly be more significant.
The two projects which could, if completely successful, add greatest value to Southern are Cheal 1 and Kaimiro deep gas. Cheal 1 is an exploration well due to be drilled within the next four weeks. Southern has estimated that the structure which Cheal 1 will target could have a net present value to Southern as high as $16.7 million. The cost of the well might also be expended for no return at all.
Kaimiro deep gas is a relatively well explored reservoir within the Kaimiro and Ngatoro fields that is not yet developed. Its nature is explained in the NPA report. There are various uncertainties surrounding the project. It is possible that higher production and better profitability can be achieved than is incorporated in NPA’s assessment of proved and probable reserve value of approximately $9.3 million. The potential value of the project could be significantly higher.
It is not possible to judge the probability of achieving the highly risky maximum potential of these projects. NPA values the Cheal 1 and Kaimiro deep gas upside potential, together with Southern’s other exploration interests, at a total of $10.2 million.
The figure of $10.2 million reflected Mr Papalia’s evaluation of Southern’s exploration prospects. No specific reference was made in the reports prepared by Mr Papalia and Buttle Wilson to the proposal to seek approval for a second well in the Mangahewa structure even though it is clear from the working papers already mentioned that Mr Dobbie and Mr Papalia had discussed the Mangahewa prospect and Mr Dobbie was aware of the proposal for a second well. The Judge appears to have accepted that Mr Papalia was not aware of the Mangahewa 2 proposal.[17] We discuss below whether that omission was material.
[17] See the discussion at [286]– [287] of the judgment.
On a break-up basis, Buttle Wilson assessed Southern’s value at $137.5 million of which $10.2 million was attributed to the value of the company’s exploration prospects. The great bulk of the company’s value was seen to lie in its production licences (nearly $80 million) and cash and deposits (approximately $40 million). The assessed value on a break-up basis would result in a value of 60 cents per share.
On a going-concern basis, Buttle Wilson noted that, internationally, oil and gas company shares trade at up to 40 per cent over net asset value which is assumed to partially reflect exploration potential. Southern’s shares had traded in 1993 and 1994 at approximately 30 per cent above net asset value. Buttle Wilson considered that, at 30 per cent of the value of proven and probable reserves, Southern’s exploration potential could be worth $23.9 million. On a going concern basis, the exploration potential was assessed to have a range between $10.2 million and $23.9 million. The resulting value per share would range from 50 to 56 cents on that basis.
Events between Buttle Wilson’s report of 14 August and the 2 November meeting
On 16 August, the independent directors recommended shareholders accept the offer on the basis of the valuations, observing that the offer price of 63 cents per share represented a 21 per cent premium over the market price prior to the announcement of the takeover offer.
By the end of August, Fletchers declared the takeover offer unconditional having received sufficient acceptances to take its shares in Southern beyond 90 per cent by value of Southern’s issued capital. This occurred despite strong shareholder resistance to the offer led by Mr Oakley (a Wellington solicitor) but also including other minority interests. Mr Oakley obtained specialist advice from a Mr Swindon (an oil and gas adviser with many years experience) and a Dr Haskell (a geologist with extensive experience in the oil and gas industry). Mr Oakley sought further detailed information as to the valuations. Further information was provided to him by Southern. Mr Oakley remained dissatisfied and continued to question Southern’s valuations.
The Judge noted Southern’s determination to handle the takeover correctly and its concerns that providing information to Mr Oakley risked treating shareholders differently and could also involve the disclosure of confidential information.[18] Mr Patek considered that the amount of the offer should be reassessed after it was announced on 16 October that Southern had been successful in its bids for new on-shore and off-shore exploration permits. In consequence, Messrs Taylor and Dobbie met Mr Papalia again in Sydney on 18 October to discuss the value implications of the new permits.
[18] At [186]–[187].
The Judge recorded that by mid to late October, Mr Patek and Mr Humphrey (the general manager for strategic planning of FCP) considered that it was necessary to increase the offer price to enable the takeover to be successfully completed. Discussions about this occurred in early November but we deal first with the next event in chronological order, the critical meeting on 2 November.
The 2 November 1995 presentation
The material presented at the meeting on 2 November 1995 lies at the heart of the appellants’ case. The meeting took place at Petrocorp’s premises in New Plymouth. It was attended by senior Fletchers executives including Mr Wilf Lammerink and Mr Keith Rawlinson. Members of the DGS team were present as was Mr Geoff Logan, the General Manager of Petrocorp. Mr Logan was also a director on the Southern board. Mr Dobbie was not present and, by the time of trial, it was accepted Mr Patek was not present.[19]
[19]At the time leave was given to the appellants to proceed and at the time of the appeal against that decision, it was understood that Mr Patek was present at the 2 November 1995 meeting.
A large number of slides were presented explaining the results of the DGS. The objective of the members of the DGS team was to persuade the Fletchers executives that the Mangahewa 2 exploration well was worth funding. Material contained in the slides was available at trial. The Judge correctly described the material as containing a good deal of spin and hyperbole. Phrases such as “world class size” and “humungous” were used to describe the size and/or potential of the Mangahewa structure.
The appellants’ case, however, focused on the two elements earlier identified:
(a)The “indicative volumetrics” of the Mangahewa structure GIIP as totalling (for the McKee and Mangahewa formations combined) 22.6 TCF; and
(b)A “timeline target” to “spud appraisal well by March 1, 1996” (in reference to commencing drilling of the Mangahewa 2 well).
The Judge reviewed the evidence given at trial.[20] We do not attempt to record here all the Judge’s findings but we summarise his review of the evidence. Neither Mr Lammerink nor Mr Rawlinson shared Mr McCagherty’s enthusiasm for the opportunities presented by the further exploration of the Mangahewa structure. Mr Lammerink described Mr McCagherty’s presentation as “over promoted” and, given the technical and operational challenges involved combined with the inherent reservoir quality issues and fluid distribution uncertainties, the perceived value of the prospect was only “a moderately positive marginal opportunity”.
[20] At [84]–[108].
Mr Rawlinson did not consider there was anything remarkable about the presentation. His evidence was that nothing was presented which was not already known other than perhaps the “hypothesis” that the reservoir was producible and the structure might be bigger than previously thought. Mr Rawlinson’s evidence was that the 22.6 TCF figure lacked credibility and it did not have any particular impact on him. There was a lack of information as to how it was calculated and he considered much more work was required to justify the estimate. He thought the figure was used only to draw attention to the ultimate potential size of Mangahewa, should everything be favourable. The gas-bearing nature of the Mangahewa structure was, he said, a matter of public knowledge and the presentation did not explain why a further well was likely to be any more commercially successful than the previous seven. He did not question the 22.6 TCF figure because the key issue was not the “gas initially in place” figure but whether gas could be economically recovered.
Nevertheless, the changes in the New Zealand gas market, the Maui depletion and the prospect of Methanex closing down part of its plant persuaded Mr Rawlinson that it might be timely to re-examine Petrocorp’s gas prospects. On that basis, he considered it was worth the DGS team continuing to work on Mangahewa.
Importantly, the Judge discusses in some detail the evidence of Mr Robert Crookbain, one of the Petrocorp geologists in the DGS team. He was responsible for calculating the 22.6 TCF figure. The Judge said:[21]
… He [Mr Crookbain] described it as a “simplistic” calculation of possible GIIP, nothing more than a “back of the envelope” figure generated to demonstrate resource size was not an issue and the gas-bearing portion of the Mangahewa structure was worthy of further consideration if economic uncertainties could be overcome. It was not an estimate of reserves. At best it was a “resource”. It was a rough calculation of indicative GIIP from the volumetrics of the structure though he accepted the petrophysics indicated considerable quantities of gas were there. He said:
… my rough estimate of the GIIP was never intended to be used for generating reserves estimates. This work was performed immediately prior to the 2 November presentation. At the time I expected to be revisiting the GIIP estimates with a fuller characterisation of the scenarios and uncertainties.
[21] At [100].
The Judge went on to describe how Mr Crookbain had calculated the figure. Amongst other things, it was necessary to compensate for assumed inaccuracies in Mr Wolter’s map below the top McKee depth. As well, a number of uncertainties in the calculation were described, at least one of which was essentially based on “educated guesses”. Mr Crookbain agreed with the view expressed by the author of an article in a petroleum technology journal that the best method to determine reserves in tight gas reservoirs is to analyse production data by use of either decline curves or reservoirs simulation. The Judge noted that the DGS team did not undertake any such work until 1996.
Petrocorp’s exploration manager Mr Steven O’Connor was also present at the 2 November presentation. He was called by the appellants and was more optimistic than the Fletchers’ executives. His view was that there was a relatively high chance of success compared to most exploration and appraisal wells and he did not believe Petrocorp would relinquish the licence without drilling Mangahewa 2 as this would have given a potential major gas opportunity to a competitor. Even so, he considered those sponsoring the project in the DGS team would have had credibility issues if the figures discussed at the 2 November meeting were presented to the senior Fletchers’ executives.
Mr Logan also gave evidence in relation to the 2 November meeting. He was apparently encouraged by Mr McCagherty’s enthusiasm and thought it worth the team continuing to work through the many technical and other issues to see if commerciality could be shown. However, he did not consider the 22.6 TCF figure was credible from a senior management perspective, being about five times the size of Maui reserves. It would have been obvious, he thought, that the DGS team could have been under no illusion that it would be a major challenge to persuade Fletchers that the second well was worth funding.
The events of 3 to 6 November
In attempting to fix Mr Patek with knowledge of the events of 2 November, the appellants placed considerable store on memoranda within Fletchers over the period 3 to 6 November. In particular, reliance was placed on a memorandum of 6 November from Mr Patek to Mr Garry Mace who had responsibility within FCL for Fletchers’ energy interests. This memorandum referred to Southern having enhanced prospects for gas production at various locations including the Mangahewa structure. It was argued on the appellants’ behalf that this showed Mr Patek was aware of the content of the material presented at the 2 November meeting.
The Judge dealt with this issue in considerable detail.[22] He noted that Mr Patek had conducted a review of onshore activities in New Plymouth at a meeting on 3 November. None of the DGS team attended the meeting. Although Mangahewa was on the agenda, the Judge said all present at the meeting agreed that there was no discussion of specific projects and the discussions focussed on high level strategic issues.
[22] At [194]–[205].
The same day, Mr Humphrey as general manager of FCP prepared a draft report on the acquisition of the minority shareholding in Southern along with a covering memorandum. The draft report noted that, by that stage, about two-thirds of the minority shareholders had accepted the offer of 63 cents per share. Fletchers held 95 per cent of the Southern shares as at 1 November.
Mr Humphrey’s report also discussed developments since an internal valuation in July which might justify an increased offer. These included improved expectations for the recovery of deep gas from the Kaimiro field, the imminent conclusion of a contract to purchase Kupe gas and the acquisition of the new permits for exploration. As the Judge noted, Mr Humphrey must have had some prior notice of Mr Papalia’s likely updated valuation because the draft report referred to an additional 12 cents per share above the earlier valuation of 50 to 56 cents. The 12 cents per share was made up of 4 cents per share for the new on-shore licences and 8 cents per share for the new off-shore licences.
Various options were discussed in the report but it was concluded that the price of 63 cents per share would be unlikely to survive a court challenge by Mr Oakley. An increase of up to 80 cents per share was recommended.
In the meantime, Mr Patek (as CEO of FCP) prepared his own personal memorandum to Mr Mace (as the head of FCL’s energy interests). This was sent on Sunday 5 November and commented on Mr Humphrey’s draft report. The memorandum recorded that Mr Patek had discussed the acquisition of the minority shareholding in Southern with FCL’s chief executive, Mr Hugh Fletcher, on the previous Friday, 3 November.
It is evident from Mr Patek’s memorandum that he believed Mr Fletcher was opposed to any increase in the offer. Mr Fletcher was said to have objected to the methods of valuation and, according to Mr Patek’s memorandum, believed that Fletchers would be subject to criticism on the basis that it had hidden value if the offer were to be increased. He also reportedly objected to being “greenmailed” by Mr Oakley. Nevertheless, he was said to be willing to receive and consider Mr Humphrey’s report.
Mr Patek’s memorandum of 5 November discussed the objections raised by Mr Fletcher. He considered that an increased offer was justified and that value would be created by concluding the acquisition expeditiously. If matters lingered, he considered value would be destroyed. He also believed his personal integrity would be compromised if Fletchers disagreed with the valuation of the new permits by the independent valuer and were not prepared to meet that value. He thought it likely that Southern’s independent directors would resign if that were to happen, given previous discussions and undertakings he had given to them. He noted that an increased offer would amount to an additional $4 million and said he had no difficulty justifying the additional expenditure in value terms. Another copy of this memorandum has handwritten notes upon it (which the Judge found were almost certainly those of Mr Mace) which, amongst other things, stated “proceed now at 75c” and “for discussion Tuesday 7/11”.
Mr Patek’s subsequent memorandum to Mr Mace of 6 November attaching the draft report on the acquisition (now in final form) was also drafted by Mr Humphrey. Like the other memoranda on this topic, it was on FCP letterhead. The memorandum effectively summarised the main points from the report and recommended that the acquisition be concluded at a price of 75 cents per share, and up to 80 cents if needed. The relevant part of the memorandum for present purposes read:
Since July, the issues of control have become clearer and tangible as we secured the Stratford gas supply contract and will soon conclude the Kupe gas purchase deal. Additional value has been created in Southern Petroleum through gas transmission to Stratford using the TAWN gas pipeline to Stratford, enhancing the Tariki/Ahuroa gas production profile, securing Kupe liquids transmission through TAWN facilities and enhanced prospects for Kapuni gas production from Kaimiro, Waihapa and the Mangahewa structure in PPL 38705 (50% Southern Petroleum) which have proven undeveloped gas reserves. Value attached to the onshore and offshore licence interests has been upgraded from the strategic plan values to those developed for the onshore and offshore bidding round.
(Emphasis added)
The Judge noted that both Mr Humphrey and Mr Patek were closely cross-examined about the reference to enhanced gas production and inclusion of the Mangahewa structure in that reference. The Judge recorded that both Mr Humphrey and Mr Patek denied having any knowledge of the material presented at the 2 November meeting which might have justified a reference to enhanced prospects at Mangahewa. Mr Humphrey said he was absolutely confident there had been no suggestion to him at this time that there was a very large field which had suddenly emerged and which had great value.
Mr Patek said he thought the reference to enhanced prospects was to fraccing the deep gas reservoirs and the improved prospects for Kaimiro, factors used in the report to help justify an increase in the value of unproven oil and gas. He added that the work done by the DGS team which was reflected in the 2 November presentation (of which he later became aware) did not amount to an enhanced prospect for Mangahewa. Mr Patek said that, in retrospect, the reference to “proven undeveloped gas reserves” was not appropriate given the level of exploration of the Mangahewa structure at that stage.
Events – 7 to 15 November
Mr Patek met Mr Oakley on 8 November to discuss Mr Oakley’s concerns about the valuations and the share offer. There was some discussion of Dr Haskell’s views about the prospects for deep gas in the Kaimiro field. Mr Patek accepted there was no discussion of the existence of the Mangahewa Information about which he said he remained unaware. It was arranged that Dr Haskell would meet Mr McCagherty the next day. Again, according to the Judge, the principal focus of the meeting was on the prospects at Kaimiro which seemed to be the main point of difference with regard to valuation.
Mr McCagherty’s evidence was that Dr Haskell had not sought any further information about any of the other existing licences including Mangahewa. Dr Haskell’s recollection was different. He said he had asked Mr McCagherty for a review of “leads and structures” but received only generalities. The material in the 2 November presentation was the type of material he would have expected to have been revealed in answer to his question. Mr Taylor agreed that Mr McCagherty had been instructed to respond in generalities because there was concern that the net present value figures for the new licence blocks had not then been released to the market. The differential treatment of shareholders in respect of the giving of information was therefore an issue.
The Judge recorded that Mr McCagherty’s evidence was that if Mr Taylor had asked him to discuss Mangahewa with Dr Haskell, he would have been happy to do so. But he would never have said that the Mangahewa 2 well would be drilled (despite his enthusiasm) because the Mangahewa Information had not then been economically analysed, expert input had not been obtained with regard to hydraulic stimulation (fraccing) and approval from Fletchers had not been obtained.
After the meeting of 9 November, Dr Haskell reported to Mr Oakley suggesting he seek an additional 15 cents per share to compensate for Dr Haskell’s view of the gas reserves available in Kaimiro. The Judge then summarised Dr Haskell’s evidence to the effect that if he had received the material presented to the 2 November meeting:[23]
… he would have suggested Southern’s minority shareholders should benefit from the deep gas reserves position, that Mangahewa 2 would test the Mangahewa prospect and, irrespective of the deep gas reserves, would encounter the reservoir systems found by Mangahewa 1 and “with stimulation, provide economic production from the culmination of the structure” in which those shareholders would have been entitled to share.
The second reports from Mr Papalia and Warburg (formerly Buttle Wilson)
[23] At [217].
Mr Papalia’s second report to the independent directors is dated 16 November although it must have been conveyed by some means prior to that time. Similarly with Warburg’s second report dated 17 November. We say that because reference was made to revised reports of share value in announcements to the Stock Exchange by Southern’s independent directors on 14 November. The effect of the revised Papalia valuation was to add post-tax value to Southern’s value of $21.33 million. The report also noted that recent development activity in the Kaimiro field had enhanced the value of Southern’s interest by $220,000. However, the report also said that exploration and appraisal work on the Cheal prospect had proved inconclusive and that evaluation of the same reservoir in the Ngaere-3 well had proved to be negative and had been abandoned. No reference was made to Mangahewa.
The Warburg second report concluded that the share value as at 17 November was 59 to 69 cents per share and that the revised price of 75 cents per share was fair and reasonable to minority shareholders.
On 14 November, Southern’s independent directors advised the Stock Exchange that they had completed their evaluation of the recently awarded permits and that Warburg had advised that the fair value for the shares had increased to a range of 59 to 69 cents per share. Shareholders were advised to await the outcome of discussions the independent directors proposed with PIL.
On the same day (14 November), the FCL board met to discuss the acquisition. The following day FCL informed the Stock Exchange that the offer had been increased to 75 cents per share and that Mr Oakley and all other significant outstanding minority shareholders had also advised they would accept the increased offer. That effectively brought the takeover to an end but it was not formally completed until January 1996.
The meeting with Methanex on 13 November
The appellants placed considerable reliance on material which Petrocorp presented to Methanex representatives on 13 November 1995 immediately before effective completion of the acquisition (14 November). The meeting was arranged on 2 November, the same day as the presentation by the DGS team already discussed. The essential purpose of the meeting was to discuss actual and potential gas resources capable of supplying the Methanex plant. Although a number of topics were discussed, the deep gas potential of the Mangahewa structure was a central part of the discussions. One of the objectives was to persuade Methanex to contribute towards the cost of drilling Mangahewa 2. For that purpose, Mr Logan instructed Mr O’Connor that the brief would be “to create the best realistic picture we can of likely increases in gas reserves over the next several years to assist Methanex with making their decision”.
Copies of the slides presented at the meeting with Methanex described the Mangahewa structure as “a very large Kapuni structure with over 150 km2 areal closure.” The material added that seven wells had been drilled into the structure over a 30 year period; gas tested at rates over 1.0 MMCFD but with inconclusive results. It was said that “reserves potential could exceed 1 TCF”.
The Judge did not make any specific finding as to whether he would also have concluded that Petrocorp had advised or encouraged PIL to buy the shares in the same way. It was not strictly necessary to do so given his other findings which were sufficient to dispose of the appellants’ case. It is not necessary for us to decide this issue either but, on the evidence, we would have concluded that the pleaded acts of advice or encouragement by Mr Patek were acts done or advice given in his capacity as the CEO of FCP.
It is possible on this issue to clearly differentiate Mr Patek’s role as CEO of FCP from his role as a director of Petrocorp. Mr Logan’s evidence was that Petrocorp had little involvement in the takeover other than as a shareholder of PIL. The takeover was driven at corporate level at Fletchers’ head office in Auckland. That evidence is supported by the evidence of Mr Patek and Mr Humphrey and by the documentary evidence. It is quite clear that the memoranda of 3 to 6 November were recommendations by Mr Patek as CEO of FCP to FCL (or a sub-committee of FCL) in relation to the increase in the offer price for the Southern shares. These memoranda were on FCP letterhead which was entirely consistent with the Fletchers’ corporate structure. FCP was the company with oversight of Fletchers’ energy interests and the FCL board took ultimate responsibility for any decisions on the offer price.
Sixth issue: Does there need to be a causative link between the possession of the inside information and the acts of encouragement or advice?
The Judge quoted at length from Fisher J’s leave judgment and the earlier decision of this Court on the issue of whether it was necessary for a plaintiff to establish under the Act that there was a causative link between the possession of the relevant inside information and its use (for example, in advising or encouraging the sale and purchase of shares). Fisher J had concluded that the Act did not require any causal connection between receipt of the Mangahewa Information and the decision to raise the offer for the remaining minority shares.[80] He found that the Act required only that, at the time he encouraged PIL to purchase, Mr Patek was in possession of unpublicised price-sensitive information. That finding was considered and upheld by this Court.[81]
[80] Haylock v Southern Petroleum NL [2002] 3 NZLR 518 (HC) at [75].
[81] Haylock v Southern Petroleum NL [2003] 2 NZLR 175 at [42], [48], [49], [57] and [58].
Although the Judge did not explicitly adopt this Court’s finding on the issue, it is implicit that he did so and, in any event, he was bound to follow this Court’s decision. On the cross-appeal, Ms Katz submitted that the Judge had erred in this respect while acknowledging it was unlikely this Court would depart from its earlier decision.
We see no reason to question this Court’s earlier decision on this point. Indeed, we consider that the reasoning of the Court is compelling. We agree that the scheme of the Act imposes absolute liability and that there is no requirement to show a link between the possession of inside information and its use.
The application for leave to appeal in CA247/2008
In view of our finding on the substantive appeal, there is no point in the appellants pursuing their application for leave to appeal in CA247/2008 relating to discovery issues in a related proceeding in the Wellington High Court. That application is dismissed accordingly.
Summary
We summarise our conclusions on the appeal and cross-appeal as follows:
(a)The Judge correctly concluded that the Mangahewa Information was not “inside information” within the meaning of the Act because it was, at least in part, already in the public domain and because, to the extent it was not publicly available, the information would not have materially affected the price of the Southern shares if the information had been made publicly available.
(b)There is no basis to disturb the Judge’s factual finding that Mr Patek did not have the Mangahewa Information at relevant times.
(c)If the Mangahewa Information was “inside information” which Mr Patek had in his possession, he had it by reason of his role as a Southern director for the purposes of the Act. Contrary to the Judge’s finding, it is not necessary to show that Mr Patek had it in his possession solely by reason of his role as a director of Southern.
(d)Petrocorp had the Mangahewa Information in its possession at relevant times and (contrary to the Judge’s finding) it did so by reason of its role as a substantial security holder in Southern.
(e)The Judge correctly found that if Mr Patek had inside information at relevant times, he encouraged PIL to buy the Southern shares at least on 3, 5 and 6 November 1995 by recommending to FCL that the offer price for the shares be increased.
(f)If Petrocorp had inside information at relevant times, it did not encourage or advise PIL to buy the Southern shares by recommending to FCL that the offer price for the shares be increased. Rather, any such recommendations were made by Mr Patek in his capacity as the Chief Executive Officer of FCP.
(g)We agree with the Judge that there does not need to be a causative link between the possession of the inside information and the relevant acts of encouragement or advice.
(h)The application for leave to appeal in CA247/2008 should be dismissed in consequence of the findings on the substantive appeal.
Disposition
The appeal and cross-appeal in CA591/2008 are dismissed.
The application for leave to appeal in CA247/2008 is dismissed.
Counsel are to confer and provide a memorandum as to costs in the light of s 18(5) of the Act within one month of the date of this judgment. Counsel may wish to consider whether s 18(5) envisages that the public issuer is obliged to pay the appeal costs of a party who has been unsuccessful at trial and on appeal.
Solicitors:
Fraser Powrie, Auckland for Appellants
Russell McVeagh, Auckland for Respondents
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